e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the Fiscal Year Ended
April 30,
2010
|
OR
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
Commission file number:
001-33923
ArcSight, Inc.
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
|
|
52-2241535
|
(State or Other Jurisdiction
of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.)
|
5 Results Way
Cupertino, California 95014
(Address of Principal Executive
Offices, including Zip Code)
(408) 864-2600
(Registrants Telephone
Number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
Common Stock, par value $0.00001 per share
|
|
|
NASDAQ Global Market
|
|
Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405) is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated
filer o
|
|
Accelerated filer þ
|
|
Non-accelerated filer o
|
|
Smaller reporting company o
|
|
|
|
|
(Do not check if a smaller reporting company)
|
|
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of voting stock held by
non-affiliates of the registrant was $690,583,284 based upon the
closing price on The NASDAQ Global Market on the last business
day of the registrants most recently completed second
fiscal quarter (October 31, 2009).
The number of outstanding shares of the registrants common
stock as of July 1, 2010 was 34,449,065.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for registrants
2010 Annual Meeting of Stockholders to be held on
September 20, 2010 and to be filed pursuant to
Regulation 14A within 120 days after registrants
fiscal year ended April 30, 2010 are incorporated by
reference into Part III of this Annual Report on
Form 10-K.
FISCAL
2010 ANNUAL REPORT ON
FORM 10-K
TABLE OF
CONTENTS
2
Forward
Looking Statements
The information in this Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or
the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. Such
statements are based upon current expectations that involve
risks and uncertainties. Any statements contained herein that
are not statements of historical facts may be deemed to be
forward-looking statements. For example, words such as
may, will, should,
estimates, predicts,
potential, continue,
strategy, believes,
anticipates, plans, expects,
intends and similar expressions are intended to
identify forward-looking statements. Our actual results and the
timing of certain events may differ significantly from the
results discussed in the forward-looking statements. Factors
that might cause or contribute to such differences include, but
are not limited to, those discussed elsewhere in this Annual
Report on
Form 10-K
in the section titled Risk Factors and the risks
discussed in our other filings with the Securities and Exchange
Commission, or the SEC. We undertake no obligation to publicly
release any revisions to the forward-looking statements after
the date of this Annual Report on
Form 10-K.
3
PART I
Overview
We are a leading provider of enterprise threat and risk
management solutions that protect business and government
enterprises. Our enterprise threat and risk management platform
collects, consolidates and correlates network and user activity
data across the enterprise so that businesses can rapidly
detect, diagnose and manage both internal and external threats
and risks across the organization for activities associated with
critical assets and processes. With our enterprise threat and
risk management platform and products, organizations can use the
ArcSight platform to reduce risk, identify vulnerabilities,
comply with regulations and protect their high-value digital
assets from cyber-theft, cyber-fraud, cyber-warfare and
cyber-espionage.
The ArcSight enterprise threat and risk management platform for
monitoring threats and risks is designed to allow our customers
to achieve complete visibility, improved uptime and streamlined
compliance by:
|
|
|
|
|
capturing event data from any network-connected system;
|
|
|
|
managing and storing event data;
|
|
|
|
analyzing events in real time;
|
|
|
|
identifying unusual behavior; and
|
|
|
|
responding quickly to prevent loss.
|
Our enterprise threat and risk management platform, as
illustrated below, includes our connector products, which
collect event information from security point solutions, network
and computing devices, databases, applications and other
elements in an organizations IT architecture, which we
refer to as event sources. A single device or application can
generate thousands of events in a single day, most of which are
low priority and typically provides information about a narrow
aspect of the infrastructure or only a portion of the threat or
compliance risk involved. That information is used in our
flagship security information and event management, or SIEM,
products where complex algorithms determine if events taking
place conform to normal patterns of behavior, established
security policies and compliance regulations, so that threats
and risks are identified. The event information is concurrently
stored in our log management products. These products in turn
initiate our threat response management product, as well as
providing the foundation for an application layer of solution
packages that are directed at specific vertical applications,
such as our Payment Card Industry (PCI) compliance solutions, or
horizontal applications, such as our EnterpriseView family of
applications that address threats and risks beyond the security
and compliance matters traditionally addressed by our SIEM and
log management products.
4
ArcSight
Enterprise Threat and Risk Management Platform
Our SIEM products, ArcSight ESM and ArcSight Express, deliver a
centralized, real-time view of all activity or events across
geographically dispersed and heterogeneous business and
technology infrastructures. Our log management products collect
and store activity and event data for regulatory compliance,
reporting and forensic analysis. Working together, these
products collect, consolidate and correlate massive amounts of
activity data, in the form of log events, from thousands of
security point solutions, network and computing devices,
databases and applications, enabling intelligent identification,
prioritization and response to compliance and corporate policy
violations, and external and insider threats. Our specialized
software and application packages deliver pre-packaged analytics
and reports tailored to specific compliance and security
initiatives, such as Sarbanes-Oxley (SOX), PCI, user monitoring
and fraud detection.
We have designed our platform to support the increasingly
complex business and technology infrastructure of our customers.
Our platform includes over 300 pre-built software connectors,
called SmartConnnectors, for products from more than 100
vendors. It also integrates easily with products for which we do
not provide pre-built connectors and with proprietary enterprise
applications to ensure that event logs from these products are
seamlessly integrated into our platform for intelligent
consolidation, correlation and analysis. As of April 30,
2010, we have sold our products to more than 1,000 customers
across a number of industries and government agencies in the
United States and internationally, including companies in the
Fortune Top 5 of the aerospace and defense, energy and
utilities, financial services, food production and services,
healthcare, high technology, insurance, media and entertainment,
retail and telecommunications industries.
No customer accounted for more than 10% of our revenues in
fiscal 2010, 2009 or 2008. Our top ten customers accounted for
22%, 23% and 26% of our product revenues during fiscal 2010,
2009 and 2008, respectively. See Note 9 of the notes to our
Consolidated Financial Statements for a discussion of total
revenues by geographical region for fiscal 2010, 2009 and 2008.
5
Our
Strategy
Our objective is to be the leading provider of enterprise threat
and risk management solutions that protect enterprises and
government agencies. To achieve this goal, we plan to:
|
|
|
|
|
grow our customer base by further penetrating the Global 2000,
expanding into new geographies and continuing to reach into the
mid-market;
|
|
|
|
further penetrate our existing customers by expanding their use
of our platform across the enterprise and extending their use of
our products to new use cases;
|
|
|
|
extend and broaden our partner network, in particular with
systems integrators, and continue to improve the effectiveness
of our channel partners;
|
|
|
|
extend our expertise in security and compliance best practices
and launch new and innovative applications that open up
additional markets or address specific security and compliance
needs and use cases;
|
|
|
|
continue to extend our value proposition to business use cases
beyond traditional IT security and compliance, as with our
recent IdentityView and FraudView products;
|
|
|
|
extend our product offerings so that they are available in the
form factor desired by the customer, including both software and
appliance versions.
|
Our
Solutions and Products
The primary components of our enterprise threat and risk
management platform are our SIEM products, ArcSight ESM and
ArcSight Express, and our ArcSight Logger suite of log
management products. These products collect streaming activity
data from the devices, applications and other elements in an
organizations IT architecture, which we refer to as event
sources, and consolidate and translate the streaming data into a
common format. The formatted and categorized data is then
processed by the correlation engine in ArcSight ESM and ArcSight
Express, where complex algorithms determine if events taking
place conform to normal patterns of behavior, established
security policies and compliance regulations. That data is also
stored in ArcSight Logger for compliance reporting and forensic
analysis. A single device or application can generate thousands
of events in a single day, most of which are low priority and
typically provides information about a narrow aspect of the
infrastructure or only a portion of the threat or compliance
risk involved. Our SIEM products identify and prioritize
high-risk activity and present a consolidated view of IT
security threats, deviations in compliance controls threats to
the business and in rich, graphical displays. In addition,
through our log management products, we enable efficient and
scalable collection, storage, analysis and reporting of
terabytes of enterprise log data for compliance requirements or
forensic analysis. Our customers enhance the value of other
compliance and security products in their business and
technology infrastructure by integrating them with our
enterprise threat and risk monitoring platform. Key benefits of
our solutions include:
|
|
|
|
|
Enterprise-Class Technology and
Architecture. We design our solutions to serve
the needs of the largest organizations, which typically have
highly complex, geographically dispersed and heterogeneous
business and technology infrastructures. We deliver
enterprise-class solutions by providing interoperability,
flexibility, scalability and efficient archiving.
|
|
|
|
Intelligent Correlation. Our correlation
engine intelligently distills millions of events occurring daily
into information that allows customers to identify, analyze,
prioritize and respond to specific threats, compliance
violations and other events of interest.
|
|
|
|
Comprehensive View. We have designed our
architecture to allow it to be extended for collection,
consolidation and correlation of information from any
network-connected system, enabling customers to potentially
address business risk and operational effectiveness beyond the
security and compliance use cases to which our products have
traditionally been applied.
|
|
|
|
Cost-Effective Consolidation and Storage. Our
log management suite provides easy, scalable, cost-effective
storage and enables customers to demonstrate the integrity and
availability of log data both in transit and at rest,
facilitating automated compliance reporting and reducing the
cost of audits.
|
6
|
|
|
|
|
Reporting and Visualization. We present
threat, compliance risk and other event information through a
rich and intuitive graphical user interface, through which
customers can view risk across their organization in a variety
of ways, address internal and external compliance requirements
and communicate the value and effectiveness of the
organizations security operations.
|
Customers can enhance these key benefits through deployment of
one of our compliance applications, which are used in
combination with our leading enterprise threat and risk
management products to focus on security or particular
compliance needs, ranging from SOX to Federal Information
Security Management Act (FISMA) to PCI. For example, our
compliance application for North American Electric Reliability
Corporation (NERC) Critical Infrastructure Protection, or CIP,
supports compliance with NERC CIP standards
002-009. We
provide other compliance applications for industry regulations
such as PCI DSS, and for governmental regulations such as HIPAA
and Sarbanes-Oxley. Our family of leading security and
compliance management products includes:
ArcSight ESM. ArcSight ESM, our flagship
product, is designed specifically to address the compliance,
security and business risk concerns of large,
geographically-distributed organizations with complex,
heterogeneous IT environments. ArcSight ESM serves as a
centralized system for understanding and managing risks across
an organizations entire business and technology
infrastructure. The key elements within ArcSight ESM include:
|
|
|
|
|
ArcSight Manager. ArcSight Manager, available
as software or as an appliance, manages event aggregation and
storage, controls the various elements of our platform and
provides the engine for high-speed real-time correlation and
incident response workflow. ArcSight Manager comes with standard
rules that address common compliance and security issues and
business risks. It also provides an intuitive system that
enables customers to write customized rules that apply an
organizations compliance and security policies into the
real-time analytics of the correlation engine, as well as
seamless integration with rules generated by our ArcSight Threat
Detector product. ArcSight Manager enables real-time
collaboration and case management among security analysts, to
track risk-prioritized response and remediation. In addition, it
provides case resolution metrics to demonstrate compliance and
security process and control effectiveness. Our case management
system also can integrate with third-party trouble ticketing
systems, such as the Remedy Service desk system from BMC
Software. Our architecture was designed to allow customers to
scale from a single centralized deployment to a distributed,
global deployment by deploying additional Managers that work in
concert.
|
|
|
|
ArcSight Console, ArcSight Web and ArcSight
Viewer. ArcSight Console is the primary user
interface to interact with and control ArcSight ESM. Through its
intuitive interface, the Console provides administrators,
analysts and operators with graphical data summaries and an
intuitive interface to perform tasks ranging from real-time
monitoring and analysis to incident investigation and response
to system administration and authoring of new content. The
Console is highly configurable to reflect individual customer
environments and can display threat and risk information in a
wide variety of formats including by geography, by division or
line of business, by type of threat, and by compliance or policy
initiative. With ArcSight Console, customers can run a wide
variety of reports to answer internal and external compliance
audits and communicate the value and effectiveness of the
organizations security operations. We also provide an
authoring system that customers can use to create new reports to
meet their specific business needs. ArcSight ESM contains
hundreds of standard report templates that immediately address
common compliance, security and business risk reporting
requirements. To facilitate remote access for IT administrators
as well as provide a portal for
line-of-business
viewing of status summaries and scheduled reports, our ArcSight
Web product provides browser-based access to all Console
functions and content, except administration and authoring, and
our ArcSight Viewer product provides browser-based read-only
access to all Console content.
|
ArcSight Logger. ArcSight Logger, our suite of
log management products, enables organizations to collect and
store event data in support of security and compliance
requirements. It is available in a variety of feature sets and
capacities either as software or one or more appliances.
ArcSight Logger provides customers with an easily searchable log
data repository, together with reporting capabilities, that can
be leveraged across networking, security and IT operations
teams. As with ArcSight ESM, ArcSight Logger provides
administrators, analysts and operators with graphical data
summaries and an intuitive interface to perform search,
reporting and management tasks. Access controls and intelligent
search technology enable customers to interact with historical
raw event data
7
for insight into specific events. ArcSight Logger currently
captures raw logs at sustained rates of up to 100,000 events per
second per appliance and provides approximately 10:1 compression
capability for event data, storing 40 terabytes or more of data
on a single appliance. ArcSight Logger software can be deployed
on multiple servers, or multiple appliances can be deployed, to
linearly scale both storage and performance. Large organizations
with multiple administrative domains or managed security service
providers can choose to deploy multiple ArcSight Logger
installations or appliances in a hierarchical or
peer-to-peer
manner to extend capacity and performance as needed. Because
multiple ArcSight Logger instances operate as an array, a
comprehensive view into enterprise-wide log data remains
available. ArcSight Logger can flexibly and selectively forward
security events to ArcSight ESM for real-time, cross-device
correlation, visualization and threat detection. In turn,
ArcSight ESM can send correlated alerts back to ArcSight Logger
for archiving and subsequent retrieval.
ArcSight Express. ArcSight Express is a set of
SIEM and log management appliances designed for smaller
organizations with fewer resources for managing a network
security and compliance program. ArcSight Express includes many
of the same correlation functions as ArcSight ESM, and many of
the same log management functions of ArcSight Logger. These are
presented in a simplified, pre-configured appliance solution, at
different price points aimed at organizations of different size
and needs. ArcSight Express includes pre-built rules, reports,
and dashboards for monitoring network security, user activity
and regulatory compliance.
ArcSight Connectors. Connectors collect event
data streams from sources across an organizations business
and technology infrastructure and feed that event data to our
ESM, ArcSight Logger, ArcSight Express and ArcSight FraudView
products. Our connectors are available as software or
appliances, which available in a range of feature sets and
throughput capacities. These connectors implement extensive
normalization and categorization capabilities to restructure
event data into a common taxonomy so events from hundreds of
different sources can be compared meaningfully and queried
systematically irrespective of which device is reporting the
information. The normalized event data stream is then
intelligently aggregated and compressed to eliminate irrelevant
and duplicate messages and reduce bandwidth and storage
consumption. Our SmartConnectors receive and translate event
data streams from over 300 different devices and applications
from more than 100 vendors and in more than 36 different
solution categories. Further, using our FlexConnector toolkit,
our customers can create custom connectors tailored to their
environment, such as for new products, proprietary applications
and mainframe and other legacy systems. Our connectors can be
deployed on intermediate collection points, such as third-party
management consoles, where available, avoiding the requirement
to provision our connectors directly onto end devices.
ArcSight EnterpriseView Applications. Our
EnterpriseView family of applications apply our threat and risk
detection technologies to address areas beyond traditional
security and compliance matters.
|
|
|
|
|
ArcSight IdentityView. ArcSight IdentityView
is a software application that enables customers to detect
increased risk from activities performed by employees,
contractors and other users of internal corporate systems. It
allows enterprise customers to address insider threat and fraud
risks as well as compliance and audit needs. IdentityView
includes specialized connectors to leading identity and access
management, or IAM, systems and directories and pre-built
capabilities for correlating multiple user accounts to a single
identity. From that, pre-built or user-defined rules for fraud
detection and unauthorized actions analyze this information to
determine if the user is performing unauthorized activities. The
pre-packaged reports and dashboards include access rights and
group membership analysis, user risk analysis by department or
job function and comprehensive activity reporting for any user
over any time period. IdentityView also utilizes the technology
underlying our ArcSight Threat Detector module to automatically
create new risk profiles employing IAM information.
|
|
|
|
ArcSight FraudView. The ArcSight FraudView
appliance enables our financial services customers to detect and
prevent or mitigate online fraud by evaluating and scoring
financial transactions in real-time (rather than simply
performing after the fact forensic analysis). It evaluates risk
factors related to the type of transaction, the account
involved, the destination and the device involved to address
account takeover, fraudulent transaction initiation and false
account creation. That helps reduce the financial
institutions penalty fees, revenue loss and operating
expenses. ArcSight FraudView correlates activity across multiple
financial transaction channels to detect sophisticated fraud
schemes that span online, ATM, telephone and branch activity, as
well as correlating and adjusting risk profiles over time.
ArcSight FraudView can
|
8
|
|
|
|
|
aggregate information from a variety of risk and fraud scoring
products already available to a financial firm, such as a
blacklist feed, to create a single, high-level risk score of any
transaction, as it occurs. As a result, banks can better
leverage their investments in legacy fraud detection
technologies. The pre-packaged reports and dashboards include
automatic watchlist and case creation, as well as analyst
desktop tools that facilitate incident investigation and
annotation, case management, notification and response. ArcSight
FraudView also utilizes the technology underlying our ArcSight
Threat Detector module to automatically update or create new
risk profiles and rules and to enable multi-path detection.
|
ArcSight Compliance Applications. We offer
pre-packaged add-on applications that enable our ESM, ArcSight
Logger and ArcSight Express products to provide technical-and
business-level checks on corporate compliance with regulatory
and policy requirements for perimeter security, protection of
key business processes, threat management and incident response.
These applications comprise relevant rules and reports to
accelerate implementation by our customers, and can be
customized or extended by the customer. These tailored
monitoring, assesments and reporting packages address specific
security, regulatory or policy concerns, including IT
governance, SOX and the Japanese analogue of Sarbanes-Oxley
(J-SOX), FISMA, PCI, NERC CIP standards
002-009,
Gramm-Leach-Bliley Act (GLBA), Health Insurance Portability and
Accountability Act (HIPAA), Basel II Framework,
International Standardization Organization/International
Electrotechnical Commission (ISO/IEC 27002:2005) and National
Institute of Standards and Technology (NIST
800-53)
compliance.
ArcSight Threat Detector. Our ArcSight Threat
Detector software is a powerful complement to our correlation
engine. It is an advanced pattern identification engine that
retrospectively examines large amounts of security events
previously collected and processed by ArcSight ESM or ArcSight
Express to discover patterns of activity that may be
characteristic of threats, such as emerging worms, new worm
variants, self-concealing malware, and low profile, slowly
developing attacks. ArcSight Threat Detector proactively alerts
the security operations analyst about existing or emerging
patterns that are not comprehended by any rules in our
correlation engine, and provides the customer the option to
classify the patterns and also to optionally or automatically
generate new rules for our SIEM products that will detect and
respond to similar threatening patterns in the future.
ArcSight Interactive Discovery Our ArcSight
Interactive Discovery visualization software helps IT security
professionals pan, zoom and switch perspectives across complex
technical data to perform in-depth analysis of security data as
well as featuring visuals and drill-down capabilities that
enable non-technical employees to see relevant threat
information in a non-technical format.
ArcSight TRM (Threat Response
Manager). ArcSight TRM is an appliance that
enables customers to quickly and precisely reconfigure network
control devices to remediate security, compliance and business
risks, consistent with an organizations policy directives.
ArcSight TRM profiles a networks topology through
communication with devices without the need to install a
software agent on the device. Through advanced algorithms, it
can identify the exact location of any node (wireless, wired or
VPN) on the network, analyze, recommend and, at the
customers option, execute specific, policy-based actions
in response to a threat, attack or other
out-of-policy
situation. ArcSight TRM can block, quarantine or filter
undesirable users and systems at the individual port level.
ArcSight TRM integrates seamlessly with ArcSight ESM or ArcSight
Express to accelerate incident response by facilitating the
coordination between the security and networking groups, thus
improving the effectiveness of the response and acute
remediation function.
ArcSight NCM (Network Configuration
Manager). ArcSight NCM is an appliance that
automates the audit of network topology, maintaining protected
records of all prior configurations for purposes of rollback,
audit and compliance reporting. ArcSight NCM presents network
topology in a visual format, allowing organizations to identify
mis-configurations, redundant links and multiple wide area
network (WAN) access routes. ArcSight NCM dynamically compares
existing device configuration and highlights discrepancies from
desired configuration policies that generally map to regulatory
requirements, operational guidelines and business rules.
Maintenance
and Professional Services
We offer a range of services in connection with or after a sale
occurs, principally installation and implementation, project
planning, advice on business use cases and training services
that complement our product offerings. Initial implementation of
ArcSight ESM is typically accomplished within two to four weeks,
and we
9
expect an implementation of ArcSight FraudView to take
approximately four to twelve weeks, while our ArcSight Logger,
ArcSight Express and other appliance products are typically
implemented in a matter of days. On an ongoing basis, we offer
consulting services and training related to application of our
enterprise threat and risk management platform to address
additional or customer-specific security and compliance issues
and business risks.
For large enterprise customers, for which design, staffing and
operation of a security operations center, or SOC, is not a part
of their core IT expertise, we offer turnkey SOC service
engagements through which we and our partners provide these
functions and customize them for the customer. SOC engagements
are typically longer in duration than other services engagements
and support the
day-to-day
monitoring of customer SOC environments. We intend to partner
with larger system integrators to provide a substantial portion
of the personnel used to provide SOC services.
Following deployment, our technical support organization
provides ongoing maintenance for our products. We provide
standard and, for customers that require
24-hour
coverage seven days a week, premium tiers of maintenance and
support, which include telephone- and web-based technical
support and updates, if and when available, to our products
during the period of coverage. Our three major support centers
are located in Hong Kong, London and Cupertino, California. In
addition, we sell an enhanced maintenance service that provides
security content updates for our SIEM products and extended
hardware maintenance for our appliance products. These content
updates reflect emerging threats and risks in the form of
signature categorization, vulnerability mapping and knowledge
base articles on an ongoing basis.
Research
and Development
Building on our history of innovation, we believe that continued
and timely development of new products and enhancements to our
existing products are necessary to maintain our competitive
position. Accordingly, we have invested, and intend to continue
to invest, significant time and resources in our research and
development activities to extend our technology leadership. At
present, our research and development efforts are focused on
improving and broadening the capabilities of each of our major
product lines and developing additional products. We work
closely with our customers, as well as technology partners, to
understand their emerging requirements and use cases for our
products. As of April 30, 2010, our research and
development team had 134 employees. Our research and
development expenses were $26.3 million, $22.5 million
and $19.8 million during fiscal 2010, 2009 and 2008,
respectively.
Sales and
Marketing
We market and sell our products through our direct sales
organization and indirectly through resellers and systems
integrators. Historically, the majority of our domestic sales
are made through our direct sales organization, while
international sales have primarily been made through our
resellers and other channel partners, while sales to
U.S. federal government customers are often through our
direct sales organization, resellers and systems integrators.
Additionally, a small but growing percentage of sales
transactions involving our appliance products are completed
without any involvement from ArcSight. We structure our sales
organization by function, including direct and channel sales,
strategic accounts, technical pre-sales, customer and sales
operations, and by region, including Americas,
U.S. Federal, Europe, Middle East and Africa, or EMEA, Asia
Pacific, or APAC, and Japan. As of April 30, 2010, we had
177 employees in our sales and marketing organizations.
The selling process for our products follows a typical
enterprise software sales cycle. It generally involves one or
more of our direct sales representatives, even when a channel
partner is involved. The sales cycle for an initial sale
normally takes from three to six months, but can extend to more
than a year for some sales of ArcSight ESM, from the time of
initial prospect qualification to consummation, and typically
includes product demonstrations and proof of concepts. We deploy
a combination of field account management supported by technical
pre-sales specialists to manage the activities from
qualification through close. After initial deployment, our sales
personnel focus on ongoing account management and follow-on
sales. To assist our customers with reaching their business and
technical goals for their implementations of our products, our
Global Services Organization meets with customers to determine
their success criteria and to help formulate both short- and
long-term plans for their
10
deployments of our products. We also have assigned specific
sales personnel to our larger, more diverse and often global
customers in order to understand their individual needs and
increase customer satisfaction.
We derive a portion of our revenues from sales of our products
and related services through channel partners, such as resellers
and systems integrators. In particular, systems integrators are
an important source of sales leads for us in the
U.S. public sector, as government agencies often rely on
them to meet IT needs, and we use resellers to augment our
internal resources in international markets and, to a lesser but
increasing extent, domestically. Our agreements with our channel
partners are generally non-exclusive. Historically, we used our
channel partners to support direct sales of our enterprise
threat and risk management platform products. Sometimes we are
required by our U.S. government customers to utilize
particular resellers. We anticipate that we will derive a
significant portion of our ArcSight Express sales through
channel partners. We also anticipate that we will derive a
substantial portion of our ArcSight Logger product sales to the
mid-market through channel partners. We are currently engaged in
a program to increase the effectiveness of our channel partners,
while continuing to broaden our channel program, but with a
decreased emphasis on adding new channel partners. In part to
address the mid-market, we created a dedicated channel team in
each of our geographic regions responsible for recruiting,
managing and supporting our channel partners and for developing
channel partners that will operate more independently.
We focus our marketing efforts on building brand awareness and
on customer lead generation, including advertising, cooperative
marketing, public relations activities, web-based seminars and
targeted direct mail and
e-mail
campaigns. We also are building our brand through articles
contributed to various trade magazines, public speaking
opportunities and international, national and regional trade
show participation. We reinforce our brand and loyalty among our
customer base with our annual users conference.
Competition
We offer a range of enterprise threat and risk management
products ranging from our SIEM and log management products to
our related connector and response products and complementary
solution software and packages. Our products address traditional
security and compliance concerns, as well as a range of other
risks that businesses face. We believe that there are three
primary sources of competition or potential competition for our
products and related professional services: custom internal
efforts; specialized startup companies; and large software
companies.
A significant source of competition is represented by the custom
efforts undertaken by potential customers to analyze and manage
the information produced from their existing devices and
applications to identify and remediate threats and satisfy
compliance requirements. We believe that, over the last several
years, a declining portion of potential customers are
undertaking such customer efforts, and expect that trend to
continue. In addition, some organizations have outsourced these
functions to managed security services providers.
For customers that choose to purchase a commercial product
rather than developing their own solution, a significant number
of specialized, privately-held companies, such as LogLogic,
netForensics, NitroSecurity, Q1 Labs and SenSage, have
developed, or are developing, products that currently, or in the
future are likely to, compete with some or all of our products.
This includes companies with log management products that are
adding SIEM functionality to their offerings and SIEM companies
adding some form of log management product to their offerings,
as the two fields converge. These specialized, privately-held
companies primarily target their offerings at mid-market and
smaller companies. In addition, specialized, privately-held
companies competing with us may price their products more
competitively than ours, or have an entirely different pricing
or distribution model, such as making introductory versions with
limited functionality available as freeware products. Further,
specialized, privately-held companies have sometimes chosen, and
in the future may choose, to partner with larger
security-focused software vendors or large diversified
enterprise software and hardware vendors to market and sell
their competitive products. Partnerships such as these enable
specialized, privately-held companies the ability to scale, and
allows larger companies the ability to offer product suites that
directly compete with ours, enabling both a competitive
advantage over us that would otherwise be unavailable to them.
We also continue to experience competition with several larger
security-focused software vendors that offer functionality such
as ours, primarily SIEM, as a component of suites of products
that include software applications for security and compliance
and enterprise management, and in some cases as a point
solution. Further, as the
11
market for our enterprise threat and risk management platform
continues to grow, we expect that large diversified enterprise
software and hardware vendors may seek to enter this market,
either by way of the organic development of a competing product
line or through the acquisition of a competitor. Larger software
vendors that are current or potential competitors include EMC,
IBM, Novell and Symantec. Competitors that offer a large array
of security or software products may be able to offer products
or functionality similar to ours at a more attractive price than
we can by integrating or bundling them with their other product
offerings.
We have emerged as a leader in our market by competing
successfully against both small and large companies. If our
target market continues to grow small, highly specialized
competitors may continue to emerge, and large software vendors
may continue to add to integrate or bundle their array of
security or software products with their other product offerings.
Mergers, acquisitions or consolidations by and among actual and
potential competitors present heightened competitive challenges
to our business. The consolidation in our industry increases the
likelihood of competition based on integration or bundling,
particularly where competitors products and offerings are
effectively integrated, and we believe that consolidation in our
industry may increase the competitive pressures we face on all
our products. If we are unable to sufficiently differentiate our
products from the integrated or bundled products of our
competitors, such as by offering enhanced functionality,
performance or value, we may see a decrease in demand for those
products, which would adversely affect our business, operating
results and financial condition. Further, it is possible that
continued industry consolidation may impact customers
perceptions of the viability of smaller or even medium-sized
software firms and consequently customers willingness to
purchase from such firms. Similarly, if customers seek to
concentrate their software purchases in the product portfolios
of a few large providers, we may be at a competitive
disadvantage notwithstanding the superior performance that we
believe our products can deliver. We believe that in order to
remain competitive at the large enterprise level, we will need
to develop and expand relationships with the large system
integrators that provide broad ranging products for these
governmental and civilian customers.
For our ESM product, we believe that we compete principally at
the large enterprise level on the basis of functionality,
analytical capability, scalability, interoperability with other
components of the network and business infrastructure, and
customers ability to successfully and rapidly deploy the
product. We believe that we compete favorably with our existing
competitors with respect to these factors. At the mid-market,
where customers do not require the full range of features and
functionality available in our ESM product, we compete with our
ArcSight Express product. In this segment of the market
potential customers may elect to purchase a less feature-rich
product, and a number of specialized, privately-held companies
are pursuing that portion of the market with lower priced
products with fewer features. We have designed our ArcSight
Express offering to compete favorably with our existing
competitors on the factors that are important in this market.
The market for our ArcSight Logger products is also competitive,
particularly when sold separately from a SIEM product. We
continue to believe that success in this market depends on our
ability to continue working more effectively with channel
partners. We may be at a disadvantage in dealing with channel
partners, who also may have relationships with large competitors
that offer a wide variety of products.
The primary competitive factors for our appliance products are
functionality, price, scalability, interoperability with other
components of the network and customers ability to
successfully and rapidly deploy the product. We believe that we
currently compete favorably with respect to these factors.
Increased competition could result in fewer customer orders,
price reductions, reduced gross margins and loss of market
share. Many of our existing and potential competitors,
particularly larger companies, enjoy substantial competitive
advantages, such as wider geographic presence, access to larger
customer bases and the capacity to leverage their sales efforts
and marketing expenditures across a broader portfolio of
products, and substantially greater financial, technical and
other resources. As a result, they may be able to adapt more
quickly and effectively to new or emerging technologies and
changing opportunities, standards or customer requirements. In
addition, large competitors, such as integrated software
companies and diversified, global hardware vendors, may
regularly sell enterprise-wide and other large software
applications, or large amounts of infrastructure hardware, to,
and may have more extensive relationships within, large
enterprises and government agencies worldwide, which may provide
them with an important advantage in competing for business with
those potential customers.
12
Intellectual
Property
Our intellectual property is an essential element of our
business. We use a combination of copyright, patent, trademark,
trade secret and other intellectual property laws,
confidentiality agreements and license agreements to protect our
intellectual property. It is our policy that our employees and
independent contractors involved in development are required to
sign agreements acknowledging that all inventions, trade
secrets, works of authorship, developments and other processes
generated by them on our behalf are our property, and assigning
to us any ownership that they may claim in those works. Despite
our precautions, it may be possible for third parties to obtain
and use without consent intellectual property that we own or
license. Unauthorized use of our intellectual property by third
parties, and the expenses incurred in protecting our
intellectual property rights, may adversely affect our business.
Patents and Patent Applications. We have
twelve issued patents and a number of patent applications
pending in the United States, internationally and in specific
foreign countries. We expect to file additional patent
applications from time to time. Our issued patents expire
between 2024 and 2028. We do not know whether any of our
outstanding patent applications will result in the issuance of a
patent, and even if additional patents are ultimately issued,
the examination process may require us to narrow our claims. Our
issued patents may be contested, circumvented, found
unenforceable or invalidated, and we may not be able to prevent
third parties from infringing them. Therefore, the exact effect
of having a patent cannot be predicted with certainty.
Oracle License Agreement. We license database
software from Oracle that we integrate with our SIEM products.
Our agreement with Oracle, which runs through May 2011, permits
us to distribute Oracle database software embedded in our SIEM
products for customers who may not have already acquired their
own Oracle licenses. Under this agreement, we have agreed to
make third-party royalty payments totaling $4.8 million
over the term of the license.
From time to time, we may encounter disputes over rights and
obligations concerning intellectual property. Although we
believe that our product offerings do not infringe the
intellectual property rights of any third party, we cannot be
certain that we will prevail in any intellectual property
dispute. If we do not prevail in these disputes, we may lose
some or all of our intellectual property protection, be enjoined
from further sales of our products that are determined to
infringe the rights of others,
and/or be
forced to pay substantial royalties to a third party, any of
which would adversely affect our business, financial condition
and results of operations.
Employees
As of April 30, 2010, we had a total of 512 employees,
consisting of 177 employees in sales and marketing,
134 employees in research and development,
86 employees in professional services, 48 employees in
support and 67 employees in general and administrative
functions. A total of 79 employees are located outside the
United States. None of our employees is represented by a union
or covered by a collective bargaining agreement. We consider our
employee relations to be good and have never experienced a work
stoppage.
Corporate
History and Information
We were incorporated in Delaware on May 3, 2000 as Wahoo
Technologies, Inc. On March 30, 2001, we changed our name
to ArcSight, Inc. Our principal executive offices are located at
5 Results Way, Cupertino, California 95014, and our telephone
number is
(408) 864-2600.
We launched our first product in January 2002, and made our
first product sale in June 2002. Our revenues have grown from
$0.2 million in fiscal 2002 and $32.8 million in
fiscal 2005 to $181.4 million in the fiscal 2010. We
initially funded our operations primarily through convertible
preferred stock financings that raised a total of
$26.8 million. We completed our initial public offering, or
IPO, in February 2008.
We believe that our product revenue has been somewhat seasonal
historically, increasing in each quarter through the fiscal
year, but with the first quarter of our fiscal year typically
having relatively lower product revenue compared to the fourth
fiscal quarter. However, we believe that there are significant
seasonal factors that may cause the second and fourth quarters
of our fiscal year to have relatively higher product revenue
(with the first and third fiscal quarters each potentially
having lower revenue than the immediately preceding fiscal
quarter), and that our
13
rapid historical growth and the required timing of new
compliance mandates may have overshadowed the nature or
magnitude of seasonal or cyclical factors that might have
influenced our business to date. See the discussion of
seasonality under Sources of Revenues, Cost of Revenues
and Operating Expenses Product Revenues in
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations for a more
complete description of the factors contributing to seasonal
variation in our business.
ArcSight and the ArcSight logo are registered
trademarks of ArcSight in the United States and in some other
countries. Where not registered, these marks and ArcSight
Console, ArcSight Express, ArcSight
Manager, ArcSight Web, ArcSight
EnterpriseView, FlexConnector, ArcSight
FraudView, ArcSight IdentityView,
ArcSight Logger, ArcSight NCM,
SmartConnector, ArcSight TRM,
ArcSight Viewer, ArcSight Interactive
Discovery, ArcSight ESM and ArcSight
Threat Detector are trademarks of ArcSight.
Available
Information
Our Internet address is www.arcsight.com. There we make
available, free of charge, our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any amendments to those reports, as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC. Our SEC reports can be accessed through
the Investor Relations section of our website. The information
found on our website is not part of this or any other report we
file with or furnish to the SEC. The SEC also maintains an
Internet website that contains reports, proxy and information
statements and other information regarding registrants, such as
ArcSight, that file electronically with the SEC. The address of
the website is www.sec.gov. In addition, you may read and copy
any filing that we make with the SEC at the public reference
room maintained by the SEC, located at 100 F Street,
N.E., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330
for further information about the public reference room.
Risk
Related to Our Business and Industry
Our
future operating results may fluctuate significantly and our
current operating results may not be a good indication of our
future performance.
Our revenues and operating results could vary significantly from
period to period as a result of a variety of factors, many of
which are outside of our control. As a result, comparing our
revenues and operating results on a
period-to-period
basis may not be meaningful, and you should not rely on our past
results as an indication of our future performance. We may not
be able to accurately predict our future revenues or results of
operations. We base our current and future expense levels on our
operating plans and sales forecasts, and our operating costs are
relatively fixed in the short-term. As a result, we may not be
able to reduce our costs sufficiently to compensate for an
unexpected shortfall in revenues, and even a small shortfall in
revenues could disproportionately and adversely affect financial
results for that quarter. In addition, we recognize revenues
from sales to some customers or resellers when cash is received,
which may be delayed because of changes or issues with those
customers or resellers. If our revenues or operating results
fall below the expectations of investors or any securities
analysts that cover our stock, the price of our common stock
could decline substantially.
In addition to other risk factors listed in this section,
factors that may affect our operating results include:
|
|
|
|
|
the timing of our sales during the quarter, particularly since a
large portion of our sales occurs in the last few weeks of the
quarter and loss or delay of a few large contracts may have a
significant adverse impact on our operating results;
|
|
|
|
changes in the mix of revenues attributable to higher-margin
revenues from ESM products as opposed to lower-margin revenues
from sales of our appliance products;
|
|
|
|
the timing of satisfying revenue recognition criteria,
including, for example, establishing (1) vendor-specific
objective evidence of fair value, or VSOE, for new products and
maintaining VSOE for maintenance and services, particularly
where we accrue the associated commission expense in a different
period, and (2) sufficient history with respect to our
newly introduced appliance licensing model such that revenue
|
14
|
|
|
|
|
recognition criteria would be met on shipment of our appliances,
rather than delaying revenue recognition until payment for these
transactions which we will be required to do until such history
is established;
|
|
|
|
|
|
changes in the renewal rate of maintenance agreements;
|
|
|
|
our ability to estimate warranty claims accurately;
|
|
|
|
general economic conditions, both domestically and in our
foreign markets, and economic conditions specifically affecting
industries in which our customers participate, such as the
impact of the continuing instability in global and
U.S. economic and financial market conditions, including
the recent instability in Europe; and
|
|
|
|
the impact of Accounting Standards Codification, or ASC, Topic
ASC 740-10,
Accounting for Uncertainty in Income Taxes, which
requires us to establish reserves for uncertain tax positions
and accrue potential tax penalties and interest.
|
Our
sales cycle is long and unpredictable, and our sales efforts
require considerable time and expense. As a result, our revenues
are difficult to predict and may vary substantially from quarter
to quarter, which may cause our operating results to
fluctuate.
Our operating results may fluctuate, in part, because of the
intensive nature of our sales efforts, the length and
variability of the sales cycle of our ESM products and the
short-term difficulty in adjusting our operating expenses.
Because decisions to purchase products such as our ESM products
involve significant capital commitments by customers, potential
customers generally have our products evaluated at multiple
levels within an organization, each often having specific and
conflicting requirements. Enterprise customers make product
purchasing decisions based in part on factors not directly
related to the features of the products, including but not
limited to the customers projections of business growth,
uncertainty regarding economic conditions, capital budgets and
anticipated cost savings from implementation of the software. As
a result of these factors, selling our products often requires
an extensive effort throughout a customers organization.
The continuing instability in global and U.S. economic and
financial market conditions has increased the duration of our
sales cycle and requires greater intensity of our sales efforts
as customers review their spending decisions. In addition, we
have less experience with sales of ArcSight Express and some of
our other appliance products. As a result, the sales cycle for
these products may be lengthy or may vary significantly. Our
sales efforts involve educating our customers, who are often
relatively unfamiliar with our products and their technical
capabilities, as well as the value of our products, including
the potential cost savings to the organization that our products
may generate. We spend substantial time, effort and money in our
sales efforts without any assurance that our efforts will
produce any sales.
The length of our sales cycle, from initial evaluation to
delivery of products, tends to be long and varies substantially
from customer to customer. Our sales cycle is typically three to
six months but can extend to more than a year for some sales. We
typically recognize a large portion of our product revenues in
the last few weeks of a quarter. It is difficult to predict
exactly when, or even if, we will actually make a sale with a
potential customer. As a result, large individual sales have, in
some cases, occurred in quarters subsequent to those we
anticipated, or have not occurred at all. The loss or delay of
one or more large product transactions in a quarter could impact
our operating results for that quarter and any future quarters
for which revenues from that transaction are delayed. As a
result of these factors, it is difficult for us to accurately
forecast product revenues in any quarter. Because a substantial
portion of our expenses are relatively fixed in the short-term,
our operating results will suffer if revenues fall below our
expectations in a particular quarter, which could cause the
price of our common stock to decline significantly.
If we
fail to enhance and manage our distribution channels, our
revenues could decline and our growth prospects could
suffer.
We derive a portion of our revenues from sales of our products
and related services through channel partners, such as resellers
and systems integrators. In particular, systems integrators are
an important source of sales leads for us in the
U.S. public sector, as government agencies often rely on
them to meet information technology, or IT, needs. We also use
resellers to augment our internal resources in international
markets and domestically. We may be
15
required by our U.S. government customers to utilize
particular resellers that may not meet our criteria for
creditworthiness, and revenues from those resellers may not be
recognizable until receipt of payment. We have derived, and
anticipate that in the future we will continue to derive, a
substantial portion of the sales of ArcSight Logger and other
appliance products through channel partners, including parties
with which we have not yet developed relationships. We expect
that channel sales will represent a substantial portion of our
revenues for the foreseeable future. In order to scale our
channel program to support growth in our business, it is
important that we continue to help our partners enhance their
ability to independently sell and deploy our products. We may be
unable to continue to successfully expand and improve the
effectiveness of our channel sales program. If we do not
successfully execute our strategy to increase channel sales,
particularly to further develop relationships with systems
integrators to facilitate sales to large enterprises and
agencies of the U.S. government, penetrate the mid-market
and sell our appliance products, our growth prospects may be
materially and adversely affected.
Our agreements with our channel partners are generally
non-exclusive and many of our channel partners have more
established relationships with our competitors. If our channel
partners do not effectively market and sell our products, if
they choose to place greater emphasis on products of their own
or those offered by our competitors, or if they fail to meet the
needs of our customers, our ability to grow our business and
sell our products may be adversely affected. Similarly, the loss
of a substantial number of our channel partners, who may cease
marketing our products and services with limited or no notice
and with little or no penalty, and our possible inability to
replace them, the failure to recruit additional channel
partners, or any reduction or delay in their sales of our
products and services or conflicts between channel sales and our
direct sales and marketing activities could materially and
adversely affect our results of operations. In addition,
increases in the proportion of our revenues attributable to
sales by channel partners, which are more likely than direct
sales to involve collectability concerns at the time of contract
execution and product delivery, in particular with channel
partners in developing markets, may cause our operating results
to fluctuate from period to period.
We
operate in an evolving market that has not yet reached
widespread adoption and have a history of losses, and we may not
be profitable in the future.
We launched our ESM products in January 2002 and our first
ArcSight Logger product in December 2006. Because the market for
our products is rapidly evolving and has not yet reached
widespread adoption, it is difficult for us to predict our
operating results and the ultimate size of the market for our
products. Although we recorded net income of $28.4 million
and $9.9 million for the fiscal years ended April 30,
2010 and April 30, 2009, respectively, we have a history of
losses from operations, incurring losses from operations of
$1.4 million, $0.3 million and $16.8 million for
the fiscal years ended April 30, 2008, 2007 and 2006,
respectively. As of April 30, 2010, our accumulated deficit
was $8.4 million. We expect our operating expenses to
increase over the next several years as we hire additional sales
and marketing personnel, expand and improve the effectiveness of
our distribution channel program and develop our technology and
new products. In addition, we have incurred, and anticipate that
we will continue to incur, significant legal, accounting and
other expenses relating to being a public company. If our
revenues do not increase to offset these expected increases in
operating expenses, we may not continue to be profitable in
future periods. Our historical revenue growth has been
inconsistent and should not be considered indicative of our
future performance. See the section entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations Sources of
Revenue, Cost of Revenues and Operating Expenses. Further,
in future periods, our revenues could decline and, accordingly,
we may not be able to sustain or increase profitability on a
consistent basis, which may result in a decline in our common
stock price.
If we
are unable to successfully develop and market new products, make
enhancements to our existing products or expand our offerings
into new markets, our business may not grow and our operating
results may suffer.
We introduced our most recent ArcSight ESM product in June 2010
and we are currently developing new versions of this product and
our Logger product, as well as developing new products in our
ETRM platform and new complementary products. Our growth
strategy and future financial performance will depend, in part,
on our ability to market and sell these products and to
diversify our offerings by successfully developing, timely
introducing and gaining customer acceptance of new products.
16
The software in our products, particularly our ArcSight ESM and
ArcSight Express products, is especially complex because it must
recognize, effectively interact with and manage a wide variety
of devices and applications, and identify and respond to new and
increasingly sophisticated security threats and other risks,
while not impeding the high network performance demanded by our
customers. The typical development cycle for a patch to our ESM
software is one to three months, a service pack is usually four
to six months and a new version or major
sub-version
is generally 12 to 18 months, and are released when and if
available. Customers and industry analysts expect speedy
introduction of software to respond to new threats and risks and
to add new functionality, and we may be unable to meet these
expectations. Since developing new products or new versions of,
or add-ons to, existing products is complex, the timetable for
their commercial release is difficult to predict and may vary
from our historical experience, which could result in delays in
their introduction from anticipated or announced release dates.
We may not offer updates as rapidly as new threats affect our
customers. If we do not quickly respond to the rapidly changing
and rigorous needs of our customers by developing and
introducing on a timely basis new and effective products,
upgrades and services that can respond adequately to new
security threats, our competitive position, business and growth
prospects will be harmed.
Diversifying our product offerings and expanding into new
markets will require significant investment and planning, will
bring us more directly into competition with software providers
that may be better established or have greater resources than we
do, will require additional investment of time and resources in
the development and training of our channel and strategic
partners and will entail significant risk of failure. Sales of
our ArcSight Logger and ArcSight Express products and other
products that we may develop and market may reduce revenues of
our flagship ESM product and our overall margin by offering a
subset of features or capabilities of our flagship ESM product
at a reduced price with a lower gross margin. If the average
selling price for orders of such alternate products is lower, we
may need to sell to a larger number of customers to achieve
equivalent revenues, potentially incurring increased sales,
marketing and general and administrative expenses in support of
those sales. Moreover, increased emphasis on the sale of our
appliance products, add-on products or new product lines could
distract us from sales of our core ArcSight ESM offering,
negatively affecting our overall sales. If we fail or delay in
diversifying our existing offerings or expanding into new
markets, or we are unsuccessful competing in these new markets,
our business, operating results and prospects may suffer.
Our
business depends, in part, on sales to the public sector, and
significant changes in the contracting or fiscal policies of the
public sector could have a material adverse effect on our
business.
We derive a portion of our revenues from contracts with federal,
state, local and foreign governments and government agencies,
and we believe that the success and growth of our business will
continue to depend on our successful procurement of government
contracts. For example, we have historically derived, and expect
to continue to derive, a significant portion of our revenues
from sales to agencies of the U.S. federal government,
either directly by us or through systems integrators and other
resellers. In the fiscal years ended April 30, 2010, 2009
and 2008, we derived 32%, 22% and 20% of our revenues,
respectively, from contracts with agencies of the
U.S. federal government. Accordingly:
|
|
|
|
|
changes in fiscal or contracting policies or decreases in
available government funding;
|
|
|
|
changes in government programs or applicable requirements;
|
|
|
|
the adoption of new laws or regulations or changes to existing
laws or regulations;
|
|
|
|
changes in political or social attitudes with respect to
security issues; and
|
|
|
|
potential delays or changes in the government appropriations
process, including actions such as spending freezes implemented
to address political or fiscal policy concerns,
|
could cause governments and governmental agencies to delay or
refrain from purchasing the products and services that we offer
in the future or otherwise have an adverse effect on our
business, financial condition and results of operations.
17
We
face intense competition in our market, including with larger,
better-known companies, and we may be unable to simultaneously
compete effectively for enterprise threat and risk management
opportunities at both the large enterprise level and for smaller
mid-size customers.
The market for enterprise threat and risk management products is
intensely competitive, and we expect competition to increase in
the future. We believe that there are three primary sources of
competition or potential competition for our products and
related professional services:
|
|
|
|
|
custom internal efforts;
|
|
|
|
specialized startup companies; and
|
|
|
|
large software companies.
|
A significant source of competition, is represented by custom
efforts undertaken by potential customers to analyze and manage
the information produced from their existing devices and
applications to identify and remediate threats and satisfy
compliance requirements. While we believe that over the last
several years a declining portion of potential customers are
undertaking such custom efforts, that apparent trend may not
continue. In addition, some organizations have outsourced these
functions to managed security services providers.
For customers that choose to purchase a commercial product
rather than developing their own solution, a significant number
of specialized, privately-held companies, such as LogLogic,
netForensics, NitroSecurity, Q1 Labs and SenSage, have
developed, or are developing, products that currently, or in the
future are likely to, compete with some or all of our products.
This includes companies with log management products that are
adding SIEM functionality to their offerings and SIEM companies
adding some form of log management product to their offerings,
as the two fields converge.
We also continue to experience competition from several larger
security-focused software vendors, such as EMC, that offer
functionality such as ours, primarily SIEM, as a component of
suites of products that include software applications for
security and compliance and enterprise management, and in some
cases as a point solution. Further, as the market for our
enterprise threat and risk management platform continues to
grow, we expect that large diversified enterprise software and
hardware vendors may seek to enter this market, either by way of
the organic development of a competing product line or through
the acquisition of a competitor. Competitors that offer a large
array of security or software products may be able to offer
products or functionality similar to ours at a more attractive
price than we can by integrating or bundling them with their
other product offerings.
We anticipate that mergers, acquisitions or consolidations by
and among actual and potential competitors will continue to
accelerate. For example, in the last five years, IBM has
acquired Internet Security Systems, Inc., Micromuse and Consul,
Novell acquired
e-Security,
EMC acquired Network Intelligence and recently announced an
agreement to acquire Archer Technologies and TrustWave acquired
Intellitactics. Acquisitions such as these present heightened
competitive challenges to our business. The consolidation in our
industry increases the likelihood of competition based on
integration or bundling, particularly where their products and
offerings are effectively integrated, and we believe that
consolidation in our industry may increase the competitive
pressures we face on all our products. If we are unable to
sufficiently differentiate our products from the integrated or
bundled products of our competitors, such as by offering
enhanced functionality, performance or value, we may see a
decrease in demand for those products, which would adversely
affect our business, operating results and financial condition.
Further, it is possible that continued industry consolidation
may impact customers perceptions of the viability of
smaller or even medium-sized software firms and consequently
customers willingness to purchase from such firms.
Similarly, if customers seek to concentrate their software
purchases in the product portfolios of a few large providers, we
may be at a competitive disadvantage notwithstanding the
superior performance that we believe our products can deliver.
We believe that in order to remain competitive at the large
enterprise level, we will need to develop and expand
relationships with the large system integrators that provide
broad ranging products and services for these governmental and
civilian customers.
A number of our existing and potential competitors enjoy
substantial competitive advantages, such as:
|
|
|
|
|
greater name recognition and longer operating histories;
|
18
|
|
|
|
|
larger sales and marketing budgets and resources;
|
|
|
|
the capacity to leverage their sales efforts and marketing
expenditures across a broader portfolio of products;
|
|
|
|
broader distribution and established relationships with
distribution partners;
|
|
|
|
access to larger customer bases;
|
|
|
|
greater customer support;
|
|
|
|
greater resources to make acquisitions;
|
|
|
|
wider geographic presence;
|
|
|
|
lower labor and development costs; and
|
|
|
|
substantially greater financial, technical and other resources.
|
As a result, they may be able to adapt more quickly and
effectively to new or emerging technologies and changing
opportunities, standards or customer requirements. In addition,
these companies have reduced, and could continue to reduce, the
price of their enterprise security and compliance management,
log collection and storage products and managed security
services, resulting in intensified pricing pressures within our
market.
We may not compete successfully against our current or potential
competitors. Companies competing with us may introduce products
that have greater performance or functionality, are easier to
implement or use, or incorporate technological advances that we
have not yet developed or implemented. In addition, companies
competing with us may price their products more competitively
than ours, or have an entirely different pricing or distribution
model, such as making introductory versions with limited
functionality available as freeware products. Further, wide
adoption of our Common Event Format, which we are promoting as a
standard for event logs generated by security and other
products, may facilitate development by our competitors and
potential competitors.
Increased competition could result in fewer customer orders,
price reductions, reduced operating margins and loss of market
share. Our larger competitors and potential competitors may be
able to provide customers with different or greater capabilities
or benefits than we can provide in areas such as technical
qualifications or geographic presence, or to provide customers a
broader range of services and products and price. In addition,
large competitors may have more extensive relationships within
large enterprises, the federal government or foreign
governments, which relationships may provide them with an
advantage in competing for business with those potential
customers. We may be required to make substantial additional
investments in research, development, marketing and sales in
order to respond to competition, and we cannot assure you that
we will be able to compete successfully in the future.
We may
not be able to compete effectively with companies that integrate
or bundle products similar to ours with their other product
offerings.
Many large, integrated software companies offer suites of
products that include software applications for security and
compliance management. In addition, hardware vendors, including
diversified, global concerns, offer products that address the
security and compliance needs of the enterprises and government
agencies that comprise our target market. Further, several
companies currently sell software products that our customers
and potential customers have broadly adopted, providing them a
substantial advantage when they sell products that perform
functions substantially similar to some of our products.
Competitors that offer a large array of security or software
products may be able to offer products or functionality similar
to ours at a more attractive price than we can by integrating or
bundling them with their other product offerings. The
consolidation in our industry increases the likelihood of
competition based on integration or bundling. Customers may also
increasingly seek to consolidate their enterprise-level software
purchases with a small number of larger companies that can
purport to satisfy a broad range of their requirements. If we
are unable to sufficiently differentiate our products from the
integrated or bundled products of our competitors, such as by
offering enhanced functionality, performance or value, we may
see a decrease in demand for our products, which would adversely
affect our business, operating results and financial condition.
Similarly, if customers seek to concentrate their software
purchases with a few large providers, we may be at a competitive
disadvantage.
19
If we
are unable to maintain and further develop our relationships
with our existing customers, our operating results may
decline.
In recent years, the majority of our product revenues has come
from sales to existing customers. Many customers make an initial
purchase from us and then decide to use our products with
respect to a larger portion of their business and technology
infrastructure or buy additional complementary products from us.
Part of our strategy is to further penetrate our existing
customers by expanding their use of our platform across the
enterprise and extending their use of our products to new use
cases. We may not be effective in executing this or any other
aspect of our growth strategy. Our revenue could decline if our
current customers do not continue to purchase additional
products and services from us, or make follow-on purchases at
lower than historical levels.
If we
are not able to maintain and enhance our brand, our business and
operating results may be harmed.
We believe that maintaining and enhancing our brand identity is
critical to our relationships with, and to our ability to
attract, new customers and partners. The successful promotion of
our brand will depend largely upon our marketing and public
relations efforts, our ability to continue to offer high-quality
products and services, and our ability to successfully
differentiate our products and services from those of our
competitors, especially to the extent that our competitors
integrate or bundle competitive offerings with a broader array
of products and services that they may offer. Our brand
promotion activities may not be successful or yield increased
revenues. In addition, extension of our brand to products and
uses different from our traditional products and services may
dilute our brand, particularly if we fail to maintain the
quality of our products and services in these new areas.
Moreover, it may be difficult to maintain and enhance our brand
in connection with sales through channel or strategic partners.
The promotion of our brand requires us to make substantial
expenditures, and we anticipate that the expenditures will
increase as our market becomes more competitive and as we expand
into new markets and as more sales are through our channel
partners. To the extent that these activities yield increased
revenues, these revenues may not offset the expenses we incur.
If we do not successfully maintain and enhance our brand, our
business may not grow, we may have reduced pricing power
relative to competitors with stronger brands, and we could lose
customers and channel partners, all of which would harm our
business, operating results and financial condition.
In addition, independent industry analysts often provide reviews
of our products and services, as well as those of our
competitors, and perception of our products in the marketplace
may be significantly influenced by these reviews. We have no
control over what these industry analysts report, and because
industry analysts may influence current and potential customers,
our brand could be harmed if they do not provide a positive
review of our products and services or view us as a market
leader.
We may
have difficulty forecasting demand for our appliance products
and, because we primarily rely on a single contract manufacturer
for manufacture and fulfillment of our appliance products, we
may be unable to fulfill orders for these appliance
products.
Fulfillment of sales of our appliance products involves hardware
manufacturing, inventory, import certification and return
merchandise authorization processes. If we fail to accurately
predict demand and as a result our manufacturers maintain
insufficient hardware inventory or excess inventory, we may be
unable to timely deliver ordered products or may have
substantial inventory expense. Because our channel partners do
not purchase our products in advance of customer orders, we may
face additional difficulty in accurately forecasting demand for
our hardware products. This difficulty in forecasting could
increase as the number of sales transactions that do not
directly involve our sales force increases, which is one of the
goals of our channel program, since we have limited historical
experience upon which to base forecasts for these types of sales
transactions. Further, as the size of individual orders
increases, we may be unable to cause delivery of unforecasted
orders, particularly near the end of quarterly periods. In
addition, we primarily use one source for the manufacture and
fulfillment of our appliance products and if this equipment
vendor fails to manufacture our appliance products or fulfill
orders in required volumes, in a timely manner, at a sufficient
level of quality, or at all, if it is no longer financially
viable or for other reasons, we may be unable to fulfill
customer orders and our operating results may fluctuate from
period to period, particularly if a disruption occurs near the
end of a fiscal period. Disruptions in the manufacture and
fulfillment of our products could damage our reputation and
relationships with our customers and result in revenue declines
and a
20
negative effect on our growth prospects. In addition, if we
change our hardware configuration or manufacturer, some
countries may require us to reinitiate their import
certification process. If we are unable to successfully perform
these functions or maintain a relationship with a fulfillment
partner that does so for us, our sales, operating results and
financial condition may be harmed. In addition, the process of
obtaining additional or alternative capacity with a different
contract manufacturer would likely result in an increase of cost
of goods sold, which could negatively impact our financial
performance if we are unable to offset such increases with
increases in the prices we charge our customers.
We
face risks related to customer outsourcing to managed security
service providers.
Some of our customers have outsourced the management of their IT
departments or the network security operations function to large
systems integrators or managed security service providers, or
MSSPs. If this trend continues, our established customer
relationships could be disrupted and our products could be
displaced by alternative system and network protection solutions
offered by systems integrators or MSSPs. Significant product
displacements could impact our revenues and have a negative
effect on our business. While to date we have developed a number
of successful relationships with MSSPs, they may develop or
acquire their own technologies rather than purchasing our
products for use in provision of managed security services.
Seasonality
may cause fluctuations in our operating results.
We believe that our product revenue has been seasonal
historically, increasing in each quarter through the fiscal
year, but with the first quarter of our fiscal year having
relatively lower product revenue compared to the prior fourth
fiscal quarter. However, we believe that there are significant
seasonal factors that may cause the second and fourth quarters
of our fiscal year to have relatively higher product revenue
(with the first and third fiscal quarters each potentially
having lower revenue than the immediately preceding fiscal
quarter). We believe that this seasonality results from a number
of factors, including:
|
|
|
|
|
the timing of our annual sales club for top
performers and annual training for our entire sales force in our
first fiscal quarter;
|
|
|
|
the fiscal year end procurement cycle of our government
customers;
|
|
|
|
the budgeting, procurement and work cycles of our customers,
including customers in the public sector;
|
|
|
|
seasonal reductions in business activity during the summer
months in the United States, Europe and certain other
regions; and
|
|
|
|
the structure of our direct sales incentive and compensation
program, which may reinforce the tendency of our direct sales
team to book the largest volume of deals toward the end of our
fiscal year.
|
We believe that our rapid historical growth and the required
timing of new compliance mandates may have overshadowed the
nature or magnitude of seasonal or cyclical factors that might
have influenced our business to date. In addition, the timing of
one or more large transactions may overshadow seasonal factors
in any particular quarterly period. In the future, we may
experience growth from additional compliance and cybersecurity
mandates that could continue to mask underlying seasonal
purchasing decisions by our customers. Seasonal or cyclical
variations in our operations may become more pronounced over
time and may materially affect our results of operations in the
future.
For example, as noted above, the timing of our fiscal quarters
and the U.S. federal governments September 30 fiscal
year end may impact product sales to governmental agencies in
the second quarter of our fiscal year, offsetting the otherwise
seasonal downturn in later summer months. Government spending on
cybersecurity and new compliance mandates may drive customer
demand at different times throughout our fiscal year, the timing
of which we may not be able to anticipate and may cause
fluctuations in our operating results. In addition, sales to
customers with a standard December 31 fiscal year end may have a
positive impact on our license revenue in the third quarter of
our fiscal year, potentially offsetting the impact of the major
holidays during the period. We expect seasonality to continue to
impact our business in the future.
21
Failure
to comply with laws or regulations applicable to our business
could cause us to lose U.S. government customers or our ability
to contract with the U.S. government.
We must comply with laws and regulations relating to the
formation, administration and performance of
U.S. government contracts, which affect how we and our
channel partners do business with U.S. government agencies.
These laws and regulations may impose added costs on our
business, and failure to comply with these or other applicable
regulations and requirements, including non-compliance in the
past, could lead to claims for damages from our channel
partners, and penalties, termination of contracts and suspension
or debarment from government contracting for a period of time
with U.S. government agencies. Any such damages, penalties,
disruption or limitation in our ability to do business with the
U.S. government could have a material adverse effect on our
business, operating results and financial condition.
Our
government contracts may limit our ability to move development
activities overseas and to source components from some
countries, which may impair our ability to optimize our product
development costs and compete for non-government
contracts.
Increasingly, product development and component sourcing are
being shifted to lower-cost countries, such as India and China.
However, some contracts with U.S. government agencies
require that at least 50% of the components of each of our
products be of U.S. origin or that each product be
substantially transformed in the U.S. or in a country on
the U.S. governments list of designated countries.
Consequently, our ability to optimize our product development by
conducting it overseas and to lower our costs of goods sold by
sourcing from lower cost regions may be hampered. Some of our
competitors do not rely on contracts with the
U.S. government to the same degree as we do and may develop
product or source components offshore, or may have the scale to
permit them to separately source versions of their competing
products for sale to customers other than U.S. government
agencies. If we are unable to develop product or source
components as cost-effectively as our competitors, our ability
to compete for our non-government customers may be reduced and
our customer sales may decline, resulting in decreased revenues.
Real
or perceived errors, failures or bugs in our products could
adversely affect our operating results and growth
prospects.
Because we offer very complex products, undetected errors,
failures or bugs may occur, especially when products are first
introduced or when new versions are released. Our products are
often installed and used in large-scale computing environments
with different operating systems, system management software and
equipment and networking configurations, which may cause errors
or failures in our products or may expose undetected errors,
failures or bugs in our products. Despite testing by us, errors,
failures or bugs may not be found in new products or releases
until after commencement of commercial shipments. In the past,
we have discovered software errors, failures and bugs in some of
our product offerings after their introduction.
In addition, our products could be perceived to be ineffective
for a variety of reasons outside of our control. Hackers could
circumvent our customers security measures, and customers
may misuse our products resulting in a security breach or
perceived product failure. We provide a top-level enterprise
security and compliance management solution that integrates a
wide variety of other elements in a customers IT and
security infrastructure, and we may receive blame for a security
breach that was the result of the failure of one of the other
elements.
Real or perceived errors, failures or bugs in our products could
result in negative publicity, loss of or delay in market
acceptance of our products, loss of competitive position or
claims by customers for losses sustained by them. In such an
event, we may be required, or may choose, for customer relations
or other reasons, to expend additional resources in order to
help correct the problem. Our product liability insurance may
not be adequate. Further, provisions in our license agreements
with end users that limit our exposure to liabilities arising
from such claims may not be enforceable in some circumstances or
may not fully protect us against such claims and related
liabilities and costs. Defending a lawsuit, regardless of its
merit, could be costly and could limit the amount of time that
management has available for
day-to-day
execution and strategic planning or other matters.
Many of our end-user customers use our products in applications
that are critical to their businesses and may have a greater
sensitivity to defects in our products than to defects in other,
less critical, software products. In
22
addition, if an actual or perceived breach of information
integrity or availability occurs in one of our end-user
customers systems, regardless of whether the breach is
attributable to our products, the market perception of the
effectiveness of our products could be harmed. Alleviating any
of these problems could require significant expenditures of our
capital and other resources and could cause interruptions,
delays or cessation of our product licensing, which could cause
us to lose existing or potential customers and could adversely
affect our operating results and growth prospects.
In addition, because we are a leading provider of enterprise
security products and services, hackers and others
may try to access our data or compromise our systems. If we are
the subject of a successful attack, then our reputation in the
industry and with current and potential customers may be
compromised and our sales and operating results could be
adversely affected.
Incorrect
or improper use of our complex products, our failure to properly
train customers on how to utilize our products or our failure to
properly provide consulting and implementation services could
result in customer dissatisfaction and negatively affect our
results of operations and growth prospects.
Our ESM products are complex and are deployed in a wide variety
of network environments. The proper use of our products,
particularly our ESM products, requires training of the end
user. If our products are not used correctly or as intended,
inadequate performance may result. For example, among other
things, deployment of our ESM products requires categorization
of IT assets and assignment of business or criticality values
for each, selection or configuration of one of our pre-packaged
rule sets, user interfaces and network utilization parameters,
and deployment of connectors for the various devices and
applications from which event data are to be collected. Our
customers or our professional services personnel may incorrectly
implement or use our products. Our products may also be
intentionally misused or abused by customers or their employees
or third parties who obtain access and use of our products.
Similarly, our ArcSight Express and Logger products, while less
complex than our ESM products, are often distributed through
channel partners and sold to customers with smaller or less
sophisticated IT departments, potentially resulting in
sub-optimal
installation. This may result in performance that is less than
the level anticipated by the end user. Because our customers
rely on our product, service and maintenance offerings to manage
a wide range of sensitive security, network and compliance
functions, the incorrect or improper use of our products, our
failure to properly train customers on how to efficiently and
effectively use our products, our failure to properly provide
consulting and implementation services and maintenance to our
customers or our failure to properly provide services for
customer SOCs, may result in negative publicity or legal claims
against us. For example, as we continue to expand our provision
of SOC services, any failure by us to properly provide these
high profile services will likely result in lost opportunities
for follow-on sales of our software and appliance products in
addition to loss of any opportunity to renew the SOC services
arrangement.
In addition, if customer personnel are not well trained in the
use of our products, customers may defer the deployment of our
products, may deploy them in a more limited manner than
originally anticipated or may not deploy them at all. If there
is substantial turnover of the customer personnel responsible
for implementation and use of our products, our product may go
unused and our ability to make additional sales may be
substantially limited.
If we
are unable to maintain effective relationships with our
technology partners, we may not be able to support the
interoperability of our software with a wide variety of security
and other products and our business may be harmed.
A key feature of ArcSight ESM is that it provides
out-of-the-box
support for many third-party devices and applications that the
customer may use in its business and technology infrastructure.
To provide effective interoperability, we work with individual
product vendors to develop our SmartConnectors, which allow our
ArcSight ESM, ArcSight Logger and ArcSight Express products to
interface with third party products. In addition, we are
promoting the adoption of our Common Event Format as a standard
way to format system log events. Some of these technology
partners are current or potential competitors of ours. If we are
unable to develop and maintain effective relationships with a
wide variety of technology partners, if companies adopt more
restrictive policies with respect to, or impose unfavorable
terms and conditions on, access to their products, or if our
Common Event Format is not widely adopted, we may not be able to
continue to provide our customers with a high degree of
23
interoperability with their existing IT and business
infrastructure, which could reduce our sales and adversely
affect our business, operating results and financial condition.
Our
international sales and operations subject us to additional
risks that can adversely affect our operating
results.
In the fiscal years ended April 30, 2010, 2009 and 2008, we
derived 29%, 27% and 33% of our revenues, respectively, from
customers outside the United States, and we are continuing to
expand our international operations as part of our growth
strategy. We currently have sales personnel and sales and
support operations in Australia, Austria, Brazil, Canada, China,
France, Germany, Hong Kong, India, Italy, Japan, Mexico, the
Netherlands, Poland, Singapore, Spain and the United Kingdom.
Our international operations subject us to a variety of risks,
including:
|
|
|
|
|
increased management, travel, infrastructure and legal
compliance costs associated with having multiple international
operations;
|
|
|
|
longer payment cycles and difficulties in collecting accounts
receivable, especially in emerging markets, and the likelihood
that revenues from international resellers and customers may
need to be recognized when cash is received, at least until
satisfactory payment history has been established;
|
|
|
|
the need to localize our products and licensing programs for
international customers;
|
|
|
|
differing regulatory and legal requirements and possible
enactment of additional regulations or restrictions on the use,
import or export of encryption technologies and our
appliance-based products, which could delay or prevent the sale
or use of our products in some jurisdictions;
|
|
|
|
weaker protection of intellectual property rights in some
countries; and
|
|
|
|
overlapping of different tax regimes.
|
Any of these risks could harm our international operations and
reduce our international sales, adversely affecting our
business, operating results and financial condition and growth
prospects.
Our
business in countries with a history of corruption and
transactions with foreign governments increase the risks
associated with our international activities.
As we operate and sell internationally, we are subject to the
U.S. Foreign Corrupt Practices Act, or the FCPA, and other
laws that prohibit improper payments or offers of payments to
foreign governments and their officials and political parties by
U.S. and other business entities for the purpose of
obtaining or retaining business. We have operations, deal with
and make sales to governmental or quasi-governmental customers
in countries known to experience corruption, particularly
certain emerging countries in East Asia, Eastern Europe, the
Middle East, Russia and South America. Our activities in these
countries create the risk of unauthorized payments or offers of
payments by one of our employees, consultants, sales agents or
channel partners that could be in violation of various laws,
including the FCPA, even though these parties are not always
subject to our control. We have implemented safeguards to
discourage these practices by our employees, consultants, sales
agents and channel partners. However, our existing safeguards
and any future improvements may prove to be less than effective,
and our employees, consultants, sales agents or channel partners
may engage in conduct for which we might be held responsible.
Violations of the FCPA may result in severe criminal or civil
sanctions, including suspension or debarment from
U.S. government contracting, and we may be subject to other
liabilities, which could negatively affect our business,
operating results and financial condition.
Failure
to protect our intellectual property rights could adversely
affect our business.
Our success depends, in part, on our ability to protect
proprietary methods and technologies that we develop under
patent and other intellectual property laws of the United
States, so that we can prevent others from using our inventions
and proprietary information. If we fail to protect our
intellectual property rights adequately, our competitors might
gain access to our technology, and our business might be harmed.
In addition, defending our intellectual property rights might
entail significant expenses. Any of our patents, copyrights,
trademarks or other
24
intellectual property rights may be challenged by others or
invalidated through administrative process or litigation. We
have twelve issued patents and a number of patent applications
pending in the United States, internationally and in specific
foreign countries. Our issued patents may not provide us with
any competitive advantages or may be challenged by third
parties, and our patent applications may never be granted at
all. Additionally, the process of obtaining patent protection is
expensive and time-consuming, and we may not be able to
prosecute all necessary or desirable patent applications at a
reasonable cost or in a timely manner. Even if issued, there can
be no assurance that these patents will adequately protect our
intellectual property, as the legal standards relating to the
validity, enforceability and scope of protection of patent and
other intellectual property rights are uncertain.
Any patents that are issued may subsequently be invalidated or
otherwise limited, enabling other companies to better develop
products that compete with ours, which could adversely affect
our competitive business position, business prospects and
financial condition. In addition, issuance of a patent does not
guarantee that we have a right to practice the patented
invention. Patent applications in the U.S. are typically
not published until 18 months after filing, or in some
cases not at all, and publications of discoveries in
industry-related literature lag behind actual discoveries. We
cannot be certain that we were the first to make the inventions
claimed in our issued patents or pending patent applications or
otherwise used in our products, that we were the first to file
for protection in our patent applications, or that third parties
do not have blocking patents that could be used to prevent us
from marketing or practicing our patented products or
technology. Effective patent, trademark, copyright and trade
secret protection may not be available to us in every country in
which our products and services are available. The laws of some
foreign countries may not be as protective of intellectual
property rights as those in the United States, and mechanisms
for enforcement of intellectual property rights may be
inadequate. Accordingly, despite our efforts, we may be unable
to prevent third parties from infringing upon or
misappropriating our intellectual property.
We might be required to spend significant resources to monitor
and protect our intellectual property rights. We may initiate
claims or litigation against third parties for infringement of
our proprietary rights or to establish the validity of our
proprietary rights. Any litigation, whether or not it is
resolved in our favor, could result in significant expense to us
and divert the efforts of our technical and management
personnel, which may adversely affect our business, operating
results and financial condition.
Confidentiality
agreements with employees and others may not adequately prevent
disclosure of trade secrets and other proprietary
information.
In order to protect our proprietary technology, processes and
methods, we rely in part on confidentiality agreements with our
corporate partners, employees, consultants, advisors and others.
These agreements may not effectively prevent disclosure of
confidential information and may not provide an adequate remedy
in the event of unauthorized disclosure of confidential
information. In addition, others may independently discover
trade secrets and proprietary information, and in these cases we
would not be able to assert any trade secret rights against
those parties. Costly and time-consuming litigation could be
necessary to enforce and determine the scope of our proprietary
rights, and failure to obtain or maintain trade secret
protection could adversely affect our competitive business
position.
We may
in the future be subject to intellectual property rights claims,
which are extremely costly to defend, could require us to pay
significant damages and could limit our ability to use certain
technologies.
Companies in the software, networking and technology industries,
including some of our current and potential competitors, own
large numbers of patents, copyrights, trademarks and trade
secrets and frequently enter into litigation based on
allegations of infringement or other violations of intellectual
property rights. In addition, many of these companies have the
capability to dedicate substantially greater resources to
enforce their intellectual property rights and to defend claims
that may be brought against them. The litigation may involve
patent holding companies or other adverse patent owners who have
no relevant product revenues and against whom our potential
patents may provide little or no deterrence. We have received,
and may in the future receive, notices that claim we have
misappropriated or misused other parties intellectual
property rights, and, to the extent we gain greater visibility,
we face a higher risk of being the subject of intellectual
property infringement claims, which is not uncommon with respect
to software technologies in general and network security
technology in particular. There
25
may be third-party intellectual property rights, including
issued or pending patents, that cover significant aspects of our
technologies or business methods. Any intellectual property
claims, with or without merit, could be very time-consuming,
could be expensive to settle or litigate and could divert our
managements attention and other resources. These claims
could also subject us to significant liability for damages,
potentially including treble damages if we are found to have
willfully infringed patents or copyrights. These claims could
also result in our having to stop using technology found to be
in violation of a third partys rights. We might be
required to seek a license for the intellectual property, which
may not be available on reasonable terms or at all. Even if a
license were available, we could be required to pay significant
royalties, which would increase our operating expenses. As a
result, we may be required to develop alternative non-infringing
technology, which could require significant effort and expense.
If we cannot license or develop technology for any infringing
aspect of our business, we would be forced to limit or stop
sales of one or more of our products or product features and may
be unable to compete effectively. Any of these results would
harm our business, operating results and financial condition.
We
rely on software licensed from other parties, the loss of which
could increase our costs and delay software
shipments.
We utilize various types of software licensed from unaffiliated
third parties in order to provide certain elements of our
product offering. For example, we license database software from
Oracle that we integrate with our ESM product. Our agreement
with Oracle permits us to distribute Oracle software in our
products to our customers and partners worldwide through May
2011. See the section entitled Item 1.
Business Intellectual Property Oracle
License Agreement. Any errors or defects in this
third-party software could result in errors that could harm our
business. In addition, licensed software may not continue to be
available on commercially reasonable terms, or at all. While we
believe that there are currently adequate replacements for
third-party software, any loss of the right to use any of this
software could result in delays in producing or delivering our
software until equivalent technology is identified and
integrated, which delays could harm our business. Our business
would be disrupted if any of the software we license from others
or functional equivalents of this software were either no longer
available to us or no longer offered to us on commercially
reasonable terms. In either case, we would be required to either
redesign our products to function with software available from
other parties or to develop these components ourselves, which
would result in increased costs and could result in delays in
our product shipments and the release of new product offerings.
Furthermore, we might be forced to limit the features available
in our current or future products. If we fail to maintain or
renegotiate any of these software licenses, we could face
significant delays and diversion of resources in attempting to
license and integrate a functional equivalent of the software.
If we
are unable to attract and retain personnel, our business would
be harmed.
We depend on the continued contributions of our senior
management and other key personnel, in particular Tom Reilly and
Hugh Njemanze, the loss of whom could harm our business. All of
our executive officers and key employees are at-will employees,
which means they may terminate their employment relationship
with us at any time. We do not maintain a key-person life
insurance policy on any of our officers or other employees.
Our future success also depends on our ability to identify,
attract and retain highly skilled technical, managerial, finance
and other personnel, particularly in our sales and marketing,
research and development and professional service departments.
We face intense competition for qualified individuals from
numerous security, software and other technology companies. In
addition, competition for qualified personnel is particularly
intense in the San Francisco Bay Area, where our
headquarters are located. Often, significant amounts of time and
resources are required to train technical, sales and other
personnel. Qualified individuals are in high demand. We may
incur significant costs to attract and retain them, and we may
lose new employees to our competitors or other technology
companies before we realize the benefit of our investment in
recruiting and training them. We may be unable to attract and
retain suitably qualified individuals who are capable of meeting
our growing technical, operational and managerial requirements,
on a timely basis or at all, and we may be required to pay
increased compensation in order to do so. If we are unable to
attract and retain the qualified personnel we need to succeed,
our business would suffer.
Volatility or lack of performance in our stock price may also
affect our ability to attract and retain our key employees. Many
of our senior management personnel and other key employees have
become, or will soon become,
26
vested in a substantial amount of stock or stock options.
Employees may be more likely to leave us if the shares they own
or the shares underlying their vested options have significantly
appreciated in value relative to the original purchase prices of
the shares or the exercise prices of the options, or if the
exercise prices of the options that they hold are significantly
above the market price of our common stock. If we are unable to
retain our employees, our business, operating results and
financial condition would be harmed.
If we
fail to manage future growth effectively, our business would be
harmed.
We operate in an emerging market and have experienced, and may
continue to experience, significant expansion of our operations.
In particular, we grew from 335 employees as of
April 30, 2008 to 400 employees as of April 30,
2009, and then to 512 employees as of April 30, 2010.
This growth has placed, and will continue to place, a strain on
our employees, management systems and other resources. Managing
our growth will require significant expenditures and allocation
of valuable management resources. If we fail to achieve the
necessary level of efficiency in our organization as it grows,
our business, operating results and financial condition would be
harmed.
Some
of our products contain open source software, and
any failure to comply with the terms of one or more of these
open source licenses could negatively affect our
business.
Certain of our products are distributed with software licensed
under open source licenses. Some of these licenses
contain requirements that we make available source code for
modifications or derivative works we create based upon the open
source software, and that we license these modifications or
derivative works under the terms of a particular open source
license or other license granting third parties certain rights
of further use. If we combine our proprietary software with open
source software in a certain manner, we could, under certain
provisions of the open source licenses, be required to release
the source code of our proprietary software. In addition to
risks related to license requirements, usage of open source
software can lead to greater risks than use of third-party
commercial software, as open source licensors generally do not
provide warranties or controls on origin of the software. We
have established processes to help alleviate these risks,
including a review process for screening requests from our
development organization for the use of open source software,
but we cannot be sure that all open source software is submitted
for approval prior to use in our products. In addition, open
source license terms may be ambiguous and many of the risks
associated with usage of open source software cannot be
eliminated, and could, if not properly addressed, negatively
affect our business. If we were found to have inappropriately
used open source software, we may be required to re-engineer our
products, to release proprietary source code, to discontinue the
sale of our products in the event re-engineering could not be
accomplished on a timely basis or to take other remedial action
that may divert resources away from our development efforts, any
of which could adversely affect our business, operating results
and financial condition.
Indemnity
provisions in various agreements potentially expose us to
substantial liability for intellectual property infringement and
other losses.
Our agreements with customers and channel partners include
indemnification provisions under which we agree to indemnify
them for losses suffered or incurred as a result of claims of
intellectual property infringement and, in some cases, for
damages caused by us to property or persons. The term of these
indemnity provisions is generally perpetual after execution of
the corresponding product sale agreement. Large indemnity
payments could harm our business, operating results and
financial condition.
Changes
or reforms in the law or regulatory landscape could diminish the
demand for our solutions, and could have a negative impact on
our business.
One factor that drives demand for our products and services is
the legal and regulatory framework in which our customers
operate. Laws and regulations are subject to drastic changes,
and these could either help or hurt the demand for our products.
Thus, some changes in the law and regulatory landscape, such as
legislative reforms that limit corporate compliance obligations,
could significantly harm our business.
27
Future
acquisitions could disrupt our business and harm our financial
condition and results of operations.
We have expanded by acquisition in the past, and we may pursue
additional acquisitions in the future, any of which could be
material to our business, operating results and financial
condition. Our ability as an organization to successfully
acquire and integrate technologies or businesses on a larger
scale is unproven. Acquisitions involve many risks, including
the following:
|
|
|
|
|
an acquisition may negatively impact our results of operations
because it may require us to incur charges and substantial debt
or liabilities, may cause adverse tax consequences, substantial
depreciation or deferred compensation charges, may result in
acquired in-process research and development expenses or in the
future may require the amortization, write-down or impairment of
amounts related to deferred compensation, goodwill and other
intangible assets, or may not generate sufficient financial
return to offset acquisition costs;
|
|
|
|
we may encounter difficulties or unforeseen expenditures in
integrating the business, technologies, products, personnel or
operations of any company that we acquire, particularly if key
personnel of the acquired company decide not to work for us;
|
|
|
|
an acquisition may disrupt our ongoing business, divert
resources, increase our expenses and distract our management;
|
|
|
|
an acquisition may result in a delay or reduction of customer
purchases for both us and the company acquired due to customer
uncertainty about continuity and effectiveness of service from
either company;
|
|
|
|
we may encounter difficulties in, or may be unable to,
successfully sell any acquired products; and
|
|
|
|
an acquisition may involve the entry into geographic or business
markets in which we have little or no prior experience.
|
If we
fail to maintain an effective system of internal controls, our
ability to produce accurate financial statements or comply with
applicable regulations could be impaired.
As a public company, we are subject to the reporting
requirements of the Exchange Act, the Sarbanes-Oxley Act of
2002, or the Sarbanes-Oxley Act, and the rules and regulations
of The NASDAQ Stock Market. We expect that the requirements of
these rules and regulations will continue to increase our legal,
accounting and financial compliance costs, make some activities
more difficult, time-consuming and costly and place undue strain
on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we
maintain effective disclosure controls and procedures and
internal control over financial reporting. We are continuing to
develop and refine our disclosure controls and other procedures
that are designed to ensure that information required to be
disclosed by us in the reports that we file with the SEC is
recorded, processed, summarized and reported within the time
periods specified in SECs rules and forms. As part of this
effort, we have licensed, and our currently in the process of
implementing, a new company-wide integrated enterprise resource
planning, or ERP, system to handle our various business,
operating and financial processes. The implementation of the ERP
system is an extremely complex and time-consuming project. Any
failure to properly implement, or the delay in the
implementation of, the new ERP system could have an adverse
impact on our operating results.
Our current controls and any new controls that we develop may
become inadequate because of changes in conditions, and the
degree of compliance with the policies or procedures may
deteriorate. Further, weaknesses in our internal controls may be
discovered in the future. Any failure to develop or maintain
effective controls, or any difficulties encountered in their
implementation or improvement, could harm our operating results
or cause us to fail to meet our reporting obligations and may
result in a restatement of our prior period financial
statements. Any failure to implement and maintain effective
internal controls also could adversely affect the results of
periodic management evaluations and annual auditor attestation
reports regarding the effectiveness of our internal control over
financial reporting that we are required to include in our
periodic reports filed with the SEC under Section 404 of
the Sarbanes-Oxley Act. Ineffective disclosure controls and
procedures and internal control over financial
28
reporting could also cause investors to lose confidence in our
reported financial and other information, which would likely
have a negative effect on the trading price of our common stock.
In order to maintain and improve the effectiveness of our
disclosure controls and procedures and internal control over
financial reporting, we have expended, and anticipate that we
will continue to expend, significant resources and provide
significant management oversight, which involve substantial
accounting-related costs. Any failure to maintain the adequacy
of our internal controls, or consequent inability to produce
accurate financial statements on a timely basis, could increase
our operating costs and could materially impair our ability to
operate our business. In the event that we are not able to
continue to demonstrate compliance with Section 404 of the
Sarbanes-Oxley Act in a timely manner, that our internal
controls are perceived as inadequate or that we are unable to
produce timely or accurate financial statements, investors may
lose confidence in our operating results and our stock price
could decline. In addition, if we are unable to continue to meet
these requirements, we may not be able to remain listed on The
NASDAQ Global Market.
We have not yet implemented a complete disaster recovery plan or
business continuity plan for our accounting and related
information technology systems. Any disaster could therefore
materially impair our ability to maintain timely accounting and
reporting.
We may
not be able to utilize a significant portion of our net
operating loss carry-forwards, which could adversely affect our
operating results.
Due to prior period losses, we have generated significant
federal and state net operating loss carry-forwards, which
expire beginning in fiscal 2020 and fiscal 2015, respectively.
U.S. federal and state income tax laws limit the amount of
these carry-forwards we can utilize upon a greater than 50%
cumulative shift of stock ownership over a three-year period,
including shifts due to the issuance of additional shares of our
common stock, or securities convertible into our common stock.
We have previously experienced a greater than 50% shift in our
stock ownership, which has limited our ability to use a portion
of our net operating loss carry-forwards, and we may experience
subsequent shifts in our stock ownership. Accordingly, there is
a risk that our ability to use our existing carry-forwards in
the future could be further limited and that existing
carry-forwards would be unavailable to offset future income tax
liabilities, adversely affecting our operating results.
Governmental
export or import controls could subject us to liability or limit
our ability to compete in foreign markets.
Our products incorporate encryption technology and may be
exported outside the U.S. only if we obtain an export
license or qualify for an export license exception. Compliance
with applicable regulatory requirements regarding the export of
our products, including new releases of our products, may create
delays in the introduction of our products in international
markets, prevent our customers with international operations
from deploying our products throughout their global systems or,
in some cases, prevent the export of our products to some
countries altogether. In addition, various countries regulate
the import of our appliance-based products and have enacted laws
that could limit our ability to distribute products or could
limit our customers ability to implement our products in
those countries. Any new export or import restrictions, new
legislation or shifting approaches in the enforcement or scope
of existing regulations, or in the countries, persons or
technologies targeted by such regulations, could result in
decreased use of our products by existing customers with
international operations, declining adoption of our products by
new customers with international operations and decreased
revenues. If we fail to comply with export and import
regulations, we may be denied export privileges, be subjected to
fines or other penalties and our products may be denied entry
into other countries.
We may
become a party to litigation that may negatively affect our
business results of operations or financial
condition.
From time to time, we may become involved in various legal
proceedings relating to matters incidental to the ordinary
course of our business, including employment litigation. Such
matters can be expensive and disruptive to normal business
operations. In addition, the outcome of litigation is highly
uncertain and an unfavorable outcome in such litigation could
have a negative effect on our business, results of operations or
financial condition.
29
Risks
Related to Ownership of Our Common Stock
Our
stock price may be volatile or may decline regardless of our
operating performance.
The trading prices of the securities of technology companies
have been highly volatile. The market price of our common stock
may fluctuate significantly in response to numerous factors,
many of which are beyond our control, including:
|
|
|
|
|
actual or anticipated fluctuations in our operating results;
|
|
|
|
the financial projections we may provide to the public, any
changes in these projections or our failure to meet these
projections;
|
|
|
|
failure of securities analysts to maintain coverage of us,
changes in financial estimates by any securities analysts who
follow our company, or our failure to meet these estimates or
the expectations of investors;
|
|
|
|
ratings or other changes by any securities analysts who follow
our company or our industry;
|
|
|
|
announcements by us or our competitors of significant technical
innovations, acquisitions, strategic partnerships, joint
ventures or capital commitments;
|
|
|
|
changes in operating performance and stock market valuations of
other technology companies generally, or those in our industry
in particular;
|
|
|
|
price and volume fluctuations in the overall stock market,
including as a result of trends in the economy as a whole, such
as the continuing volatility in the financial markets;
|
|
|
|
lawsuits threatened or filed against us; and
|
|
|
|
other events or factors, including those resulting from war,
incidents of terrorism or responses to these events.
|
In addition, the stock markets, and in particular The NASDAQ
Global Market on which our common stock is listed, have
experienced extreme price and volume fluctuations that have
affected and continue to affect the market prices of equity
securities of many companies, particularly technology companies.
Broad market fluctuations such as these may have and could
continue to adversely affect the market price of our common
stock. Even prior to the continuing volatility in the financial
markets, stock prices of many technology companies had
fluctuated in a manner unrelated or disproportionate to the
operating performance of those companies. In the past,
stockholders have instituted securities class action litigation
following periods of market volatility. If we were to become
involved in securities litigation, it could subject us to
substantial costs, divert resources and the attention of
management from our business and adversely affect our business,
operating results and financial condition.
If
securities or industry analysts cease publishing research or
publish inaccurate or unfavorable research about our business,
our stock price and trading volume could decline.
The trading market for our common stock depends in part on the
research and reports that securities or industry analysts
publish about us or our business. Securities analysts and
industry analysts that currently cover us may cease to do so,
negatively impacting the trading price for our stock. If one or
more of the analysts who cover us or our industry downgrade our
stock or the stock of other companies in our industry, or
publish inaccurate or unfavorable research about our business or
industry, our stock price would likely decline. If one or more
of these analysts fail to publish reports on us regularly,
demand for our stock could decrease, which might cause our stock
price and trading volume to decline.
Delaware
law, provisions in our restated certificate of incorporation and
amended and restated bylaws and the concentration of our
ownership could make a merger, tender offer or proxy contest
difficult, thereby depressing the trading price of our common
stock.
We are a Delaware corporation and the anti-takeover provisions
of the Delaware General Corporation Law may discourage, delay or
prevent a change in control by prohibiting us from engaging in a
business combination with an interested stockholder for a period
of three years after the person becomes an interested
stockholder, even if
30
a change of control would be beneficial to our existing
stockholders. In addition, our restated certificate of
incorporation and amended and restated bylaws contain provisions
that may make the acquisition of our company more difficult
without the approval of our board of directors, including the
following:
|
|
|
|
|
our board of directors is classified into three classes of
directors with staggered three-year terms;
|
|
|
|
currently only our president and chief executive officer, our
lead independent director or a majority of our board of
directors is authorized to call a special meeting of
stockholders;
|
|
|
|
our stockholders are only able to take action at a meeting of
stockholders and not by written consent;
|
|
|
|
vacancies on our board of directors are able to be filled only
by our board of directors and not by stockholders;
|
|
|
|
directors may be removed from office only for cause;
|
|
|
|
our restated certificate of incorporation authorizes
undesignated preferred stock, the terms of which may be
established, and shares of which may be issued, without
stockholder approval; and
|
|
|
|
advance notice procedures will apply for stockholders to
nominate candidates for election as directors or to bring
matters before an annual meeting of stockholders.
|
In addition, as of July 1, 2010 our directors and executive
officers, together with their affiliates, beneficially own in
the aggregate 20.1% of our outstanding common stock (including
options exercisable by those holders within 60 days of that
date). Further, holders that together with their affiliates,
hold 5% or more of our outstanding common stock, but who are not
affiliated with our directors and executive officers,
beneficially own in the aggregate an additional 20.1% of our
outstanding common stock as of July 1, 2010. As a result,
our directors and officers and their affiliates, collectively,
or our largest stockholders, acting together, may be able to
impede a merger, consolidation or sale of all or substantially
all of our assets.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
Our corporate headquarters and research and development
facilities occupy approximately 116,000 square feet in
Cupertino, California under a lease that expires on May 31,
2017. In addition to our principal office space in Cupertino, we
lease facilities for use as sales and local support offices in
various cities in the United States and internationally. We
believe our facilities are adequate for our needs for at least
the next 12 months. We also anticipate that suitable
additional or alternative space will be reasonably available to
accommodate foreseeable expansion of our operations.
|
|
Item 3.
|
Legal
Proceedings
|
We are subject to various claims, complaints and legal actions
that arise in the normal course of business from time to time.
We do not believe we are party to any currently pending legal
proceedings the outcome of which will have a material adverse
effect on our operations or financial position. 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 business, consolidated financial
position, results of operations or cash flows.
|
|
Item 4.
|
(Removed
and Reserved)
|
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
31
Market
Information for Common Stock
Our common stock has been listed on The NASDAQ Global Market
under the symbol ARST since our IPO in February
2008. The following table sets forth, for the periods indicated,
the high and low
intra-day
prices for our common stock as reported on The NASDAQ Global
Market.
|
|
|
|
|
|
|
|
|
Fiscal 2009
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
11.74
|
|
|
$
|
7.19
|
|
Second Quarter
|
|
|
13.00
|
|
|
|
5.25
|
|
Third Quarter
|
|
|
10.00
|
|
|
|
4.17
|
|
Fourth Quarter
|
|
|
16.10
|
|
|
|
7.70
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
20.80
|
|
|
$
|
13.52
|
|
Second Quarter
|
|
|
25.99
|
|
|
|
16.90
|
|
Third Quarter
|
|
|
29.24
|
|
|
|
22.15
|
|
Fourth Quarter
|
|
|
29.33
|
|
|
|
22.58
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2011
|
|
High
|
|
Low
|
|
First Quarter (through July 6, 2010)
|
|
$
|
25.77
|
|
|
$
|
17.51
|
|
Stockholders
As of July 1, 2010, we had approximately 41 record holders
of our common stock.
Stock
Price Performance Graph
The following graph shows a comparison from February 14,
2008 (the date our common stock commenced trading on The NASDAQ
Global Market) through April 30, 2009 of the cumulative
total return for an investment of $100 (and the reinvestment of
dividends) in our common stock, the NASDAQ Composite Index and
the NASDAQ Computer and Data Processing Index. Such returns are
based on historical results and are not intended to suggest
future performance.
COMPARISON
OF 26 MONTH CUMULATIVE TOTAL RETURN*
Among
ArcSight, Inc., the NASDAQ Composite Index
and the NASDAQ Computer & Data Processing Index
|
|
|
* |
|
$100 invested on 2/14/08 in stock or 1/31/08 in index, including
reinvestment of dividents. Fiscal year ending April 30. |
32
The above information under the heading Stock Price
Performance Graph shall not be deemed to be
filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise
subject to the liabilities of that section or Sections 11
and 12(a)(2) of the Securities Act of 1933, as amended, and
shall not be incorporated by reference into any registration
statement or other document filed by us with the Securities and
Exchange Commission, whether made before or after the date of
this Annual Report on
Form 10-K,
regardless of any general incorporation language in such filing,
except as shall be expressly set forth by specific reference in
such filing.
Dividend
Policy
We have never declared or paid cash dividends on our capital
stock. We currently intend to retain any future earnings and do
not expect to declare or pay any dividends in the foreseeable
future. Any further determination to pay dividends on our
capital stock will be at the discretion of our board of
directors and will depend on our financial condition, results of
operations, capital requirements and other factors that our
board of directors considers relevant.
Equity
Compensation Plan Information
The following table summarizes information about our equity
compensation plans as of April 30, 2010. All outstanding
awards relate to our common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Number of
|
|
|
|
(c) Number of Securities
|
|
|
Securities to be
|
|
|
|
Remaining Available for
|
|
|
Issued Upon
|
|
|
|
Future Issuance Under
|
|
|
Exercise of
|
|
(b) Weighted-Average
|
|
Equity Compensation
|
|
|
Outstanding
|
|
Exercise Price of
|
|
Plans (Excluding
|
|
|
Options, Warrants
|
|
Outstanding Options,
|
|
Securities Reflected in
|
Plan Category
|
|
and Rights(1)
|
|
Warrants and Rights
|
|
Column (a))
|
|
Equity compensation plans approved by security holders
|
|
|
6,734,350
|
|
|
$
|
10.41
|
|
|
|
4,222,243
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,734,350
|
|
|
$
|
10.41
|
|
|
|
4,222,243
|
|
|
|
|
(1) |
|
Prior to our IPO, we issued securities under our 2002 Stock
Plan, as amended, and our 2000 Stock Incentive Plan. Following
our IPO, we issued securities under our 2007 Equity Incentive
Plan (2007 Plan) and our 2007 Employee Stock
Purchase Plan (ESPP). |
Under the 2007 Plan we may issue stock awards, including but not
limited to restricted stock awards, restricted stock units,
stock bonus awards, stock appreciation rights and performance
share awards. The 2007 Plan contains a provision that the number
of shares available for grant and issuance will be increased on
January 1 of each year from 2009 through 2012 by an amount equal
to 4% of our shares outstanding on the immediately preceding
December 31, unless our board of directors, in its
discretion, determines to make a smaller increase. It is the
policy of our board of directors that non-employee directors are
granted options to purchase 25,000 shares of common stock
under the 2007 Plan upon initial election or appointment to the
board. Similarly, on the date of the first board meeting
following each annual stockholder meeting each non-employee
director will automatically be granted options to purchase
10,375 shares of common stock under the 2007 Plan pursuant
to that policy. The board may also make discretionary grants to
purchase common stock to any non-employee director.
Under the 2007 ESPP we may grant options for the purchase of our
common stock. The 2007 ESPP contains a provision that the number
of shares available for grant and issuance will be increased on
January 1 of each of 2009 through 2016, by an amount equal to 1%
of our shares outstanding on the immediately preceding
December 31, unless our board of directors, in its
discretion determines to make a smaller increase.
Recent
Sales of Unregistered Securities
For the fiscal quarter ended April 30, 2010, we did not
sell any unregistered securities.
33
Use of
Proceeds from Public Offering of Common Stock
The
Form S-1
Registration Statement (Registration
No. 333-145974)
relating to our IPO was declared effective by the SEC on
February 14, 2008, and the offering commenced that day.
Morgan Stanley & Co. Incorporated acted as the sole
book-running manager for the offering, and Lehman Brothers Inc.,
Wachovia Capital Markets, LLC and RBC Capital Markets
Corporation acted as co-managers of the offering.
The net proceeds to us of our IPO after deducting
underwriters discounts and offering expenses were
$45.9 million. Through April 30, 2010, we did not use
any of the net proceeds. We expect to use the net proceeds for
general corporate purposes, including working capital and
potential capital expenditures and acquisitions. Although we may
also use a portion of the net proceeds for the acquisition of,
or investment in, companies, technologies, products or assets
that complement our business, we have no present understandings,
commitments or agreements to enter into any acquisitions or make
any investments.
Our management will retain broad discretion in the allocation
and use of the net proceeds of our IPO, and investors will be
relying on the judgment of our management regarding the
application of the net proceeds. Pending specific utilization of
the net proceeds as described above, we have invested the net
proceeds of the offering in short-term, interest-bearing
obligations. The goal with respect to the investment of the net
proceeds will be capital preservation and liquidity so that such
funds are readily available to fund our operations.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
For the fiscal year ended April 30, 2010, we did not
repurchase any equity securities.
34
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data should be
read in conjunction with Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
related notes included elsewhere in this Annual Report on
Form 10-K.
The selected financial data in this section is not intended to
replace the financial statements and is qualified in its
entirety by the consolidated financial statements and related
notes thereto included elsewhere in this Annual Report on
Form 10-K.
Our historical results of operations are not necessarily
indicative of results to be expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
Consolidated Statements of Operations Data:
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
106,568
|
|
|
$
|
80,616
|
|
|
$
|
63,765
|
|
|
$
|
43,989
|
|
|
$
|
22,859
|
|
Maintenance
|
|
|
54,736
|
|
|
|
38,521
|
|
|
|
27,607
|
|
|
|
18,762
|
|
|
|
11,473
|
|
Services
|
|
|
20,080
|
|
|
|
17,031
|
|
|
|
10,173
|
|
|
|
7,082
|
|
|
|
5,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
181,384
|
|
|
|
136,168
|
|
|
|
101,545
|
|
|
|
69,833
|
|
|
|
39,435
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
12,969
|
|
|
|
8,595
|
|
|
|
4,767
|
|
|
|
2,569
|
|
|
|
1,769
|
|
Maintenance(1)
|
|
|
9,503
|
|
|
|
6,861
|
|
|
|
5,691
|
|
|
|
3,498
|
|
|
|
2,085
|
|
Services(1)
|
|
|
13,340
|
|
|
|
9,875
|
|
|
|
5,800
|
|
|
|
3,521
|
|
|
|
2,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
35,812
|
|
|
|
25,331
|
|
|
|
16,258
|
|
|
|
9,588
|
|
|
|
6,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
145,572
|
|
|
|
110,837
|
|
|
|
85,287
|
|
|
|
60,245
|
|
|
|
32,639
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
26,266
|
|
|
|
22,537
|
|
|
|
19,762
|
|
|
|
14,535
|
|
|
|
12,154
|
|
Sales and marketing
|
|
|
73,658
|
|
|
|
56,279
|
|
|
|
53,453
|
|
|
|
36,587
|
|
|
|
24,309
|
|
General and administrative
|
|
|
26,269
|
|
|
|
20,278
|
|
|
|
13,422
|
|
|
|
9,453
|
|
|
|
12,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
126,193
|
|
|
|
99,094
|
|
|
|
86,637
|
|
|
|
60,575
|
|
|
|
49,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
19,379
|
|
|
|
11,743
|
|
|
|
(1,350
|
)
|
|
|
(330
|
)
|
|
|
(16,802
|
)
|
Other income (expense), net
|
|
|
(399
|
)
|
|
|
734
|
|
|
|
472
|
|
|
|
462
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
18,980
|
|
|
|
12,477
|
|
|
|
(878
|
)
|
|
|
132
|
|
|
|
(16,583
|
)
|
Provision (benefit) for income taxes
|
|
|
(9,407
|
)
|
|
|
2,564
|
|
|
|
1,131
|
|
|
|
389
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
28,387
|
|
|
$
|
9,913
|
|
|
$
|
(2,009
|
)
|
|
$
|
(257
|
)
|
|
$
|
(16,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic
|
|
$
|
0.85
|
|
|
$
|
0.32
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(2.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, diluted
|
|
$
|
0.78
|
|
|
$
|
0.30
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(2.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income (loss) per common share
|
|
|
33,434
|
|
|
|
31,233
|
|
|
|
25,936
|
|
|
|
10,042
|
|
|
|
7,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income (loss) per common
share
|
|
|
36,197
|
|
|
|
33,550
|
|
|
|
25,936
|
|
|
|
10,042
|
|
|
|
7,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock-based compensation expense is included above as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of maintenance revenues
|
|
$
|
445
|
|
|
$
|
216
|
|
|
$
|
106
|
|
|
$
|
3
|
|
|
$
|
5
|
|
Cost of services revenues
|
|
|
225
|
|
|
|
142
|
|
|
|
115
|
|
|
|
14
|
|
|
|
5
|
|
Research and development
|
|
|
2,177
|
|
|
|
1,342
|
|
|
|
1,356
|
|
|
|
501
|
|
|
|
1,950
|
|
Sales and marketing
|
|
|
3,418
|
|
|
|
2,451
|
|
|
|
2,685
|
|
|
|
661
|
|
|
|
210
|
|
General and administrative
|
|
|
3,941
|
|
|
|
1,994
|
|
|
|
664
|
|
|
|
350
|
|
|
|
5,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
10,206
|
|
|
$
|
6,145
|
|
|
$
|
4,926
|
|
|
$
|
1,529
|
|
|
$
|
8,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues in fiscal 2007 and prior years were impacted by
revenues related to multiple element sales transactions
consummated for which the revenues were deferred because we did
not have vendor-specific objective
35
evidence of fair value, or VSOE, for some product elements that
were not delivered in the fiscal year of the transaction.
Following identification in mid-fiscal 2007 of transactions with
such undelivered elements, with respect to some of these
transactions, we and our customers amended the contractual terms
to remove the undelivered product elements and in other
instances we have since delivered such product elements. The net
impact of these transactions reduced revenues in fiscal 2006 by
$6.3 million and increased revenues in fiscal 2010, 2009,
2008 and 2007 by $0.9 million, $0.9 million,
$2.9 million and $1.8 million, respectively. See
Item 7: Managements Discussion and Analysis of
Financial Condition and Results of Operations
Sources of Revenues, Cost of Revenues and Operating
Expenses for additional details, including the net amounts
involved. While similar multiple element transactions with
undelivered elements for which we lack VSOE may be identified
prospectively in future periods, we expect that in future
periods the comparison of revenues period-to-period will not be
impacted to the same extent by similar transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and marketable securities
|
|
$
|
149,371
|
|
|
$
|
90,467
|
|
|
$
|
71,946
|
|
|
$
|
16,917
|
|
|
$
|
16,443
|
|
Working capital (deficit)
|
|
|
123,773
|
|
|
|
74,549
|
|
|
|
46,711
|
|
|
|
(3,811
|
)
|
|
|
5,377
|
|
Total assets
|
|
|
226,203
|
|
|
|
141,161
|
|
|
|
118,579
|
|
|
|
48,990
|
|
|
|
32,926
|
|
Current and long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,758
|
|
|
|
26,758
|
|
Common stock and additional paid-in capital
|
|
|
144,273
|
|
|
|
113,781
|
|
|
|
101,574
|
|
|
|
23,479
|
|
|
|
19,383
|
|
Total stockholders equity
|
|
|
135,576
|
|
|
|
76,673
|
|
|
|
54,769
|
|
|
|
5,130
|
|
|
|
1,433
|
|
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with the audited consolidated financial statements
and notes thereto and managements discussion and analysis
of financial condition and results of operations for the fiscal
year ended April 30, 2010 included herein. This Annual
Report on
Form 10-K
contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended. These statements are often identified by the
use of words such as may, will,
expect, believe, anticipate,
intend, could, estimate, or
continue, and similar expressions or variations.
Such forward-looking statements are subject to risks,
uncertainties and other factors that could cause actual results
and the timing of certain events to differ materially from
future results expressed or implied by such forward-looking
statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified
herein, and those discussed in the section titled Risk
Factors, set forth in Part I, Item 1A of this
Form 10-K
and in our other SEC filings. We disclaim any obligation to
update any forward-looking statements to reflect events or
circumstances after the date of such statements.
Overview
We are a leading provider of enterprise threat and risk
management solutions that protect businesses and government
agencies. Our enterprise threat and risk management platform
collects, consolidates and correlates network and user activity
data across the enterprise so that businesses can rapidly
detect, diagnose and manage both internal and external threats
and risks across the organization for activities associated with
critical assets and processes. With our enterprise threat and
risk management platform and products, organizations can use the
ArcSight platform to reduce risk, identify vulnerabilities,
comply with regulations and protect their high-value digital
assets from cyber-theft, cyber-fraud, cyber-warfare and
cyber-espionage.
Our SIEM products, ArcSight ESM and ArcSight Express, deliver a
centralized, real-time view of all activity or events across
geographically dispersed and heterogeneous business and
technology infrastructures. Our log
36
management products collect and store activity and event data
for regulatory compliance, reporting and forensic analysis.
Working together, these products collect, consolidate and
correlate massive amounts of activity data, in the form of log
events, from thousands of security point solutions, network and
computing devices, databases and applications, enabling
intelligent identification, prioritization and response to
compliance and corporate policy violations, and external and
insider threats. Our specialized software and application
packages deliver pre-packaged analytics and reports tailored to
specific compliance and security initiatives, such as
Sarbanes-Oxley (SOX), PCI, user monitoring and fraud detection.
We were founded in May 2000 and first sold our initial ESM
product in June 2002. We initially funded our operations
primarily through convertible preferred stock financings that
raised a total of $26.8 million. Our revenues have grown
from $32.8 million in fiscal 2005 to $181.4 million in
fiscal 2010.
In February 2008, we completed our IPO in which we sold
6,000,000 shares of common stock, at an issue price of
$9.00 per share. We raised a total of $54.0 million in
gross proceeds from our IPO, or $45.9 million in net
proceeds after deducting underwriting discounts of
$3.8 million and offering expenses of $4.3 million.
We achieved positive cash flows from operations in fiscal 2004
through 2010. We generated $45.7 million and
$16.8 million in cash from our operating activities during
fiscal 2010 and 2009, respectively, and we generally expect to
continue to generate positive cash flows from operating
activities on an annual basis. As of April 30, 2010, we had
cash, cash equivalents and marketable securities of
$149.4 million, net accounts receivable of
$33.6 million, and an aggregate of $27.2 million in
accounts payable and accrued liabilities.
Important
Factors Affecting Our Operating Results and Financial
Condition
We believe that the market for our products is still in the
early stages of development, but may be entering a stage of more
widespread adoption. We have identified factors that we expect
to play an important role in our future growth and
profitability. These factors are:
Development and Introduction of New
Products. We believe it is important that we
continue to develop or acquire new products and services that
will help us capitalize on opportunities in the enterprise
threat and risk management market. An example of a new product
introduced in fiscal 2010 is ArcSight FraudView, an appliance
product that detects online fraud by evaluating and scoring
financial transactions. We continue the enhancement of our SIEM
and log management products and solutions, such as enhanced
location-based intelligence for our ESM products in May 2009, an
updated version of our ArcSight Express product in March 2010
and version 4.5 of our ArcSight Logger product in June 2010. In
addition, we continue to develop and release updates to
complementary solution packages for our SIEM and log management
products.
Sales of Products to New Customers and Continued Sales to Our
Installed Base. The market for enterprise threat
and risk management solutions is growing, with initial purchases
often driven by corporate compliance initiatives, and federal
government cyber-security spending priorities. A key component
of our growth will depend on our ability to sell our products to
new customers. An initial sale typically involves the sale of
our SIEM or log management products, in combination with each
other or with our complementary solution packages to address a
specific compliance or security use case, such as SOX, PCI, user
monitoring or fraud detection. Many customers make an initial
purchase from us and then decide whether to use our products
with respect to a larger portion of their business and
technology infrastructure or buy additional complementary
products from us. Thus, another key component of our growth will
be our ability to ensure initial customer success and
successfully maintain and further develop the relationships with
our existing customers to cover additional use cases. While
historically our initial sale to a customer has involved our ESM
products, we anticipate that a growing proportion of future new
customers will be a result of initial sales of our ArcSight
Logger products, our ArcSight Express product and our other
products sold in an appliance form factor. We may not be able to
generate the level of subsequent sales that we have historically
experienced with our ESM customers.
Further Development of Our Channel Network and Our
Relationships with System
Integrators. Historically, we have sold our
products primarily through our direct sales force, with sales to
government or international customers through systems
integrators and resellers. In recent years, we expanded our
sales channel to assist us in penetrating the mid-market,
particularly as we expanded our appliance-based offerings. We
believe that our current
37
and any new appliance-based products that we develop will be
sold more effectively through resellers and, if we are
successful in introducing these new products, we will become
more dependent on the development of an effective channel
network. In addition to continuing to develop additional
channel-ready products and versions of our products
designed for use by smaller enterprises, further training,
certification and development of our existing channel partners
to improve their effectiveness will be a key factor in the
success of this strategy. Further, we believe that strong
relationships with major system integrators will facilitate
sales to large enterprises and governmental customers,
particularly for use cases beyond traditional security and
compliance.
Sources
of Revenues, Cost of Revenues and Operating Expenses
Our sales transactions typically include the following elements:
license fees paid for the use of our software and appliance
products in perpetuity or, in limited circumstances, for a
specified term; an arrangement for first-year support and
maintenance, which includes unspecified software updates and
upgrades; and professional services for installation,
implementation and training. The majority of our revenues are
derived from sales of our enterprise threat and risk management
products, primarily ArcSight ESM and Logger, and we expect this
to continue for the foreseeable future. We sell our products and
services through our direct sales force, channel partners and
system integrator partners, although the emphasis varies from
region to region. For example, we primarily sell through
resellers and other channel partners internationally, while our
sales to U.S. federal government customers are typically
through our direct sales force, resellers and system integrators.
Our strategy is to make our products available in the form
factor desired by the customer. Consequently, our SIEM, log
management and related products are available as software, as
appliances or as packages of software and appliances. However,
our appliance products generally have lower gross margins than
our software products.
We recognize revenues pursuant to generally accepted accounting
principles or GAAP, in accordance with Accounting Standards
Codification, or ASC, Topic
985-605,
Software Revenue Recognition, as amended, or ASC
985-605. ASC
985-605
provides that, if revenues are to be recognized upon product
delivery, among other things vendor-specific objective evidence
of fair value, or VSOE, for each undelivered element of multiple
element customer contracts is required. In addition, if we
determine that collectibility is not reasonably assured, we
defer the revenues until collectibility becomes reasonably
assured, generally upon receipt of cash.
Deferred revenue and accounts receivable are reported net of
adjustments for sales transactions invoiced during the period
that are recognized as revenue in a future period once cash is
received and all other revenue recognition criteria have been
met, which are sometimes referred to as net-down adjustments.
Accordingly, we believe that in order to understand the change
in both deferred revenue and accounts receivable from one period
to another, the impact of these net-down adjustments should be
considered.
Historically sales to U.S. commercial and governmental
entities have represented a majority of our revenues, while
international sales, including sales to agencies of foreign
governments, have represented a smaller portion of our revenues.
While the vertical
make-up of
our revenues will vary from period to period, over the long term
we expect revenues from sales to U.S. commercial and
governmental entities to each continue to grow in absolute
dollars, and we expect that sales to customers outside of the
United States will continue to grow in absolute dollars over the
long term.
Product
Revenues
Product revenues consist of license fees for our software
products and sales of our appliance products. License fees are
based on a number of factors, including the type and number of
devices that a customer intends to monitor using our software as
well as the number of users and locations. In addition to our
core solution, some of our customers purchase additional
licenses for optional extension modules that provide enhanced
discovery and analytics capabilities. Sales of our appliance
products consist of sales of the appliance hardware and
associated perpetual licenses to the embedded software. We
introduced our first appliance products in June 2006 and our
first ArcSight Logger product, our most widely adopted appliance
product to date, in December 2006. Appliance fees are based on
the number of appliances purchased and, in some cases, on the
number of network devices with which our customer intends to use
the appliances. We generally recognize product revenues at the
time of product delivery, provided all other revenue recognition
criteria have been met.
38
Historically, we have engaged in long sales cycles with our
customers, typically three to six months and more than a year
for some sales, and many customers make their purchase decisions
in the last month of a fiscal quarter, following procurement
trends in the industry. Further, average deal size can vary
considerably depending on our customers configuration
requirements, implementation plan and budget availability. As a
result, it is difficult to predict timing or size of product
sales on a quarterly basis. In addition, we may fail to forecast
sufficient production of our appliance products, or we may be
unable to physically deliver appliances within the quarter,
depending on the proximity of the order to the end of the
quarter. These situations may lead to delay of revenues until we
can deliver products. The loss or delay of one or more large
sales transactions in a quarter could impact our operating
results for that quarter and any future quarters into which
revenues from that transaction are delayed.
In addition, we believe that our product revenue has been
somewhat seasonal historically, increasing in each quarter
through the fiscal year, but with the first quarter of our
fiscal year typically having relatively lower product revenue
compared to the prior fourth fiscal quarter. However, we believe
that there are significant seasonal factors that may cause the
second and fourth quarters of our fiscal year to have relatively
higher product revenue (with the first and third fiscal quarters
each potentially having lower revenue than the immediately
preceding fiscal quarter). We believe that this seasonality
results from a number of factors, including:
|
|
|
|
|
the timing of our annual sales club for top
performers and annual training for our entire sales force in our
first fiscal quarter;
|
|
|
|
the fiscal year end procurement cycle of our government
customers;
|
|
|
|
the budgeting, procurement and work cycles of our customers,
including customers in the public sector;
|
|
|
|
seasonal reductions in business activity during the summer
months in the United States, Europe and certain other
regions; and
|
|
|
|
the structure of our direct sales incentive and compensation
program, which may reinforce the tendency of our direct sales
team to book the largest volume of deals toward the end of our
fiscal year.
|
We believe that our rapid historical growth and the required
timing of new compliance mandates may have overshadowed the
nature or magnitude of seasonal or cyclical factors that might
have influenced our business to date. In addition, the timing of
one or more large transactions may overshadow seasonal factors
in any particular quarterly period. In the future, we may
experience growth from additional compliance and cybersecurity
mandates that could continue to mask underlying seasonal
purchasing decisions by our customers. Seasonal or cyclical
variations in our operations may become more pronounced over
time and may materially affect our results of operations in the
future.
For example, as noted above, the timing of our fiscal quarters
and the U.S. federal governments September 30 fiscal
year end may impact product sales to governmental agencies in
the second quarter of our fiscal year, offsetting the otherwise
seasonal downturn in later summer months. Government spending on
cybersecurity and new compliance mandates may drive customer
demand at different times throughout our fiscal year, the timing
of which we may not be able to anticipate and may cause
fluctuations in our operating results. In addition, sales to
customers with a standard December 31 fiscal year end may have a
positive impact on our license revenue in the third quarter of
our fiscal year, potentially offsetting the impact of the major
holidays during the period. We expect seasonality to continue to
impact our business in the future.
As of April 30, 2010, 2009 and 2008, deferred product
revenues were $10.8 million, $9.8 million and
$13.6 million, respectively. Included in deferred product
revenues as of April 30, 2010, 2009 and 2008 were
$0.5 million, $1.3 million and $2.2 million,
respectively, related to multiple element arrangements where one
or more product elements for which we did not have VSOE remained
undelivered. The remainder of deferred product revenues as of
April 30, 2010, 2009 and 2008 were $10.3 million,
$8.5 million and $11.4 million, respectively, and
primarily related to product revenues to be recognized ratably
over the term of the maintenance arrangements, prepayments in
advance of delivery and other delivery deferrals. Deferred
revenue and accounts receivable are reported net of adjustments
for sales transactions invoiced during the period that are
recognized as revenue in a future period once cash is received
and all other revenue recognition criteria have been met. These
net-down adjustments decrease both accounts receivable and
deferred revenue. Accordingly, we believe that in order to
39
understand the change in both deferred revenue and accounts
receivable from one period to another the impact of these
net-down adjustments should be considered. As of April 30,
2010, 2009 and 2008, deferred product revenues of
$10.8 million, $9.8 million and $13.6 million,
respectively, were reduced by net-down adjustments of
$10.1 million, $5.4 million and $3.3 million,
respectively. Our operating results in any particular quarterly
period in fiscal 2010 may be similarly impacted by the
recognition of previously deferred revenue, where the associated
costs were recorded in prior periods. See Critical
Accounting Policies, Significant Judgments and
Estimates Revenue Recognition and Note 2
to our Consolidated Financial Statements (Significant
Accounting Policies Revenue Recognition)
elsewhere in this report.
Maintenance
Revenues
Maintenance includes rights to unspecified software product
updates and upgrades, maintenance releases and patches released
during the term of the support period, and internet and
telephone access to maintenance personnel. Maintenance revenues
are generated both from maintenance that we agree to provide in
connection with initial sales of software and hardware products
and from maintenance renewals. We generally sell maintenance on
an annual basis. We offer two levels of maintenance-standard and
premium. The premium level is for customers that require
24-hour
coverage seven days a week. In most cases, we provide
maintenance for sales made through channel partners. In
addition, we sell an enhanced maintenance offering that provides
frequent security content updates for our software. Maintenance
fees are treated as deferred revenue at the time the maintenance
agreement is initiated and recognized ratably over the term of
the maintenance agreement. As our customer base expands, we
expect maintenance revenues to continue to grow, as maintenance
is sold to new customers and existing customers renew.
As of April 30, 2010, deferred maintenance revenues were
$46.7 million, of which $39.1 million represented
current deferred maintenance revenues. As of April 30,
2009, deferred maintenance revenues were $32.4 million, of
which $26.7 million represented current deferred
maintenance revenues. As of April 30, 2008, deferred
maintenance revenues were $24.3 million, of which
$20.0 million represented current deferred maintenance
revenues. Deferred maintenance revenues relate to advanced
payments for support contracts that are recognized ratably. As
of April 30, 2010, 2009 and 2008, the deferred maintenance
revenues of $46.7 million, $32.4 million and
$24.3 million, respectively, were reduced by net-down
adjustments of $3.9 million, $2.6 million and
$1.5 million, respectively. Net-down adjustments decrease
both accounts receivable and deferred revenue and typically
relate to billed but unpaid customer transactions for
maintenance renewal support terms where services have not yet
been provided, or where revenue from the customer is only
recognized when cash has been paid and all other revenue
recognition criteria have been met. See Critical
Accounting Policies, Significant Judgments and
Estimates Revenue Recognition and Note 2
to our Consolidated Financial Statements (Significant
Accounting Policies Revenue Recognition)
elsewhere in this report.
Services
Revenues
Services revenues are generated from sales of services to our
customers, including installation and implementation of our
software, consulting and training. Professional services are not
essential to the functionality of the associated software
products. During fiscal 2009 and 2010, we continued to enter
into an increasing number of service engagements to staff and
manage the security operations center, or SOCs, of certain large
customers. SOC engagements are typically longer in duration than
other services engagements and support the day-to-day monitoring
of customer SOC environments. We generally sell our services on
a
time-and-materials
basis and recognize revenues as the services are performed.
Services revenues have generally increased over time as we have
sold and delivered installation and training services to our new
customers and continued to sell training and consulting services
to our existing customers, including our new SOC services.
As of April 30, 2010, 2009 and 2008, deferred service
revenues were $3.4 million, $2.9 million and
$3.4 million, respectively, in each case all of which
represented current deferred services revenues. Deferred
services revenues relate to customer payments in advance of
services being performed. As of April 30, 2010, 2009 and
2008, the deferred service revenues of $3.4 million,
$2.9 million and $3.4 million, respectively were
reduced by net-down adjustments of $1.0 million,
$1.0 million and $0.7 million, respectively. Net-down
adjustments decrease both accounts receivable and deferred
revenue and typically relate to billed but unpaid customer
transactions for service engagements where services have not yet
been provided, or where revenue from the customer is only
40
recognized when cash has been paid and all other revenue
recognition criteria have been met. See Critical
Accounting Policies, Significant Judgments and
Estimates Revenue Recognition and Note 2
to our Consolidated Financial Statements (Significant
Accounting Policies Revenue Recognition)
elsewhere in this report.
Cost
of Revenues
Cost of revenues for our software products consists of
third-party royalties and license fees for licensed technology
incorporated into our software product offerings. Cost of
revenues for appliance products consists of the hardware costs
of the appliances and third-party royalties for licensed
technology. The cost of product revenues is primarily impacted
by the mix of software and appliance products as well as the
relative ratio of third-party royalty bearing products included
in software sales transactions. Sales of our appliance products
are generally at a lower gross margin than sales of our software
products.
Cost of maintenance revenues consists primarily of salaries and
benefits related to maintenance personnel, royalties and other
out-of-pocket expenses, and facilities and other related
overhead.
Cost of services revenues consists primarily of the salaries and
benefits of personnel, travel and other out-of-pocket expenses,
facilities and other related overhead that are allocated based
on the portion of the efforts of such personnel that are related
to performance of professional services, and cost of services
provided by subcontractors for professional services. Services
gross margin may fluctuate as a result of periodic changes in
our use of third party service providers, resulting in lower or
higher gross margins for these services.
Gross margins may fluctuate from period to period as a result of
the mix of software, appliances and services as components of
revenue. However, in general over the longer term, we expect
gross margins to fluctuate around current levels.
Operating
and Non-Operating Expenses
Research and Development Expenses. Research
and development expenses consist primarily of salaries and
benefits of personnel engaged in the development of new
products, the enhancement of existing products, quality
assurance activities and, to a lesser extent, facilities costs
and other related overhead. We expense all of our research and
development costs as they are incurred. We expect research and
development expenses to increase in absolute dollars for the
foreseeable future as we continue to invest in the development
of our products.
Sales and Marketing Expenses. Sales and
marketing expenses consist primarily of salaries, commissions
and benefits related to sales and marketing personnel and
consultants; travel and other out-of-pocket expenses; expenses
for marketing programs, such as for trade shows and our annual
users conference, marketing materials and corporate
communications; and facilities costs and other related overhead.
Commissions on sales of products and maintenance are typically
accrued and expensed when the respective revenue elements are
ordered. Commissions on sales of services are typically accrued
and expensed when the services were ordered. We pay commissions
for channel sales not only to our channel sales force but also
to our direct sales force in an effort to minimize channel
conflicts as we develop our channel network. We intend to hire
additional sales personnel, initiate additional marketing
programs and further develop and build additional relationships
with resellers and systems integrators on a global basis.
Accordingly, we expect that our sales and marketing expenses
will continue to increase for the foreseeable future in absolute
dollars.
General and Administrative Expenses. General
and administrative expenses consist primarily of salaries and
benefits related to general and administrative personnel and
consultants; accounting and legal fees; insurance costs and
facilities costs and other related overhead. We expect that, in
the future, general and administrative expenses will increase in
absolute dollars as we add personnel and incur additional costs
related to the growth of our business and additional legal,
accounting and other expenses in connection with our reporting
and compliance obligations as a public company.
Other Income (Expense), Net. Other income
(expense), net consists of interest earned on our cash
investments and foreign currency-related gains and losses. Our
interest income will vary each reporting period depending on our
average cash balances during the period and the current level of
interest rates. Our foreign currency-related gains and losses
will also vary depending upon movements in underlying exchange
rates.
41
Accounting for Income Taxes. Our provision for
income taxes is calculated in compliance with ASC Topic 740,
Accounting for Income Taxes, or ASC 740, and other
related guidance, and generally consists of tax expense related
to current period earnings. We estimate income taxes in each of
the jurisdictions in which we operate. Deferred income taxes are
recorded for the expected tax consequences of temporary
differences between the tax bases of assets and liabilities for
financial reporting purposes and amounts recognized for income
tax purposes. Deferred tax assets are recognized for deductible
temporary differences, along with net operating loss and tax
credit carry-forwards, if it is more likely than not that the
tax benefits will be realized. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be
recovered or settled. These deferred tax assets and liabilities
are included within the consolidated balance sheets.
To the extent a deferred tax asset cannot be recognized a
valuation allowance is established to reduce our deferred tax
assets to the amount that is more likely than not to be
realized. A valuation allowance is maintained until sufficient
evidence exists to support the reversal of all or some portion
of these allowances. Should the actual amounts differ from our
estimates, the amount of our valuation allowance could be
materially impacted. As of April 30, 2010, and in
accordance with ASC 740, we evaluated our need for a valuation
allowance based on historical evidence, trends in profitability
and expectations of future taxable income, and determined that a
valuation allowance against deferred tax assets was no longer
necessary. As such, we released $18.6 million of the
valuation allowance as an offset against all of our
U.S. and state deferred tax assets resulting in a net
benefit in our provision for income taxes.
Critical
Accounting Policies, Significant Judgments and
Estimates
Our consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States, which requires us to make estimates and judgments
that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported amounts of
revenues and expenses during the reporting period. We base our
estimates and judgments on our historical experience, knowledge
of current conditions and our beliefs regarding likely
occurrences in the future, given available information.
Estimates are used for, but are not limited to, revenue
recognition, determination of fair value of stock and
stock-based awards, valuation of goodwill and intangible assets
acquired in business combinations, impairment of goodwill and
other intangible assets, amortization of intangible assets,
accounting for income taxes, accounting for uncertainties in
income taxes, contingencies and litigation, allowances for
doubtful accounts, and accrued liabilities. Actual results may
differ from those estimates, and any differences may be material
to our financial statements. Further, if we apply different
factors, or change the method by which we apply the various
factors that are used, in making our critical estimates and
judgments, our reported operating results and financial
condition could be materially affected.
Revenue
Recognition
We recognize revenues in accordance with ASC
985-605.
Accordingly, we exercise judgment and use estimates in
connection with the determination of the amount of product,
maintenance and services revenues to be recognized in each
accounting period.
We derive revenues primarily from three sources: (i) sales
of our software and hardware products, (ii) fees for
maintenance to provide unspecified upgrades and customer
technical support, and (iii) fees for services, including
professional services for product installation, implementation,
staffing and management services for SOCs and training. Our
appliance products contain software that is more than incidental
to the functionality of the product. In accordance with the
guidance, we recognize revenues when the following conditions
have been met:
|
|
|
|
|
persuasive evidence of an arrangement exists;
|
|
|
|
the fee is fixed or determinable;
|
|
|
|
product delivery has occurred or services have been
rendered; and
|
|
|
|
collection is considered probable.
|
42
We typically use a binding purchase order in conjunction with
either a signed contract or reference on the purchase order to
the terms and conditions of our shrinkwrap or end-user license
agreement as evidence of an arrangement. We assess whether the
fee is fixed or determinable based on the payment terms
associated with the transaction and whether the sales price is
subject to refund or forfeiture, concession or other adjustment.
We do not generally grant rights of return or price protection
to our distribution partners or end users, other than limited
rights of return during the warranty period in some cases. We
use shipping documents, contractual terms and conditions and
customer acceptance, when applicable, to verify product delivery
to the customer. For perpetual software license fees in
arrangements that do not include customization, or services that
are not considered essential to the functionality of the
licenses, delivery is deemed to occur when the product is
delivered to the customer. Services and consulting arrangements
that are not essential to the functionality of the licensed
product are recognized as revenues as these services are
provided. Delivery of maintenance is considered to occur on a
straight-line basis ratably over the life of the contract. We
consider probability of collection based on a number of factors,
such as creditworthiness of the customer as determined by credit
checks and analysis, past transaction history, the geographic
location and financial viability. We do not require, nor do we
request, collateral from customers. If we determine that
collectibility is not reasonably assured, we defer the revenues
until collectibility becomes reasonably assured, generally upon
receipt of cash. A net-down adjustment may be recorded in cases
where sales transactions have been invoiced but are recognized
on cash receipt, for invoiced but unpaid sales transactions
related to post-contract customer support obligations for which
the term has not commenced, or for invoiced but unpaid service
engagements where services have not yet been provided. Net-down
adjustments decrease both accounts receivable and deferred
revenue. Any such transactions included in accounts receivable
and deferred revenue at period end are reflected on the balance
sheet on a net basis.
Our sales of software products to date have typically been
multiple element arrangements, which have included software
licenses and corresponding maintenance, and have also generally
included some amount of professional services. Our sales of
appliance products to date have been multiple element
arrangements as well, which included hardware, software licenses
and corresponding maintenance, and have also generally included
some amount of professional services. We allocate the total
arrangement fee among these multiple elements based upon their
respective fair values as determined by VSOE or, if applicable,
by the residual method under the guidance. VSOE for maintenance
and support services is based on separate sales
and/or
renewals to other customers or upon renewal rates quoted in
contracts when the quoted renewal rates are deemed substantive
in both rate and term. VSOE for professional services is
established based on prices charged to customers when those
services are sold separately. If we cannot objectively determine
the fair value of any undelivered element in a multiple element
arrangement, we defer revenues for each element until all
elements have been delivered, or until VSOE can objectively be
determined for any remaining undelivered element. If VSOE for
maintenance does not exist, and this represents the only
undelivered element, then revenues for the entire arrangement
are recognized ratably over the performance period. When VSOE of
a delivered element has not been determined, but the fair value
for all undelivered elements has, we use the residual method to
record revenues for the delivered element. Under the residual
method, the fair value of the undelivered elements is deferred
and the remaining portion of the arrangement fee is allocated to
the delivered element and recognized immediately as revenues.
Revenues from time-based (term) license sales that include
ongoing delivery obligations throughout the term of the
arrangement are recognized ratably over the term.
Our agreements generally do not include acceptance provisions.
However, if acceptance provisions exist, we deem delivery to
have occurred upon customer acceptance.
For sales to direct end-users and channel partners, we recognize
product revenue once either we or our channel partner has a
contractual agreement in place and upon transfer of title and
risk of loss, which is generally upon shipment, provided all
other criteria for revenue recognition have been met. Where
sales are made through resellers, revenue is generally recorded
upon shipment to the end-users, when all other criteria for
revenue recognition have been met. In a limited number of
instances, when delivery is to be made to a reseller upon the
request of either the end-user or the reseller, and when all
other criteria for revenue recognition have been met, it is our
practice to recognize revenue on shipment to a reseller but only
where an end-user has been identified prior to shipment. For
end-users, resellers and systems integrators, we generally have
no significant obligations for future performance such as rights
of return or pricing credits.
43
We assess whether fees are collectible and fixed or determinable
at the time of the sale, and recognize revenues if all other
revenue recognition criteria have been met. Our standard payment
terms are net 30 days and are considered normal up to
net three months, while payment terms beyond three months are
considered to be extended terms. Payments that are due within
three months are generally deemed to be fixed or determinable
based on our successful collection history on these agreements.
Stock-Based
Compensation
Effective May 1, 2006, we adopted ASC Topic 718,
Compensation-Stock Compensation, or ASC 718, which
requires companies to expense the fair value of employee stock
options and other forms of stock-based compensation. The
guidance requires nonpublic companies that used the minimum
value method, for either recognition or pro forma disclosures to
apply the guidance using the prospective-transition method. As
such, we continued to apply the minimum value method in future
periods to unvested equity awards outstanding at the date of
adoption of ASC 718 that were measured using the minimum value
method. In addition, we continued to amortize those awards
granted prior to May 1, 2006 utilizing an accelerated
amortization schedule. As of April 30, 2009, amortization
under the minimum value method was complete. In accordance with
the guidance, we will recognize the compensation cost of
employee stock-based awards granted subsequent to April 30,
2006 in the statement of operations using the straight-line
method over the vesting period of the award.
To determine the fair value of stock options granted after
May 1, 2006, we have elected to use the
Black-Scholes-Merton option pricing model, which requires, among
other inputs, an estimate of the fair value of the underlying
common stock on the date of grant and assumptions as to
volatility of our stock over the expected term of the related
options, the expected term of the options, the risk-free
interest rate and the option forfeiture rate. As there had been
no public market for our common stock prior to our IPO in
February 2008, we have determined the volatility for options
granted for fiscal 2008 and fiscal 2007 based on an analysis of
reported data for a peer group of companies that issued options
with substantially similar terms. The expected volatility of
options granted has been determined using weighted-average
measures of the implied volatility and the historical volatility
for this peer group of companies for a period equal to the
expected life of the option. The weighted-average expected
volatility for options granted during fiscal 2010, 2009 and
2008, was 57%, 52% and 55%, respectively. The expected life of
options has been determined considering the expected life of
options granted by a group of peer companies and the average
vesting and contractual terms of options granted to our
employees. The weighted-average expected life of options granted
for fiscal 2010, 2009 and 2008 was 5.64, 5.74 and
5.25 years, respectively. For fiscal 2010, 2009 and 2008,
the weighted-average risk-free interest rate used was 2.41%,
3.13% and 4.22%, respectively. The risk-free interest rate is
based on a zero coupon United States treasury instrument whose
term is consistent with the expected life of the stock options.
We have not paid and do not anticipate paying cash dividends on
our shares of common stock; therefore, the expected dividend
yield is assumed to be zero. In addition, ASC 718 requires
companies to utilize an estimated forfeiture rate when
calculating the expense for the period, whereas the former
SFAS 123 guidance permitted companies to record forfeitures
based on actual forfeitures, which was our historical policy
prior to the adoption of ASC 718. We apply an estimated annual
forfeiture rate of 5%, based on our historical forfeiture
experience during the previous six years, in determining the
expense recorded in our consolidated statement of operations.
The forfeiture rate is graded and results in a weighted average
effective forfeiture rate of 12.9%, 8.6%, and 5.5% for fiscal
2010, 2009, and 2008, respectively.
We recorded expense of $9.0 million, $5.1 million and
$4.2 million for fiscal 2010, 2009 and 2008, respectively,
in connection with stock-based awards accounted for under ASC
718. As of April 30, 2010, unrecognized stock-based
compensation expense of non-vested stock options was
$21.1 million. As of April 30, 2010, the unrecognized
stock-based compensation expense is expected to be recognized
using the straight-line method over the required service period
of the options. The actual amount of stock-based compensation
expense we record in any fiscal period will depend on a number
of factors, including the number of stock options issued and the
volatility of our stock price over time. In future periods,
stock-based compensation expense may increase as we issue
additional equity-based awards to continue to attract and retain
key employees. Additionally, the guidance requires that we
recognize compensation expense only for the portion of stock
options that are expected to vest. If the actual number of
forfeitures differs from that estimated by management, we will
be required to record adjustments to stock-based compensation
expense in future periods.
44
Our 2007 Employee Stock Purchase Plan, or ESPP, became effective
on the effectiveness of our IPO on February 14, 2008. The
ESPP provides for consecutive six-month offering periods, except
for the first offering period, which commenced on
February 14, 2008 and ended on September 15, 2008. The
ESPP is compensatory and results in compensation cost accounted
for under ASC 718. We use the Black-Scholes-Merton option
pricing model to estimate the fair value of rights to acquire
stock granted under the ESPP. For the fiscal year ended
April 30, 2010, 2009 and 2008, we recorded stock-based
compensation expense associated with the ESPP of
$1.2 million, $1.0 million and $0.2 million,
respectively. As of April 30, 2010, unrecognized
stock-based compensation expense associated with rights to
acquire shares of common stock under the ESPP was
$0.5 million.
Business
Combinations
We account for business combinations in accordance with ASC
Topic 805, Business Combinations, or ASC 805, which
requires the purchase method of accounting for business
combinations. In accordance with the guidance, we determine the
recognition of intangible assets based on the following
criteria: (i) the intangible asset arises from contractual
or other rights; or (ii) the intangible asset is separable
or divisible from the acquired entity and capable of being sold,
transferred, licensed, returned or exchanged. In accordance with
the guidance, we allocate the purchase price of our business
combinations to the tangible assets, intangible assets and
liabilities acquired based on their estimated fair values. We
record the excess of the purchase price over the total of those
fair values as goodwill.
Our valuations require significant estimates, especially with
respect to intangible assets. Critical estimates in valuing
certain intangible assets include, but are not limited to,
future expected cash flows from customer contracts, customer
lists and distribution agreements and discount rates. We
estimate fair value based upon assumptions we believe to be
reasonable, but which are inherently uncertain and
unpredictable, and, as a result, actual results may differ from
our estimates.
Goodwill
and Intangible Assets
In accordance with ASC Topic 350, Goodwill and Other
Intangible Assets, or ASC 350, we do not amortize goodwill
or other intangible assets with indefinite lives but rather test
them for impairment. The guidance requires us to perform an
impairment review of our goodwill balance at least annually,
which we intend to perform on November 1 of each fiscal year,
and also whenever events or changes in circumstances indicate
that the carrying amount of these assets may not be recoverable.
The allocation of the acquisition cost to intangible assets and
goodwill requires the extensive use of estimates and
assumptions, including estimates of future cash flows expected
to be generated by the acquired assets and amortization of
intangible assets, other than goodwill. Further, when impairment
indicators are identified with respect to previously recorded
intangible assets, the values of the assets are determined using
discounted future cash flow techniques. Significant management
judgment is required in the forecasting of future operating
results that are used in the preparation of the projected
discounted cash flows, and should different conditions prevail,
material write-downs of net intangible assets could occur. We
review periodically the estimated remaining useful lives of our
acquired intangible assets. A reduction in our estimate of
remaining useful lives, if any, could result in increased
amortization expense in future periods. Future goodwill
impairment tests could result in a charge to earnings.
Allowance
for Doubtful Accounts
We maintain an allowance for doubtful accounts based on a
periodic review of customer accounts, payment patterns and
specific collection issues. Where account-specific collection
issues are identified, we record a specific allowance based on
the amount that we believe will not be collected. For accounts
where specific collection issues are not identified, we record a
reserve based on the age of the receivables. As of
April 30, 2010, we had two customers that accounted for 15%
and 10%, respectively, of our net accounts receivable, which
receivables were majorily paid subsequent to the end of fiscal
2010. As of April 30, 2009, we had two customers that
accounted for 17% and 11%, respectively, of our net accounts
receivable, which receivables were fully paid subsequent to the
end of fiscal 2009.
45
Accounting
for Income Taxes
Management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets.
Our provision for income taxes is calculated in accordance with
ASC 740, and other related guidance, and generally consists of
tax expense related to current period earnings. As part of the
process of preparing our consolidated financial statements, we
continuously monitor the circumstances impacting the expected
realization of our deferred tax assets for each jurisdiction. We
consider all available evidence, both positive and negative,
including historical levels of income in each jurisdiction,
expectations and risks associated with estimates of future
taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance. We
determine our income tax expense together with calculating the
deferred income tax expense or benefit related to temporary
differences resulting from the differing treatment of items for
tax and accounting purposes, such as deferred revenue or
deductibility of certain intangible assets. These temporary
differences result in deferred tax assets and liabilities. We
must then assess the likelihood that the deferred tax assets may
be recovered through carry back to prior years income or
through the generation of future taxable income after
consideration of tax planning strategies. Changes in these
estimates may result in significant increases or decreases to
our tax provision in a period in which such estimates are
changed which in turn would affect net income.
As of April 30, 2010, and in accordance with ASC 740, we
evaluated our need for a valuation allowance based on historical
evidence, trends in profitability and expectations of future
taxable income, and determined that a valuation allowance
against deferred tax assets was no longer necessary. As such, we
released $18.6 million of the valuation allowance as an
offset against all of our U.S. and state deferred tax
assets resulting in a net benefit in our provision for income
taxes.
We adopted ASC
740-10-50,
Accounting for Uncertainty in Income Taxes, an
interpretation of the guidance under ASC 740, on May 1,
2007. ASC
740-10-50
prescribes a recognition threshold and measurement attributes
for the financial statement recognition and measurement of
uncertain tax positions taken or expected to be taken in a
companys income tax return. The pronouncement also
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition with respect to income tax uncertainty. Management
judgment is required to determine if the weight of available
evidence indicates that a tax position is more likely than not
to be sustained, as well as the largest amount of benefit from
each sustained position that is more likely than not to be
realized.
As a result of the implementation of ASC
740-10-50 in
fiscal 2008, we recognized a liability for uncertain tax
positions and a cumulative effect adjustment to the beginning
balance of accumulated deficit on the balance sheet of
$0.1 million. As of April 30, 2009 and 2010, the
liability for uncertain tax positions was $0.3 million and
$0.4 million, respectively. In addition, as of
April 30, 2009, we recorded a $2.7 million reduction
to deferred tax assets for unrecognized tax benefits, all of
which was currently offset by a full valuation allowance that
had no affect on the beginning balance of accumulated deficit or
the net balance sheet. As of April 30, 2010, the
unrecognized tax benefit of $2.7 million increased to
$3.4 million.
Our total unrecognized tax benefit as of April 30, 2010,
2009 and 2008 was $3.4 million, $2.7 million and
$2.1 million, respectively. For the year ended
April 30, 2010 if the remaining balance of
$3.4 million of unrecognized tax benefits were realized in
a future period, it would result in a tax benefit and a
reduction of the effective tax rate. For the years ended
April 30, 2009 and 2008 without regard to the valuation
allowance, if the balance of $2.7 million and
$2.1 million, respectively, of unrecognized tax benefits
would have been realized in a future period, it would have
resulted in a tax benefit and a reduction of the effective tax
rate. We do not expect any material changes to the amount of the
unrecognized tax benefit associated with our uncertain tax
positions within the next twelve months.
Our policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense.
As of April 30, 2010, 2009, and 2008 we had approximately
$44,000, $37,000 and $23,000, respectively, of accrued interest
or penalties associated with unrecognized tax benefits.
We file income tax returns in the U.S. federal
jurisdiction, California and various state and foreign tax
jurisdictions in which we have a subsidiary or branch operation.
During the fourth quarter of fiscal 2010, the
46
U.S. Internal Revenue Service, or IRS, notified us of its
intent to audit fiscal years 2007 to 2009. The IRS will also
make a determination regarding R&D tax credit carryforwards
from calendar 2000 through April 30, 2009. Tax years 2001
to 2009 remain open to examination by state tax authorities, and
the tax years 2005 to 2009 remain open to examination by the
foreign tax authorities.
Results
of Operations
The following table presents our results of operations as a
percentage of total revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
58.7
|
%
|
|
|
59.2
|
%
|
|
|
62.8
|
%
|
Maintenance
|
|
|
30.2
|
|
|
|
28.3
|
|
|
|
27.2
|
|
Services
|
|
|
11.1
|
|
|
|
12.5
|
|
|
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
7.1
|
|
|
|
6.3
|
|
|
|
4.7
|
|
Maintenance
|
|
|
5.2
|
|
|
|
5.0
|
|
|
|
5.6
|
|
Services
|
|
|
7.4
|
|
|
|
7.3
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
19.7
|
|
|
|
18.6
|
|
|
|
16.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
80.3
|
|
|
|
81.4
|
|
|
|
84.0
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
14.5
|
|
|
|
16.6
|
|
|
|
19.5
|
|
Sales and marketing
|
|
|
40.6
|
|
|
|
41.3
|
|
|
|
52.6
|
|
General and administrative
|
|
|
14.5
|
|
|
|
14.9
|
|
|
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
69.6
|
|
|
|
72.8
|
|
|
|
85.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
10.7
|
%
|
|
|
8.6
|
%
|
|
|
(1.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Fiscal 2010 and Fiscal 2009
Revenues
Revenues for 2010 and 2009 were as follows (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2010
|
|
|
2009
|
|
|
Dollars
|
|
|
Percent
|
|
|
Products
|
|
$
|
106,568
|
|
|
$
|
80,616
|
|
|
$
|
25,952
|
|
|
|
32.2
|
%
|
Percentage of total revenues
|
|
|
58.7
|
%
|
|
|
59.2
|
%
|
|
|
|
|
|
|
|
|
Maintenance
|
|
|
54,736
|
|
|
|
38,521
|
|
|
|
16,215
|
|
|
|
42.1
|
%
|
Percentage of total revenues
|
|
|
30.2
|
%
|
|
|
28.3
|
%
|
|
|
|
|
|
|
|
|
Services
|
|
|
20,080
|
|
|
|
17,031
|
|
|
|
3,049
|
|
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
11.1
|
%
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
181,384
|
|
|
$
|
136,168
|
|
|
$
|
45,216
|
|
|
|
33.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Revenues. Product revenues in fiscal
2010 included revenues of $47.8 million from 324 new
customers and revenues of $58.8 million from existing
customers. New customer revenues from 324 customers for fiscal
2010 increased by $16.0 million compared to revenues from
217 new customers fiscal 2009. The significant
47
increase in the number of new customer for fiscal 2010 compared
to fiscal 2009 is primarily the result of an increase in the
number of mid-market customers purchasing our products. The
average transaction size of new customer purchases remained
relatively consistent from fiscal 2009 to fiscal 2010. This was
a result of an increase in the average transaction size of new
enterprise and government customers, offsetting the smaller
transaction size from a greater number of mid-market customers.
Existing customer revenues for fiscal 2010 increased by
$9.9 million compared to existing customer revenues for
fiscal 2009. The increase was primarily attributable to an
increase in the number and average transaction size of sales to
our existing customers, driven by additional purchases of our
ESM product together with our ArcSight Logger products as well
as the expansion of the deployment of our products more broadly
across their IT infrastructure. We anticipate that the mix of
product revenues from new and existing customers could fluctuate
from period to period as a result of the transaction size,
product mix, impact of the recovering economic environment and
related geography of each revenue transaction.
Maintenance Revenues. Maintenance revenues
increased $16.2 million for fiscal 2010 compared to fiscal
2009, as a result of providing support services to a larger
installed base as well as the incremental maintenance revenues
from increased product sales.
Services Revenues. Services revenues increased
by $3.0 million for fiscal 2010 compared to fiscal 2009,
primarily due to continued growth in our SOC staffing and
management engagements.
Geographic Regions. We sell our product in
three geographic regions: Americas; EMEA; and APAC. Net sales,
which include product, maintenance and service revenues, for
each region are summarized in the following table (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2010
|
|
|
2009
|
|
|
Dollars
|
|
|
Percent
|
|
|
Americas
|
|
$
|
139,938
|
|
|
$
|
109,812
|
|
|
$
|
30,126
|
|
|
|
27.4
|
%
|
Percentage of total revenues
|
|
|
77.2
|
%
|
|
|
80.6
|
%
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
33,750
|
|
|
|
19,409
|
|
|
|
14,341
|
|
|
|
73.9
|
%
|
Percentage of total revenues
|
|
|
18.6
|
%
|
|
|
14.3
|
%
|
|
|
|
|
|
|
|
|
APAC
|
|
|
7,696
|
|
|
|
6,947
|
|
|
|
749
|
|
|
|
10.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
4.2
|
%
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
181,384
|
|
|
$
|
136,168
|
|
|
$
|
45,216
|
|
|
|
33.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for fiscal 2010 as compared to fiscal 2009
increased due to the strength of the Americas and EMEA regions.
The EMEA region during fiscal 2010 increased in both absolute
dollars and as a percentage of revenues, as IT infrastructure
and security mandate spending returned to historic levels from
the unusually low levels of 2009 caused by the recent economic
instability in this region. We experienced an increase in
revenues in the Americas region in absolute dollars, but the
percentage of total revenues year over year remained roughly
constant, primarily due to the growth in the EMEA region. The
Asia Pacific regions revenue increased by 11% in fiscal
2010 as compared to fiscal 2009.
Cost
of Revenues and Gross Margin
The following table is a summary of cost of product,
maintenance, and services revenues in absolute amounts (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2010
|
|
|
2009
|
|
|
Dollars
|
|
|
Percent
|
|
|
Products
|
|
$
|
12,969
|
|
|
$
|
8,595
|
|
|
$
|
4,374
|
|
|
|
50.9
|
%
|
Maintenance
|
|
|
9,503
|
|
|
|
6,861
|
|
|
|
2,642
|
|
|
|
38.5
|
%
|
Services
|
|
|
13,340
|
|
|
|
9,875
|
|
|
|
3,465
|
|
|
|
35.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
35,812
|
|
|
$
|
25,331
|
|
|
$
|
10,481
|
|
|
|
41.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
The following table is a summary of gross profit for products,
maintenance and services and their respective gross margins (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Gross margin
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
93,599
|
|
|
$
|
72,021
|
|
Percentage of product revenues
|
|
|
87.8
|
%
|
|
|
89.3
|
%
|
Maintenance
|
|
$
|
45,233
|
|
|
$
|
31,660
|
|
Percentage of maintenance revenues
|
|
|
82.6
|
%
|
|
|
82.2
|
%
|
Services
|
|
$
|
6,740
|
|
|
$
|
7,156
|
|
Percentage of services revenues
|
|
|
33.6
|
%
|
|
|
42.0
|
%
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
145,572
|
|
|
$
|
110,837
|
|
Percentage of total revenues
|
|
|
80.3
|
%
|
|
|
81.4
|
%
|
|
|
|
|
|
|
|
|
|
Cost of Product Revenues and Gross
Margin. Cost of product revenues increased by
$4.4 million in fiscal 2010, primarily due to increased
appliance product cost of goods of $3.3 million, the
majority of which relates to increased ArcSight Logger product
sales, as well as an increase of $0.9 million in related
royalty obligations attributed to ESM and appliance products
that include licensed technology. Product gross margin as a
percentage of product revenues decreased by 1.5% as a percentage
of product revenues for fiscal 2010 compared to fiscal 2009, due
to appliance revenues contributing a higher percentage of
product revenue than the prior year. While we expect appliance
revenues to generally represent less than half of product
revenues going forward, the mix of software and appliance
product revenues will likely fluctuate from period to period,
potentially negatively impacting product gross margins during
the period.
Cost of Maintenance Revenues and Gross
Margin. Cost of maintenance revenues increased by
$2.6 million in fiscal 2010, due primarily to increased
compensation-related expenses of $1.4 million related to
increased head count and cost per employee in our technical
support organization. In addition, third-party royalty support
and maintenance expenses increased by $0.8 million.
Maintenance gross margin remained roughly constant for fiscal
2010 compared to fiscal 2009 increasing by 0.4% as a percentage
of maintenance revenues.
Cost of Services Revenues and Gross
Margin. Cost of service revenues increased by
$3.5 million in fiscal 2010, primarily due to a
$1.5 million increase in compensation related-expenses
related to increased head count and cost per employee.
Additionally, use of third party contractors and external
consultants increased by $1.2 million, $0.8 million of
which relates to SOC engagements. Services gross margin as a
percentage of services revenues decreased by 8.4% to 33.6% for
fiscal 2010 from 42.0% for fiscal 2009, due primarily to an
increase in headcount and related cost per employee, the
increased use of higher cost external consultants to staff such
engagements, and the investment and introduction of ArcSight
University. We continue to hire internally to staff our growing
services business increasing headcount 43% from fiscal 2009 to
fiscal 2010. We expect margins to stabilize in the future as our
SOC business is further developed and is able to sustain its own
growth, and we utilize personnel from system integrator
partners. Additionally, training and materials increased by
$0.3 million and travel related expenses increased by
$0.4 million.
49
Operating
Expenses
The following table is a summary of research and development,
sales and marketing, and general and administrative expenses in
absolute amounts and as a percentage of total revenues (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2010
|
|
|
2009
|
|
|
Dollars
|
|
|
Percent
|
|
|
Research and development
|
|
$
|
26,266
|
|
|
$
|
22,537
|
|
|
$
|
3,729
|
|
|
|
16.5
|
%
|
Percentage of total revenues
|
|
|
14.5
|
%
|
|
|
16.6
|
%
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
73,658
|
|
|
|
56,279
|
|
|
|
17,379
|
|
|
|
30.9
|
%
|
Percentage of total revenues
|
|
|
40.6
|
%
|
|
|
41.3
|
%
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
26,269
|
|
|
|
20,278
|
|
|
|
5,991
|
|
|
|
29.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
14.5
|
%
|
|
|
14.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
126,193
|
|
|
$
|
99,094
|
|
|
$
|
27,099
|
|
|
|
27.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
69.6
|
%
|
|
|
72.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Expenses. The
increase in research and development expenses in fiscal 2010 of
$3.7 million compared to fiscal 2009 was primarily
attributable to an increase of $3.3 million in
compensation-related expenses associated with an increase in
research and development personnel from 109 to 134 at the
respective period ends. We plan to continue hiring to extend our
product platform. As a result, we expect research and
development expenses to continue to increase in absolute dollars.
Sales and Marketing Expenses. The increase in
sales and marketing expenses in fiscal 2010 of
$17.4 million compared to fiscal 2009 was primarily
attributable to an increase of $13.0 million in
compensation-related expense of which $6.4 million related
to commission and bonus plan expenses partially associated with
a change in commission plan structures but primarily due to
strong annual sales during the fiscal period and
$6.6 million was due to an increase in sales and marketing
personnel across our sales organization from 141 to 177 at the
respective period ends. We plan to continue hiring in line with
our growth opportunities. In addition, the increase in sales and
marketing expenses also includes an increase of
$1.1 million in external consultants and temporary help
partially attributable to supporting operations abroad and
market research, an increase in travel and entertainment
expenses of $1.0 million, an increase in marketing program
expenses of $0.9 million most notably related to corporate
identity, trade show and event services. We expect sales and
marketing expenses to continue to increase in absolute dollars.
Sales and marketing expense as a percentage of total revenue
decreased slightly by 0.7% to 40.6% for fiscal 2010 compared to
41.3% for fiscal 2009, due primarily to lower sales commissions
as a result of changes in compensation plan structure, and as a
result of a greater percentage of sales to existing customers,
which are at a lower cost than sales to new customers.
General and Administrative Expenses. The
increase in general and administrative expenses of
$6.0 million in fiscal 2010 compared to fiscal 2009 was
primarily attributable to an increase of $2.5 million
associated with compensation expense and an increase of
$1.9 million in stock-based compensation expense, partially
due to an increase in general and administrative personnel from
54 to 67 at the respective period ends. External consultants and
temporary help increased $0.7 million and third-party
software support and maintenance expense increased
$0.6 million attributable to enterprise resource planning,
or ERP, system hosting expenses related to the implementation
project. This increase was offset by a decrease of
$0.4 million in legal, audit and tax advisory service fees.
We expect general and administrative expenses to increase in
absolute dollars due to growth of our corporate infrastructure.
50
Non-Operating
Expenses
The following table is a summary of interest income and other
expenses, net, in absolute amounts and as a percentage of total
revenues (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2010
|
|
|
2009
|
|
|
Dollars
|
|
|
Percent
|
|
|
Interest income
|
|
$
|
124
|
|
|
$
|
991
|
|
|
$
|
(867
|
)
|
|
|
(87.5
|
)%
|
Percentage of total revenues
|
|
|
0.1
|
%
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(523
|
)
|
|
|
(257
|
)
|
|
|
(266
|
)
|
|
|
(103.5
|
)%
|
Percentage of total revenues
|
|
|
(0.3
|
)%
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
|
(9,407
|
)
|
|
|
2,564
|
|
|
|
(11,971
|
)
|
|
|
(466.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
(5.2
|
)%
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses
|
|
$
|
9,008
|
|
|
$
|
(1,830
|
)
|
|
$
|
10,838
|
|
|
|
592.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
5.0
|
%
|
|
|
(1.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income. The decrease in interest
income of $0.9 million for fiscal 2010 compared to fiscal
2009 was primarily to lower interest rates during fiscal 2010.
Other Expense, Net. Other expense, net, for
fiscal 2010 compared to fiscal 2009 increased as a result of
increases in interest expense associated with entering into new
capitalized software license arrangements, as well as increases
in foreign currency losses.
Provision (Benefit) for Income Taxes. For
fiscal 2010, we recorded a benefit from income taxes of
$9.4 million. The effective tax rate for fiscal 2010 is
(49.6%), and is based on our taxable income for the year. The
difference between the provision for income taxes that would be
derived by applying the statutory rate to our income before tax
and the income tax provision actually recorded is primarily due
to the release of all of our valuation allowance, the impact of
non-deductible ASC 718 stock-based compensation expenses, offset
by the use of net operating loss carry-forwards and tax credits
previously offset by a valuation allowance. For fiscal 2009 we
recorded a provision for income taxes of $2.6 million. The
effective tax rate for fiscal 2009 is 20.6%. The difference
between the provision for income taxes that would be derived by
applying the statutory rate to our income before tax and the
income tax provision actually recorded is primarily due to the
impact of nondeductible ASC 718 stock-based compensation
expenses, offset by the use of net operating loss carry-forwards
and tax credits.
Comparison
of Fiscal 2009 and Fiscal 2008
Revenues
Revenues for 2009 and 2008 were as follows (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2009
|
|
|
2008
|
|
|
Dollars
|
|
|
Percent
|
|
|
Products
|
|
$
|
80,616
|
|
|
$
|
63,765
|
|
|
$
|
16,851
|
|
|
|
26.4
|
%
|
Percentage of total revenues
|
|
|
59.2
|
%
|
|
|
62.8
|
%
|
|
|
|
|
|
|
|
|
Maintenance
|
|
|
38,521
|
|
|
|
27,607
|
|
|
|
10,914
|
|
|
|
39.5
|
%
|
Percentage of total revenues
|
|
|
28.3
|
%
|
|
|
27.2
|
%
|
|
|
|
|
|
|
|
|
Services
|
|
|
17,031
|
|
|
|
10,173
|
|
|
|
6,858
|
|
|
|
67.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
12.5
|
%
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
136,168
|
|
|
$
|
101,545
|
|
|
$
|
34,623
|
|
|
|
34.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Revenues. Product revenues in fiscal
2009 included revenues of $31.7 million from 217 new
customers and revenues of $48.9 million from existing
customers. New customer revenues in fiscal 2009 increased
51
by $0.8 million compared to new customer revenues in fiscal
2008. Despite the increase of 53 new customers in fiscal 2009
compared to fiscal 2008, the marginal increase of product
revenue from new customers was a result of a decline in average
sales price of new customer sales transactions. This was
primarily attributable to an increase in the number of new
mid-market customers purchasing our ArcSight Logger product on a
stand-alone basis during fiscal 2009 compared to fiscal 2008, as
well pricing pressure resulting from the poor economic
environment. Existing customer revenues in fiscal 2009 increased
by $16.1 million compared to existing customer revenues in
fiscal 2008. The increase was primarily attributable to
follow-on sales of our ESM and appliance products from a larger
installed base. In addition, there was a net recognition of
$0.9 million of product revenues in fiscal 2009 related to
sales transactions executed in prior years that included
undelivered product elements for which we did not have VSOE,
while in fiscal 2008 there was a net recognition of product
revenues of $2.7 million from such transactions. As of
April 30, 2009, deferred product revenues included
$1.3 million related to similar transactions. See the
related discussion in Sources of Revenues,
Cost of Revenues and Operating Expenses.
Maintenance Revenues. Maintenance revenues
increased by $10.9 million in fiscal 2009 as a result of
providing support services to a larger installed base as well as
the incremental maintenance revenues from increased product
sales. As a result of the timing of revenue recognition for
sales transactions that included an undelivered product element
for which we did not have VSOE, there was no recognition of such
maintenance revenues in fiscal 2009, and a net recognition of
$0.2 million of maintenance revenues in fiscal 2008. See
the related discussion in Sources of Revenues,
Cost of Revenues and Operating Expenses.
Services Revenues. Services revenues increased
by $6.9 million in fiscal 2009 primarily due to service
engagements to staff and manage the SOCs of certain large
customers.
Geographic Regions. We sell our product in
three geographic regions: Americas; EMEA; and APAC. Net sales,
which include product, maintenance and service revenues, for
each region are summarized in the following table (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2009
|
|
|
2008
|
|
|
Dollars
|
|
|
Percent
|
|
|
Americas
|
|
$
|
109,812
|
|
|
$
|
77,621
|
|
|
$
|
32,191
|
|
|
|
41.5
|
%
|
Percentage of total revenues
|
|
|
80.6
|
%
|
|
|
76.4
|
%
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
19,409
|
|
|
|
18,447
|
|
|
|
962
|
|
|
|
5.2
|
%
|
Percentage of total revenues
|
|
|
14.3
|
%
|
|
|
18.2
|
%
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
|
6,947
|
|
|
|
5,477
|
|
|
|
1,470
|
|
|
|
26.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
5.1
|
%
|
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
136,168
|
|
|
$
|
101,545
|
|
|
$
|
34,623
|
|
|
|
34.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for fiscal 2009 as compared to fiscal 2008
increased primarily due to the strength of the Americas region.
The Americas region during fiscal 2009 increased in both
absolute dollars and as a percentage of revenues. We experienced
an increase in revenues of the EMEA and APAC regions in absolute
dollars, but a decrease in percentage of total revenues year
over year. This percentage decrease was caused by a more
significant impact on IT spending in this region due to the weak
economic environment.
52
Cost
of Revenues and Gross Margin
The following table is a summary of cost of product,
maintenance, and services revenues in absolute amounts and as a
percentage of total revenues (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2009
|
|
|
2008
|
|
|
Dollars
|
|
|
Percent
|
|
|
Products
|
|
$
|
8,595
|
|
|
$
|
4,767
|
|
|
$
|
3,828
|
|
|
|
80.3
|
%
|
Maintenance
|
|
|
6,861
|
|
|
|
5,691
|
|
|
|
1,170
|
|
|
|
20.6
|
%
|
Services
|
|
|
9,875
|
|
|
|
5,800
|
|
|
|
4,075
|
|
|
|
70.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
25,331
|
|
|
$
|
16,258
|
|
|
$
|
9,073
|
|
|
|
55.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table is a summary of gross profit for products,
maintenance and services and their respective gross margins (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Gross margin
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
72,021
|
|
|
$
|
58,998
|
|
Percentage of product revenues
|
|
|
89.3
|
%
|
|
|
92.5
|
%
|
Maintenance
|
|
$
|
31,660
|
|
|
$
|
21,916
|
|
Percentage of maintenance revenues
|
|
|
82.2
|
%
|
|
|
79.4
|
%
|
Services
|
|
$
|
7,156
|
|
|
$
|
4,373
|
|
Percentage of services revenues
|
|
|
42.0
|
%
|
|
|
43.0
|
%
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
110,837
|
|
|
$
|
85,287
|
|
Percentage of total revenues
|
|
|
81.4
|
%
|
|
|
84.0
|
%
|
|
|
|
|
|
|
|
|
|
Cost of Product Revenues and Gross
Margin. Cost of product revenues increased by
$3.8 million in fiscal 2009, primarily due to increased
ArcSight Logger appliance cost of goods related to increased
ArcSight Logger appliance sales, as well as an increase related
to royalty obligations. Product gross margin decreased by 3.2%
as a percentage of product revenues to 89.3% in fiscal 2009,
compared to 92.5% in fiscal 2008 due in part to increased sales
of lower margin ArcSight Logger and Connector appliance products
and due in part to an increase in royalty fees related to
increased sales of products that include licensed technology.
Cost of Maintenance Revenues and Gross
Margin. Cost of maintenance revenues increased by
$1.2 million in fiscal 2009, due primarily to increased
compensation related expenses of $1.0 million related to
increased head count in our technical support organization and
increases in third-party royalty support and maintenance
expenses of $0.4 million, offset by a decrease in
recruiting expenses of $0.1 million. Maintenance gross
margin increased by 2.8% as a percentage of maintenance revenues
to 82.2% in fiscal 2009 compared to 79.4% in fiscal 2008 due
primarily to our installed base growing more quickly than
corresponding growth in our support organization and associated
costs.
Cost of Services Revenues and Gross
Margin. Cost of service revenues increased by
$4.1 million in fiscal 2009 primarily due to a
$1.9 million increase in compensation related-expenses
related to increased head count and cost per employee, a
$1.9 million increase related to the use of third party
contractors and external consultants and a $0.3 million
increase related to training and materials expense. Services
gross margin decreased by 1.0% as a percentage of services
revenues to 42.0% for fiscal 2009 compared to 43.0% in fiscal
2008, due primarily to an increase in headcount and related cost
per employee, partially offset by increased employee
productivity in relation to revenue growth.
53
Operating
Expenses
The following table is a summary of research and development,
sales and marketing, and general and administrative expenses in
absolute amounts and as a percentage of total revenues (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2009
|
|
|
2008
|
|
|
Dollars
|
|
|
Percent
|
|
|
Research and development
|
|
$
|
22,537
|
|
|
$
|
19,762
|
|
|
$
|
2,775
|
|
|
|
14.0
|
%
|
Percentage of total revenues
|
|
|
16.6
|
%
|
|
|
19.5
|
%
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
56,279
|
|
|
|
53,453
|
|
|
|
2,826
|
|
|
|
5.3
|
%
|
Percentage of total revenues
|
|
|
41.3
|
%
|
|
|
52.6
|
%
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
20,278
|
|
|
|
13,422
|
|
|
|
6,856
|
|
|
|
51.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
14.9
|
%
|
|
|
13.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
99,094
|
|
|
$
|
86,637
|
|
|
$
|
12,457
|
|
|
|
14.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
72.8
|
%
|
|
|
85.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Expenses. The
increase in research and development expenses in fiscal 2009 of
$2.8 million compared to fiscal 2008 was primarily
attributable to an increase of $2.6 million in
compensation-related expenses associated with an increase in
research and development personnel from 101 to 109 at the
respective period ends. In addition, there was an increase in
facilities-related expense of $0.2 million as a result of
the expansion of our headquarters in Cupertino, California to
accommodate the increase in our personnel.
Sales and Marketing Expenses. The increase in
sales and marketing expenses in fiscal 2009 of $2.8 million
compared to fiscal 2008 was primarily attributable to an
increase of $2.0 million in compensation-related expense
associated with an increase in sales and marketing personnel
from 123 to 141 at the respective period ends. The increase also
included an increase of $0.5 million in marketing program
expense, an increase of $0.4 million in travel and
entertainment expenses, and an increase in facilities expense of
$0.2 million, offset by a decrease of $0.2 million in
outside consulting fees. Sales and marketing expense as a
percentage of total revenue decreased by 11.3% to 41.3% for
fiscal 2009 as compared to 52.6% in fiscal 2008, due primarily
to lower sales commissions as a result of changes in
compensation plan structure, and as a result of a greater
percentage of sales to existing customers, which are at a lower
cost than sales to new customers.
General and Administrative Expenses. The
increase in general and administrative expenses of
$6.9 million in fiscal 2009 compared to fiscal 2008 was
primarily attributable to an increase of $3.3 million
associated with compensation-related expense partially due to an
increase in general and administrative personnel from 41 to 54
at the respective period ends. The increase also included an
increase in professional service expenses for legal and
accounting of $2.1 million, an increase of
$0.3 million in liability insurance premium expense
associated with increasing our coverage level in connection with
our becoming a public company, an increase of $0.4 million
in other service and miscellaneous expenses, an increase of
$0.2 million in depreciation expense, an increase of
$0.1 million in bad debt expense, and an increase of
$0.2 million related to an investor relations program.
54
Non-Operating
Expenses
The following table is a summary of interest income and other
expenses, net, in absolute amounts and as a percentage of total
revenues (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2009
|
|
|
2008
|
|
|
Dollars
|
|
|
Percent
|
|
|
Interest income
|
|
$
|
991
|
|
|
$
|
857
|
|
|
$
|
134
|
|
|
|
15.6
|
%
|
Percentage of total revenues
|
|
|
0.7
|
%
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(257
|
)
|
|
|
(385
|
)
|
|
|
128
|
|
|
|
(33.2
|
)%
|
Percentage of total revenues
|
|
|
(0.2
|
)%
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
2,564
|
|
|
|
1,131
|
|
|
|
1,433
|
|
|
|
126.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
1.9
|
%
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses
|
|
$
|
(1,830
|
)
|
|
$
|
(659
|
)
|
|
$
|
(1,695
|
)
|
|
|
(257.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
(1.3
|
)%
|
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income. The increase in interest
income of $0.1 million for fiscal 2009 compared to fiscal
2008 was primarily attributable to increased cash and cash
equivalents related to net proceeds received from our IPO. The
increase was offset by lower interest rates during fiscal 2009.
Other Income (Expense), Net. The increase in
other income (expense) of $0.1 million, net for fiscal 2009
compared to fiscal 2008 was primarily a result of a reduction in
interest expense related to capitalized software licenses.
Provision for Income Taxes. For fiscal 2009,
we recorded a provision for income taxes of $2.6 million.
The effective tax rate for fiscal 2009 is 20.6%. The difference
between the provision for income taxes that would be derived by
applying the statutory rate to our income before tax and the
income tax provision actually recorded is primarily due to the
impact of nondeductible ASC 718 stock-based compensation
expenses, offset by the use of net operating loss carry-forwards
and tax credits previously offset by a valuation allowance. For
fiscal 2008, we recorded a provision for income taxes of
$1.1 million, primarily related to foreign corporate income
taxes, federal and state alternative minimum taxes currently
due, and a charge of $0.1 million to establish a deferred
tax liability related to the temporary timing differences
between the tax deductible amortization of goodwill related to
the acquisition of Enira Technologies, LLC in June 2006 under
applicable tax rules and ASC 350 under which goodwill must
be analyzed annually for impairment rather than amortized for
financial reporting purposes (See Note 11
Income Taxes for more detailed discussion). The
effective tax rate for fiscal 2008 was (128.8%). The effective
tax rate for fiscal 2008 differs from the U.S. federal
statutory rate primarily due to our inability during this period
to record a tax benefit for all or a portion of the domestic tax
loss as a result of the valuation allowance on our deferred tax
assets, and to a lesser extent other non-deductible items such
as non-deductible ASC 718 stock-based compensation expense.
Liquidity
and Capital Resources
From our inception in May 2000 through October 2002, we funded
our operations primarily through convertible preferred stock
financings that raised a total of $26.8 million. We
achieved positive cash flows from operations in fiscal 2004
through 2009, and generated $45.7 million of cash from our
operating activities during fiscal 2010 compared to
$16.8 million of cash from our operating activities during
fiscal 2009. We generally expect to continue generating positive
operating cash flows on an annual basis. There may be individual
quarters in which we use cash as a result of the timing of
receipts or payments such as receipt of a large receivable from
a customer whose revenue is recognized on a cash basis or
payment of annual bonuses in the first quarter of a fiscal year.
As we have continued to generate cash, we invested
$25.0 million into marketable security investments during
fiscal 2010, of which $12.0 million remains invested as of
April 30, 2010. These marketable securities consist of
certificates of deposit and US Treasury notes invested with
financial institutions that we believe to be financially sound,
in order to minimize our credit risk. Additionally in February
2008, we completed our IPO in which we sold
6,000,000 shares
55
of common stock at an issue price of $9.00 per share. We raised
a total of $54.0 million in gross proceeds from our IPO, or
$45.9 million in net proceeds after deducting underwriting
discounts and offering expenses.
At April 30, 2010, we had cash and cash equivalents
totaling $137.4 million and accounts receivable of
$33.6 million, compared to $90.5 million of cash and
cash equivalents and $34.2 million of accounts receivable
at April 30, 2009.
Historically our principal uses of cash have consisted of
payroll and other operating expenses and purchases of property
and equipment to support our growth. In fiscal 2007, we used
$7.2 million in cash to purchase the assets of Enira
Technologies, LLC and pay acquisition costs.
The following table shows our cash flows from operating
activities, investing activities and financing activities for
the stated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Net cash provided by operating activities
|
|
$
|
45,685
|
|
|
$
|
16,841
|
|
|
$
|
13,532
|
|
Net cash used in investing activities
|
|
|
(16,689
|
)
|
|
|
(2,007
|
)
|
|
|
(4,012
|
)
|
Net cash provided by financing activities
|
|
$
|
17,876
|
|
|
$
|
3,948
|
|
|
$
|
45,567
|
|
Operating
Activities
We have reported net income for fiscal 2010 and 2009 and
although we reported a net loss in fiscal 2008, our operating
activities have provided positive cash flows for each fiscal
year presented, primarily due to the significant non-cash
charges associated with stock-based compensation and
depreciation and amortization reflected in operating expenses
and cash received from collections from customers. In addition,
the realized tax benefit related to the excess of the deductible
amount over the recognized stock-based compensation cost is
classified as a cash inflow from financing activities and a cash
outflow from operating activities. Our cash flows from operating
activities in any period will continue to be significantly
influenced by our results of operations, these non-cash charges
and changes in deferred revenues, as well as changes in other
components of our working capital.
While we may report negative cash flows from operating
activities from time to time in particular quarterly periods, we
generally expect to continue to generate positive cash flows
from operating activities on an annual basis. Future cash from
operations will depend on many factors, including:
|
|
|
|
|
the growth in our sales transactions and associated cash
collections or growth in receivables;
|
|
|
|
the level of our sales and marketing activities, including
expansion into new territories;
|
|
|
|
the timing and extent of spending to support product development
efforts; and
|
|
|
|
the timing of the growth in general and administrative expenses
as we further develop our administrative infrastructure to
support the business as a public company.
|
We generated $45.7 million of cash from operating
activities during fiscal 2010, primarily as a result of
generated net income of $28.4 million for this period,
which included non-cash charges of $10.2 million for
stock-based compensation expense, $3.3 million of
depreciation and amortization, offset by non-cash outflow of
$8.3 million from excess tax benefits from stock-based
compensation expense and $19.5 million from deferred tax
assets related to our valuation release. In addition, cash
generated from operations included $15.9 million increase
in deferred revenues, a $9.6 million increase in other
accrued liabilities, an increase in accounts payable of
$3.6 million, and an increase in accrued compensation and
benefits of $2.4 million due to timing of commissions
earned on increased sales and bonus payments earned related to
headcount increases. These amounts were offset by a
$0.6 million increase in prepaid expenses.
We generated $16.8 million of cash from operating
activities during fiscal 2009, primarily as a result of
generated net income of $9.9 million for this period, which
included non-cash charges of $6.1 million for stock-based
compensation expense, $3.3 million of depreciation and
amortization and a $1.3 million non-cash outflow from
excess tax benefits from stock-based compensation expense, a
$3.8 million increase in deferred revenues, a
$2.2 million decrease in prepaid expenses, a
$2.2 million increase in other accrued liabilities. These
amounts were
56
offset in part by a $7.7 million increase in accounts
receivable associated with the growth in revenue and timing of
sales, a decrease in accounts payable of $1.7 million and a
$0.2 million decrease in our accrued compensation and
benefits due to changes in our compensation plan structures.
We generated $13.5 million of cash from operating
activities during fiscal 2008, primarily as a result of a
$11.7 million increase in deferred revenues, a
$5.2 million increase in our accrued compensation and
benefits because sales commissions and performance bonus accrued
under our fiscal 2008 bonus plan were not paid until the first
quarter of fiscal 2009, a $0.6 million decrease in prepaid
expenses, offset in part by a $11.1 million increase in
accounts receivable associated with the growth in revenue and
timing of sales. In addition, we had a net loss of
$2.0 million for this period, which included non-cash
charges of $4.9 million for stock-based compensation
expense and $2.5 million of depreciation and amortization.
Investing
Activities
During fiscal 2010, we used $16.7 million in cash for
investing activities, comprised primarily of acquisitions of
$25.0 million in short-term held to maturity investments of
which $13.0 million have matured during the fiscal period,
and $5.5 million in capital expenditures primarily
associated with software acquired in support of our ERP software
implementation, in addition to acquisitions of computer
equipment, furniture and fixtures and software in support of the
expansion of our infrastructure and work force. In addition,
$0.8 million of previously restricted cash reserved under
operating lease terms and conditions became unrestricted after
satisfying certain requirements of the operating lease. During
fiscal 2009, we used $2.0 million in cash for investing
activities, all of which was related to capital expenditures
associated with computer equipment, furniture and fixtures and
software in support of the expansion of our infrastructure and
work force. During fiscal 2008, we used $4.0 million in
cash for investing activities, of which $2.0 million was
related to capital expenditures associated with computer
equipment, furniture and fixtures and software, and
$1.4 million related to leasehold improvements, all in
support of the expansion of our infrastructure and work force.
Financing
Activities
During fiscal 2010, we generated $17.9 million of cash from
financing activities, comprised of $12.0 million from net
proceeds from the exercise of stock options and
$8.3 million from realized tax benefit related to the
excess of the deductible amount over the recognized stock-based
compensation cost, offset by $2.4 million in payments for
prepaid software licenses used as a component in our product
sales. During fiscal 2009, we generated $3.9 million of
cash from financing activities, comprised primarily of
$4.8 million from net proceeds from the exercise of stock
options and $1.3 million inflow from tax benefits
associated with disqualifying dispositions of awards associated
with stock-based compensation, offset by $2.1 million in
payments for prepaid software licenses used as a component in
our product sales. During fiscal 2008, we generated
$45.6 million of cash from financing activities, comprised
primarily of $50.2 million in proceeds from our IPO (after
underwriting discounts and commissions) and $0.9 million of
net proceeds from the exercise of stock options, offset by
payments of $3.7 million in IPO preparation costs,
$1.9 million in payments for capital lease obligations and
capitalized software licenses used as a component in our product
sales.
Other
Factors Affecting Liquidity and Capital Resources
We believe that our cash and cash equivalents and any cash flow
from operations will be sufficient to meet our anticipated cash
needs, including for working capital purposes, capital
expenditures and various contractual obligations, for at least
the next 12 months. We may, however, require additional
cash resources due to changed business conditions or other
future developments, including any investments or acquisitions
we may decide to pursue. If these sources are insufficient to
satisfy our cash requirements, we may seek to sell debt
securities or additional equity securities or to obtain a credit
facility. The sale of additional equity securities could result
in additional dilution to our stockholders. The incurrence of
indebtedness would result in debt service obligations and could
result in operating and financial covenants that would restrict
our operations. In addition, there can be no assurance that any
additional financing will be available on acceptable terms, if
at all. We anticipate that, from time to time, we may evaluate
acquisitions of complementary businesses, technologies or
assets. However, there are no current understandings,
commitments or agreements with respect to any acquisitions.
57
Off-Balance
Sheet Arrangements
As of April 30, 2010, we had no off-balance sheet
arrangements as defined in Item 303(a)(4) of the SECs
Regulation S-K.
Contractual
Obligations and Commitments
We lease facilities for our corporate headquarters, subsidiaries
and regional sales offices. We lease our principal facility in
Cupertino, California under a non-cancelable operating lease
agreement. In November 2009, we modified and extended our
operating lease agreement, which now expire in May 2017. Over
the term of the amendment we have agreed to make payments
totaling $22.1 million.
We also have leases for our regional sales offices that are for
13 months or less.
The following table is a summary of our contractual obligations
as of April 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
FY 2011
|
|
|
FY 2012
|
|
|
FY 2013
|
|
|
FY 2014
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
|
Operating lease obligations
|
|
$
|
22,833
|
|
|
$
|
3,354
|
|
|
$
|
3,024
|
|
|
$
|
3,045
|
|
|
$
|
3,137
|
|
|
$
|
10,273
|
|
Accrued contractual obligations
|
|
$
|
2,986
|
|
|
|
2,595
|
|
|
|
271
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,819
|
|
|
$
|
5,949
|
|
|
$
|
3,295
|
|
|
$
|
3,165
|
|
|
$
|
3,137
|
|
|
$
|
10,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 20, 2009, we entered into a software license
agreement with Oracle USA, Inc that authorizes us to integrate
Oracle database software with our ArcSight ESM products and
distribute ArcSight ESM products with the embedded database
software. Under the agreement, which has a two year term that
commenced on May 31, 2009 when our prior agreement with
Oracle expired, we have agreed to make royalty payments totaling
$4.8 million over the license term. During fiscal 2010, we
made payments of approximately $2.4 million under the
current agreement. Under the prior agreement with Oracle, we
made payments totaling $1.9 million during fiscal 2009.
Recent
Accounting Pronouncements
In May 2009, the FASB issued revised guidance under ASC Topic
855-10,
Subsequent Events, which establishes principles and
requirements for subsequent events. Subsequent events are events
or transactions that occur after the balance sheet date but
before financial statements are issued or are available to be
issued. There are two types of subsequent events: (i) the
first type consists of events or transactions that provide
additional evidence about conditions that existed at the date of
the balance sheet and (ii) the second type consists of
events that provide evidence about conditions that did not exist
at the date of the balance sheet but arose after that date. An
entity shall recognize in its financial statements the effects
of all subsequent events that provide additional evidence about
conditions that existed at the date of the balance sheet,
including the estimates inherent in the process of preparing
financial statements. This guidance is effective for interim or
annual financial periods ending after June 15, 2009. We
adopted this guidance effective May 1, 2009.
In February 2010, the FASB issued ASU
No. 2010-09,
Amending Subsequent Events (Topic 855) Certain
Recognition and Disclosure Requirements. This guidance
addresses the interaction between Topic 855 and related SEC
reporting requirements. The amendment removes the requirement
for SEC filers to disclose a date through which subsequent
events have been evaluated. The amendment is effective upon
issuance and has been adopted for our fiscal quarter ended
January 31, 2010, the adoption of which did not impact our
condensed consolidated results of operations, financial
condition or cash flows.
In June 2009, the FASB issued ASC Topic
105-10
The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles, which approved
the FASB Accounting Standards Codification as the single source
of authoritative United States accounting and reporting
standards for all non-governmental entities, except for guidance
issued by the SEC. The codification, which changes the
referencing of financial standards, is effective for interim or
annual financial periods ending after September 15, 2009.
We adopted the guidance effective August 1, 2009. All
references made to generally accepted accounting principles in
the United States, or U.S. GAAP, will use the new
Codification numbering system prescribed by the FASB. As the
58
Codification is not intended to change or alter existing
U.S. GAAP, it did not have any impact on our condensed
consolidated results of operations, financial condition or cash
flows.
In October 2009, the FASB issued Accounting Standards Update, or
ASU
No. 2009-13,
Revenue Recognition (Topic 605) Multiple-Deliverable
Element Arrangements a consensus of the FASB
Emerging Issues Task Force. This guidance impacts the
determination of when the individual deliverables included in a
multiple-element arrangement may be treated as separate units of
accounting. Additionally, this guidance modifies the manner in
which the transaction consideration is allocated across the
separately identified deliverables by no longer permitting the
residual method of allocating arrangement consideration. This
revised guidance is effective for annual financial periods
beginning after June 15, 2010, and early adoption is
permitted. We are currently evaluating the potential impact, if
any, the adoption of this new guidance will have on our
consolidated results of operations, financial condition or cash
flows.
In October 2009, the FASB issued ASU
No. 2009-14,
Software (Topic 985) Certain Arrangements That Contain
Software Elements a consensus of the FASB Emerging
Issues Task Force. This guidance amends the scope of
pre-existing software revenue guidance by removing from the
guidance non-software components of tangible products and
certain software components of tangible products. This revised
guidance is effective for annual financial periods beginning
after June 15, 2010, and early adoption is permitted. We
are currently evaluating the potential impact, if any, the
adoption of this new guidance will have on our consolidated
results of operations, financial condition or cash flows.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market Risk. Market risk represents the risk
of loss that may impact our financial position due to adverse
changes in financial market prices and rates. Our market risk
exposure is primarily a result of fluctuations in foreign
exchange rates, interest rates and credit risk. We do not hold
or issue financial instruments for trading purposes.
Foreign Currency Exchange Risk. To date,
substantially all of our international sales have been
denominated in U.S. dollars, and therefore the majority of
our net revenues are not subject to foreign currency risk. Our
operating expenses and cash flows are subject to fluctuations
due to changes in foreign currency exchange rates, but
historically have had relatively little impact on our operating
results and cash flows. We utilize foreign currency forward and
option contracts to manage our currency exposures as part of our
ongoing business operations. We do not expect to enter into
foreign currency exchange contracts for trading or speculative
purposes.
Interest Rate Risk. Our investment policy is
intended to preserve principal, provide liquidity and maximize
income by limiting default risk, market risk and reinvestment
risk. To minimize these risks, we primarily invest in money
market funds, certificates of deposit and US Treasury
securities. We had cash, cash equivalents and marketable
securities of totaling $149.4 million as of April 30,
2010, including the $45.9 million net proceeds from our
IPO, which are primarily held for working capital and general
corporate purposes. The fair value of our investment portfolio
would not be significantly impacted by either a 100 basis
point increase or decrease in market interest rates due mainly
to the short-term nature of the majority of our investment
portfolio. As a result, we do not believe that we have any
material exposure to changes in the fair value of our investment
portfolio as a result of changes in interest rates. Declines in
interest rates, however, will reduce future interest income. We
do not enter into investments for trading or speculative
purposes.
Credit Risk. Financial instruments that
potentially subject us to concentrations of credit risk consist
principally of cash equivalents, marketable securities, foreign
currency forward contracts and accounts receivable. We are
exposed to credit risk in the event of default by the financial
institutions holding our cash, cash equivalents, marketable
securities, and foreign currency forward contracts to the extent
recorded on its balance sheet. Risks associated with cash
equivalents, marketable securities, and foreign currency forward
contracts are mitigated by banking with high-credit quality
institutions. Cash deposits and investments may be in excess of
insured limits. We believe that the financial institutions that
hold our investments are financially sound and, accordingly,
minimal credit risk exists with respect to these investments. To
date, we have not experienced any losses on our cash, cash
equivalents and marketable securities and minimal losses on its
foreign currency forward contracts. We perform periodic
evaluations of the relative credit standing of the financial
institutions.
59
We sell our products, maintenance and services directly to
customers or through resellers in APAC, EMEA, and the Americas,
with the majority of our sales in the United States. We monitor
our exposure within accounts receivable and record an allowance
against doubtful accounts as necessary. We perform ongoing
credit evaluations of our customers and extend credit in the
normal course of business and generally do not require
collateral. Historically, we have not experienced significant
credit losses on our accounts receivable. We believe that any
risk of loss for trade receivables is mitigated by our ongoing
credit evaluations of customers.
No customer or reseller accounted for more than 10% of total
revenues for fiscal 2010, 2009 or 2008. As of April 30,
2010, we had two resellers with accounts receivable balances
greater than 10% of our net accounts receivable, with balances
of 15% and 10% of net accounts receivable. As of April 30,
2009, we had two customers with accounts receivable balances
greater than 10% of our net accounts receivable, with balances
of 17% and 11% of net accounts receivable. Reseller accounts
receivable balances greater than 10% are comprised of multiple
customers and often multiple transactions with those customers.
In fiscal 2010, 2009 and 2008, we derived 32%, 22% and 20% of
our revenues, respectively, from contracts with agencies of the
U.S. federal government.
60
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Quarterly
Results of Operations
The following table sets forth unaudited quarterly consolidated
statements of operations data for each of the years in the
two-year period ended April 30, 2010, (in thousands, except
per share data). We derived this information from our unaudited
consolidated financial statements, which we prepared on the same
basis as our audited consolidated financial statements contained
in this Annual Report on
Form 10-K.
In our opinion, these unaudited statements include all
adjustments, consisting only of normal recurring adjustments
that we consider necessary for a fair statement of that
information when read in conjunction with the consolidated
financial statements and related notes included elsewhere in
this Annual Report on
Form 10-K.
The operating results for any quarter should not be considered
indicative of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
July 31,
|
|
|
Oct. 31,
|
|
|
Jan. 31,
|
|
|
April 30,
|
|
|
July 31,
|
|
|
Oct. 31,
|
|
|
Jan. 31,
|
|
|
April 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
(Unaudited, in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
15,802
|
|
|
$
|
19,169
|
|
|
$
|
21,775
|
|
|
$
|
23,870
|
|
|
$
|
18,265
|
|
|
$
|
28,018
|
|
|
$
|
26,555
|
|
|
$
|
33,730
|
|
Maintenance
|
|
|
8,568
|
|
|
|
9,530
|
|
|
|
10,004
|
|
|
|
10,419
|
|
|
|
11,919
|
|
|
|
12,617
|
|
|
|
14,702
|
|
|
|
15,498
|
|
Services
|
|
|
3,293
|
|
|
|
4,136
|
|
|
|
4,613
|
|
|
|
4,989
|
|
|
|
4,371
|
|
|
|
4,868
|
|
|
|
4,853
|
|
|
|
5,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
27,663
|
|
|
|
32,835
|
|
|
|
36,392
|
|
|
|
39,278
|
|
|
|
34,555
|
|
|
|
45,503
|
|
|
|
46,110
|
|
|
|
55,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
1,655
|
|
|
|
1,844
|
|
|
|
2,637
|
|
|
|
2,459
|
|
|
|
1,944
|
|
|
|
3,150
|
|
|
|
3,824
|
|
|
|
4,051
|
|
Maintenance(1)
|
|
|
1,631
|
|
|
|
1,663
|
|
|
|
1,637
|
|
|
|
1,930
|
|
|
|
1,925
|
|
|
|
2,434
|
|
|
|
2,497
|
|
|
|
2,647
|
|
Services(1)
|
|
|
2,043
|
|
|
|
2,387
|
|
|
|
2,587
|
|
|
|
2,858
|
|
|
|
2,630
|
|
|
|
3,204
|
|
|
|
3,283
|
|
|
|
4,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
5,329
|
|
|
|
5,894
|
|
|
|
6,861
|
|
|
|
7,247
|
|
|
|
6,499
|
|
|
|
8,788
|
|
|
|
9,604
|
|
|
|
10,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
22,334
|
|
|
|
26,941
|
|
|
|
29,531
|
|
|
|
32,031
|
|
|
|
28,056
|
|
|
|
36,715
|
|
|
|
36,506
|
|
|
|
44,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
5,315
|
|
|
|
5,423
|
|
|
|
5,201
|
|
|
|
6,598
|
|
|
|
5,598
|
|
|
|
6,576
|
|
|
|
6,429
|
|
|
|
7,663
|
|
Sales and marketing
|
|
|
14,868
|
|
|
|
14,355
|
|
|
|
12,298
|
|
|
|
14,758
|
|
|
|
14,785
|
|
|
|
18,582
|
|
|
|
18,563
|
|
|
|
21,728
|
|
General and administrative
|
|
|
4,349
|
|
|
|
4,863
|
|
|
|
4,943
|
|
|
|
6,123
|
|
|
|
6,018
|
|
|
|
6,336
|
|
|
|
6,767
|
|
|
|
7,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
24,532
|
|
|
|
24,641
|
|
|
|
22,442
|
|
|
|
27,479
|
|
|
|
26,401
|
|
|
|
31,494
|
|
|
|
31,759
|
|
|
|
36,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(2,198
|
)
|
|
|
2,300
|
|
|
|
7,089
|
|
|
|
4,552
|
|
|
|
1,655
|
|
|
|
5,221
|
|
|
|
4,747
|
|
|
|
7,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
305
|
|
|
|
340
|
|
|
|
157
|
|
|
|
(68
|
)
|
|
|
(89
|
)
|
|
|
(179
|
)
|
|
|
(81
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
(1,893
|
)
|
|
|
2,640
|
|
|
|
7,246
|
|
|
|
4,484
|
|
|
|
1,566
|
|
|
|
5,042
|
|
|
|
4,666
|
|
|
|
7,706
|
|
Provision (benefit) for income taxes
|
|
|
(563
|
)
|
|
|
795
|
|
|
|
2,183
|
|
|
|
149
|
|
|
|
551
|
|
|
|
2,544
|
|
|
|
2,438
|
|
|
|
(14,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,330
|
)
|
|
$
|
1,845
|
|
|
$
|
5,063
|
|
|
$
|
4,335
|
|
|
$
|
1,015
|
|
|
$
|
2,498
|
|
|
$
|
2,228
|
|
|
$
|
22,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock-based compensation expense as included in above: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of maintenance revenues
|
|
$
|
46
|
|
|
$
|
54
|
|
|
$
|
56
|
|
|
$
|
60
|
|
|
$
|
80
|
|
|
$
|
102
|
|
|
$
|
123
|
|
|
$
|
140
|
|
Cost of services revenues
|
|
|
33
|
|
|
|
39
|
|
|
|
34
|
|
|
|
36
|
|
|
|
33
|
|
|
|
43
|
|
|
|
64
|
|
|
|
85
|
|
Research and development
|
|
|
339
|
|
|
|
334
|
|
|
|
322
|
|
|
|
347
|
|
|
|
429
|
|
|
|
518
|
|
|
|
595
|
|
|
|
635
|
|
Sales and marketing
|
|
|
751
|
|
|
|
752
|
|
|
|
466
|
|
|
|
482
|
|
|
|
612
|
|
|
|
851
|
|
|
|
987
|
|
|
|
968
|
|
General and administrative
|
|
|
234
|
|
|
|
346
|
|
|
|
786
|
|
|
|
628
|
|
|
|
776
|
|
|
|
971
|
|
|
|
1,071
|
|
|
|
1,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expenses
|
|
$
|
1,403
|
|
|
$
|
1,525
|
|
|
$
|
1,664
|
|
|
$
|
1,553
|
|
|
$
|
1,930
|
|
|
$
|
2,485
|
|
|
$
|
2,840
|
|
|
$
|
2,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
The following table sets forth our historical results, for the
periods indicated, as a percentage of our revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
July 31,
|
|
Oct. 31,
|
|
Jan. 31,
|
|
April 30,
|
|
July 31,
|
|
Oct. 31,
|
|
Jan. 31,
|
|
April 30,
|
|
|
2008
|
|
2008
|
|
2009
|
|
2009
|
|
2009
|
|
2009
|
|
2010
|
|
2010
|
|
|
(Unaudited)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
57.1
|
%
|
|
|
58.4
|
%
|
|
|
59.8
|
%
|
|
|
60.8
|
%
|
|
|
52.9
|
%
|
|
|
61.6
|
%
|
|
|
57.6
|
%
|
|
|
61.1
|
%
|
Maintenance
|
|
|
31.0
|
|
|
|
29.0
|
|
|
|
27.5
|
|
|
|
26.5
|
|
|
|
34.5
|
|
|
|
27.7
|
|
|
|
31.9
|
|
|
|
28.1
|
|
Services
|
|
|
11.9
|
|
|
|
12.6
|
|
|
|
12.7
|
|
|
|
12.7
|
|
|
|
12.6
|
|
|
|
10.7
|
|
|
|
10.5
|
|
|
|
10.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
6.0
|
|
|
|
5.6
|
|
|
|
7.3
|
|
|
|
6.3
|
|
|
|
5.6
|
|
|
|
6.9
|
|
|
|
8.3
|
|
|
|
7.3
|
|
Maintenance
|
|
|
5.9
|
|
|
|
5.1
|
|
|
|
4.5
|
|
|
|
4.9
|
|
|
|
5.6
|
|
|
|
5.4
|
|
|
|
5.4
|
|
|
|
4.8
|
|
Services
|
|
|
7.4
|
|
|
|
7.3
|
|
|
|
7.1
|
|
|
|
7.3
|
|
|
|
7.6
|
|
|
|
7.0
|
|
|
|
7.1
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
19.3
|
|
|
|
18.0
|
|
|
|
18.9
|
|
|
|
18.5
|
|
|
|
18.8
|
|
|
|
19.3
|
|
|
|
20.8
|
|
|
|
19.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
80.7
|
|
|
|
82.0
|
|
|
|
81.1
|
|
|
|
81.5
|
|
|
|
81.2
|
|
|
|
80.7
|
|
|
|
79.2
|
|
|
|
80.2
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
19.2
|
|
|
|
16.5
|
|
|
|
14.3
|
|
|
|
16.8
|
|
|
|
16.2
|
|
|
|
14.5
|
|
|
|
13.9
|
|
|
|
13.9
|
|
Sales and marketing
|
|
|
53.7
|
|
|
|
43.7
|
|
|
|
33.8
|
|
|
|
37.6
|
|
|
|
42.8
|
|
|
|
40.8
|
|
|
|
40.3
|
|
|
|
39.4
|
|
General and administrative
|
|
|
15.7
|
|
|
|
14.8
|
|
|
|
13.5
|
|
|
|
15.6
|
|
|
|
17.4
|
|
|
|
13.9
|
|
|
|
14.7
|
|
|
|
12.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
88.6
|
|
|
|
75.0
|
|
|
|
61.6
|
|
|
|
70.0
|
|
|
|
76.4
|
|
|
|
69.2
|
|
|
|
68.9
|
|
|
|
66.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(7.9
|
)%
|
|
|
7.0
|
%
|
|
|
19.5
|
%
|
|
|
11.5
|
%
|
|
|
4.8
|
%
|
|
|
11.5
|
%
|
|
|
10.3
|
%
|
|
|
14.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to rounding to the nearest tenth of a percent, totals may
not equal the sum of the line items in the table above.
Our operating results may fluctuate due to a variety of factors,
many of which are outside our control. 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.
Revenues have increased over the quarters presented, other than
for the first quarter of fiscal 2010, due primarily to the
seasonality of our business with our first quarter having
relatively lower product revenue compared to our respective
prior fourth quarter. In addition, the timing of our annual
sales club for top performers and annual training
for our entire sales force occurs annually during our first
fiscal quarter, may inhibit the selling potential during this
period.
Our second and fourth quarters of our fiscal year tend to have
relatively higher product revenue due to a number of factors,
but primarily due to the fiscal year end procurement cycles of
our U.S federal government customers, the budgeting, procurement
and work cycles of our customers, including customers in the
public sector, and the structure of our direct sales incentive
and compensation programs, which may reinforce the tendency of
our direct sales team to book the largest volume of deals
towards the end of our fiscal year. Likewise our quarterly
revenue improvements are offset by seasonal reductions in
business activity during the summer months in the United States
and Europe.
In general, our quarterly revenue continues to increase due to
the increased number of products sold to new and existing
customers and expansion into the international and mid-size
markets. Our revenues continue to be positively impacted by
timing of new compliance and cybersecurity mandates both
domestic and international. Most notably during fiscal 2010, our
quarterly revenue improvements have been positively impacted by
continued strong sales in our federal vertical and strong
mid-market wins. In addition, continued improvements in the EMEA
region and significant revenue wins in our enterprise business
drive continue to drive our growth.
Our operating expenses in general steadily increase over the
quarterly periods presented. We continue to invest in resources
to expand our platform and product offerings and expect research
and development expenses to continue to increase in absolute
dollars. On a quarterly basis, we have focused on continuing to
grow and expand our business model, improve and create new
market opportunities and expand our customer base. Our sales and
marketing expenses on a quarterly basis reflect this focus and
we expect that these expenses will continue to increase in
absolute dollars to reflect our continued growth. Headcount
increased 28% during 2010 raising headcount to
512 employees, and will continue to increase as we expand
our headcount across the organization as a result of continued
growth.
62
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
63
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
ArcSight, Inc.
We have audited the accompanying consolidated balance sheets of
ArcSight, Inc. as of April 30, 2010 and 2009, and the
related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended April 30, 2010. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of ArcSight, Inc. at April 30, 2010 and
2009, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
April 30, 2010, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
ArcSight, Inc.s internal control over financial reporting
as of April 30, 2010, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated July 9, 2010 expressed an unqualified opinion
thereon.
San Jose, California
July 9, 2010
64
ARCSIGHT,
INC.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share amounts and par value)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
137,358
|
|
|
$
|
90,467
|
|
Marketable securities
|
|
|
12,013
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of
$256 and $262, as of April 30, 2010 and 2009, respectively
|
|
|
33,609
|
|
|
|
34,184
|
|
Deferred tax asset, current
|
|
|
8,807
|
|
|
|
|
|
Capitalized software, current
|
|
|
2,303
|
|
|
|
144
|
|
Prepaid expenses and other current assets
|
|
|
6,557
|
|
|
|
3,717
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
200,647
|
|
|
|
128,512
|
|
Property and equipment, net
|
|
|
8,174
|
|
|
|
4,416
|
|
Deferred tax asset, non-current
|
|
|
10,649
|
|
|
|
|
|
Goodwill
|
|
|
5,746
|
|
|
|
5,746
|
|
Acquired intangible assets, net
|
|
|
430
|
|
|
|
1,319
|
|
Other long-term assets
|
|
|
557
|
|
|
|
1,168
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
226,203
|
|
|
$
|
141,161
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,039
|
|
|
$
|
1,432
|
|
Accrued compensation and benefits
|
|
|
13,633
|
|
|
|
11,671
|
|
Obligations for software licenses, current
|
|
|
2,832
|
|
|
|
363
|
|
Other accrued liabilities
|
|
|
5,696
|
|
|
|
4,337
|
|
Deferred revenues, current
|
|
|
49,674
|
|
|
|
36,160
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
76,874
|
|
|
|
53,963
|
|
Deferred revenues, non-current
|
|
|
11,237
|
|
|
|
8,888
|
|
Other long-term liabilities
|
|
|
2,516
|
|
|
|
1,637
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
90,627
|
|
|
|
64,488
|
|
Commitments and contingencies (Note 5)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.00001 par value per share,
10,000,000 shares authorized as of April 30, 2010 and
2009, respectively; no shares issued and outstanding as of
April 30, 2010 and 2009, respectively
|
|
|
|
|
|
|
|
|
Common stock, $0.00001 par value per share;
150,000,000 shares authorized as of April 30, 2010 and
April 30, 2009, respectively; 34,322,543 and 32,248,116
issued and outstanding as of April 30, 2010 and 2009,
respectively
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
144,273
|
|
|
|
113,781
|
|
Accumulated other comprehensive loss
|
|
|
(290
|
)
|
|
|
(314
|
)
|
Accumulated deficit
|
|
|
(8,407
|
)
|
|
|
(36,794
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
135,576
|
|
|
|
76,673
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
226,203
|
|
|
$
|
141,161
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
65
ARCSIGHT,
INC.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
106,568
|
|
|
$
|
80,616
|
|
|
$
|
63,765
|
|
Maintenance
|
|
|
54,736
|
|
|
|
38,521
|
|
|
|
27,607
|
|
Services
|
|
|
20,080
|
|
|
|
17,031
|
|
|
|
10,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
181,384
|
|
|
|
136,168
|
|
|
|
101,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
12,969
|
|
|
|
8,595
|
|
|
|
4,767
|
|
Maintenance(1)
|
|
|
9,503
|
|
|
|
6,861
|
|
|
|
5,691
|
|
Services(1)
|
|
|
13,340
|
|
|
|
9,875
|
|
|
|
5,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
35,812
|
|
|
|
25,331
|
|
|
|
16,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
145,572
|
|
|
|
110,837
|
|
|
|
85,287
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
26,266
|
|
|
|
22,537
|
|
|
|
19,762
|
|
Sales and marketing
|
|
|
73,658
|
|
|
|
56,279
|
|
|
|
53,453
|
|
General and administrative
|
|
|
26,269
|
|
|
|
20,278
|
|
|
|
13,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
126,193
|
|
|
|
99,094
|
|
|
|
86,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
19,379
|
|
|
|
11,743
|
|
|
|
(1,350
|
)
|
Interest income
|
|
|
124
|
|
|
|
991
|
|
|
|
857
|
|
Other income (expense), net
|
|
|
(523
|
)
|
|
|
(257
|
)
|
|
|
(385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
18,980
|
|
|
|
12,477
|
|
|
|
(878
|
)
|
Provision (benefit) for income taxes
|
|
|
(9,407
|
)
|
|
|
2,564
|
|
|
|
1,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
28,387
|
|
|
$
|
9,913
|
|
|
$
|
(2,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic
|
|
$
|
0.85
|
|
|
$
|
0.32
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, diluted
|
|
$
|
0.78
|
|
|
$
|
0.30
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income (loss) per common share
|
|
|
33,434
|
|
|
|
31,233
|
|
|
|
25,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income (loss) per common
share
|
|
|
36,197
|
|
|
|
33,550
|
|
|
|
25,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock-based compensation expense included in above (see
Note 8): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of maintenance revenues
|
|
$
|
445
|
|
|
$
|
216
|
|
|
$
|
106
|
|
Cost of services revenues
|
|
|
225
|
|
|
|
142
|
|
|
|
115
|
|
Research and development
|
|
|
2,177
|
|
|
|
1,342
|
|
|
|
1,356
|
|
Sales and marketing
|
|
|
3,418
|
|
|
|
2,451
|
|
|
|
2,685
|
|
General and administrative
|
|
|
3,941
|
|
|
|
1,994
|
|
|
|
664
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
66
ARCSIGHT,
INC.
Consolidated
Statements of Stockholders Equity
For
the Fiscal Years Ended April 2008, 2009 and 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Stock-
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Based
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands, except share amounts)
|
|
|
Balance as of April 30, 2007
|
|
|
13,032,497
|
|
|
|
26,758
|
|
|
|
10,620,041
|
|
|
|
|
|
|
|
23,479
|
|
|
|
(554
|
)
|
|
|
13
|
|
|
|
(44,566
|
)
|
|
|
5,130
|
|
Cumulative effect adjustment due to the adoption of
ASC 740-10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
(132
|
)
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
402,260
|
|
|
|
|
|
|
|
923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
923
|
|
Reclassification of options exercised but not vested, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
Repurchase of common stock subject to vesting
|
|
|
|
|
|
|
|
|
|
|
(6,845
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Amortization of deferred stock-based compensation, net of
terminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
91
|
|
Amortization of restricted stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
|
404
|
|
Stock-based compensation under ASC 718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,431
|
|
Exercise of Series B preferred stock warrants
|
|
|
12,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
6,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock into common stock
|
|
|
(13,045,406
|
)
|
|
|
(26,758
|
)
|
|
|
14,000,441
|
|
|
|
|
|
|
|
26,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering, net of issuance costs of
$4,288
|
|
|
|
|
|
|
|
|
|
|
6,000,000
|
|
|
|
|
|
|
|
45,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,932
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
(58
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,009
|
)
|
|
|
(2,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2008
|
|
|
|
|
|
|
|
|
|
|
31,022,190
|
|
|
|
|
|
|
|
101,574
|
|
|
|
(53
|
)
|
|
|
(45
|
)
|
|
|
(46,707
|
)
|
|
|
54,769
|
|
Issuance of common stock under stock option and stock purchase
plans
|
|
|
|
|
|
|
|
|
|
|
1,225,926
|
|
|
|
|
|
|
|
4,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,800
|
|
Reclassification of options exercised but not vested, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
Amortization of deferred stock-based compensation, net of
terminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
Amortization of restricted stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
Stock-based compensation under ASC 718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,092
|
|
Tax benefit from stock-based awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,291
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(269
|
)
|
|
|
|
|
|
|
(269
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,913
|
|
|
|
9,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2009
|
|
|
|
|
|
$
|
|
|
|
|
32,248,116
|
|
|
$
|
|
|
|
$
|
113,781
|
|
|
$
|
|
|
|
$
|
(314
|
)
|
|
$
|
(36,794
|
)
|
|
$
|
76,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under stock option and stock purchase
plans
|
|
|
|
|
|
|
|
|
|
|
2,074,427
|
|
|
|
|
|
|
|
12,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,017
|
|
Stock-based compensation under ASC 718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,206
|
|
Tax benefit from stock-based awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,269
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
24
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,387
|
|
|
|
28,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2010
|
|
|
|
|
|
$
|
|
|
|
|
34,322,543
|
|
|
$
|
|
|
|
$
|
144,273
|
|
|
$
|
|
|
|
$
|
(290
|
)
|
|
$
|
(8,407
|
)
|
|
$
|
135,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
67
ARCSIGHT,
INC.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
28,387
|
|
|
$
|
9,913
|
|
|
$
|
(2,009
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,452
|
|
|
|
2,471
|
|
|
|
1,945
|
|
Amortization of acquired intangibles
|
|
|
889
|
|
|
|
842
|
|
|
|
573
|
|
Loss (gain) on disposal of property and equipment
|
|
|
26
|
|
|
|
17
|
|
|
|
(6
|
)
|
Stock-based compensation
|
|
|
10,206
|
|
|
|
6,145
|
|
|
|
4,926
|
|
Deferred tax assets
|
|
|
(19,456
|
)
|
|
|
|
|
|
|
|
|
Excess tax benefit from stock-based compensation
|
|
|
(8,269
|
)
|
|
|
(1,291
|
)
|
|
|
|
|
Provision for allowance for doubtful accounts
|
|
|
134
|
|
|
|
142
|
|
|
|
33
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
441
|
|
|
|
(7,668
|
)
|
|
|
(11,137
|
)
|
Prepaid expenses and other assets
|
|
|
(624
|
)
|
|
|
2,205
|
|
|
|
1,008
|
|
Accounts payable
|
|
|
3,607
|
|
|
|
(1,683
|
)
|
|
|
269
|
|
Accrued compensation and benefits
|
|
|
2,386
|
|
|
|
(193
|
)
|
|
|
5,186
|
|
Other accrued liabilities
|
|
|
9,643
|
|
|
|
2,159
|
|
|
|
1,066
|
|
Deferred revenues
|
|
|
15,863
|
|
|
|
3,782
|
|
|
|
11,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
45,685
|
|
|
|
16,841
|
|
|
|
13,532
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
842
|
|
|
|
|
|
|
|
|
|
Maturities of marketable securities
|
|
|
12,985
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(24,998
|
)
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(5,518
|
)
|
|
|
(2,007
|
)
|
|
|
(4,031
|
)
|
Proceeds from sales of property and equipment
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(16,689
|
)
|
|
|
(2,007
|
)
|
|
|
(4,012
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial public offering preparation costs
|
|
|
|
|
|
|
|
|
|
|
(3,669
|
)
|
Proceeds from initial public offering
|
|
|
|
|
|
|
|
|
|
|
50,220
|
|
Excess tax benefit from stock-based compensation
|
|
|
8,269
|
|
|
|
1,291
|
|
|
|
|
|
Proceeds from exercise of stock options, net of repurchases
|
|
|
12,017
|
|
|
|
4,800
|
|
|
|
920
|
|
Payment of capital lease and software license obligations
|
|
|
(2,410
|
)
|
|
|
(2,143
|
)
|
|
|
(1,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
17,876
|
|
|
|
3,948
|
|
|
|
45,567
|
|
Effect of exchange rate changes on cash
|
|
|
19
|
|
|
|
(261
|
)
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
46,891
|
|
|
|
18,521
|
|
|
|
55,029
|
|
Cash and cash equivalents at beginning of period
|
|
|
90,467
|
|
|
|
71,946
|
|
|
|
16,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
137,358
|
|
|
$
|
90,467
|
|
|
$
|
71,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
2,873
|
|
|
$
|
1,669
|
|
|
$
|
331
|
|
Interest expense paid
|
|
|
103
|
|
|
|
110
|
|
|
|
227
|
|
Supplemental disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon conversion of preferred stock
|
|
|
|
|
|
|
|
|
|
|
26,758
|
|
Property and equipment acquired under capital lease
|
|
|
713
|
|
|
|
101
|
|
|
|
|
|
Capitalized software obligations
|
|
|
4,606
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
68
ARCSIGHT,
INC.
Notes to
Consolidated Financial Statements
|
|
1.
|
Description
of Business
|
ArcSight, Inc. (ArcSight or the Company)
is a leading provider of enterprise threat and risk management
solutions that protect businesses and government agencies. The
Companys enterprise threat and risk management platform
collects, consolidates and correlates network and user activity
data across the enterprise so that businesses can rapidly
detect, diagnose and manage both internal and external threats
and risks across the organization for activities associated with
critical assets and processes. With the Companys
enterprise threat and risk management platform and products,
organizations can use the ArcSight platform to reduce risk,
identify vulnerabilities, comply with regulations and protect
their high-value digital assets from cyber-theft, cyber-fraud,
cyber-warfare and cyber-espionage. The Companys SIEM
products deliver a centralized, real-time view of all activity
or events across geographically dispersed and heterogeneous
business and technology infrastructures. Its log management
products collect and store activity and event data for
regulatory compliance, reporting and forensic analysis. Working
together, these products collect, consolidate and correlate
massive amounts of activity data, in the form of log events,
from thousands of security point solutions, network and
computing devices, databases and applications, enabling
intelligent identification, prioritization and response to
compliance and corporate policy violations, and external and
insider threats. The Companys specialized software and
application packages deliver pre-packaged analytics and reports
tailored to specific compliance and security initiatives, such
as Sarbanes-Oxley (SOX), PCI, user monitoring and fraud
detection. The Company is headquartered in Cupertino,
California, and was incorporated on May 3, 2000 under the
laws of the state of Delaware.
Initial
Public Offering
In February 2008, the Company completed an initial public
offering (IPO), in which it sold
6,000,000 shares of common stock, at an issue price of
$9.00 per share. The Company raised a total of
$54.0 million in gross proceeds from the IPO, or
$45.9 million in net proceeds after deducting
underwriters discounts of $3.8 million and other
offering expenses of $4.3 million. Upon the completion of
the IPO, all shares of convertible preferred stock outstanding
automatically converted into 14,000,441 shares of common
stock.
|
|
2.
|
Significant
Accounting Policies
|
Basis
of Presentation and Consolidation
The accompanying audited consolidated financial statements
include the accounts of the Company and its wholly-owned
subsidiaries. All significant inter-company transactions have
been eliminated on consolidation.
On November 20, 2007, the Board of Directors and the
Companys stockholders approved a
1-for-4
reverse stock split of the Companys outstanding shares of
common stock and convertible preferred stock (the Reverse
Split). All authorized, reserved, issued and outstanding
common stock, convertible preferred stock and per share amounts
contained in these notes and the accompanying consolidated
financial statements have been retroactively adjusted to reflect
the Reverse Split.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles
(GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements as well as the reported
amounts of revenues and expenses during the reporting period.
The Company bases its estimates and judgments on its historical
experience, knowledge of current conditions, and its beliefs on
what could occur in the future, given available information.
Estimates, assumptions and judgments, are used for, but are not
limited to, revenue recognition, determination of fair value of
stock and stock-based awards, valuation of goodwill and
intangible assets acquired in business combinations, impairment
of goodwill and other intangible assets, amortization of
intangible assets, contingencies and litigation, accounting for
income taxes, including the valuation
69
reserve on deferred tax assets and uncertain tax positions,
allowances for doubtful accounts, valuations of cash equivalents
and marketable securities, and accrued liabilities such as bonus
accruals. Actual results may differ from those estimates, and
such differences may be material to the financial statements.
Cash
and Cash Equivalents
The Company maintains its cash and cash equivalents in accounts
consisting of high-credit quality financial instruments. The
Company considers all highly liquid investments purchased with a
maturity of three months or less at the date of purchase to be
cash equivalents. The Companys cash equivalents consist of
money market accounts on deposit with two banks and are stated
at cost, which approximates fair value.
Marketable
Securities
Marketable securities were $12.0 million as of
April 30, 2010. There were no marketable securities as of
April 30, 2009. The Company determines the appropriate
classification of the securities at the time of purchase and
re-evaluates the designation as of each balance sheet date. As
of April 30, 2010, all marketable securities are considered
available-for-sale.
Marketable securities consist principally of taxable, short-term
marketable certificates of deposit and U.S. Treasury notes,
with original maturities between three and nine months.
Marketable securities are stated at estimated fair value with
unrealized gains and losses reported in accumulated other
comprehensive loss. Unrealized gain recorded net of tax benefit
amounted to $3,000 for fiscal 2010. A decline in the market
value of any available-for sale security below cost that is
deemed to be
other-than-temporary
results in an impairment which reduces the carrying amount to
fair value. The impairment is charged to earnings and a new cost
basis for the security is established. To determine whether an
impairment is
other-than-temporary,
the Company considers whether it has the ability and intent to
hold the investment until a market price recovery and considers
whether evidence indicating the costs of the investment is
recoverable outweighs evidence to the contrary. Evidence
considered in this assessment includes the reason for the
impairment, the severity and duration of the impairment, changes
in value subsequent to period-end, and the general market
conditions. There were no
other-than-temporary
impairments for the period ended April 30, 2010. The
specific identification method is used to determine the costs of
securities disposed of, with realized gains and losses reflected
in other expense, net. Investments are anticipated to be used
for current operations.
Fair
Value of Financial Instruments
The carrying amounts of cash equivalents, marketable securities,
trade accounts receivable, accounts payable, and other accrued
liabilities approximate their respective fair values due to the
relatively short-term maturities. The carrying amounts of
marketable securities and derivative financial instruments
approximate their respective fair values due to adjusting these
investments to their respective market values each reporting
period.
Foreign
Currency Translation/Transactions
The functional currency of the Companys foreign
subsidiaries is the local currency. Adjustments resulting from
translating foreign functional currency financial statements
into U.S. dollars are recorded as a separate component of
accumulated other comprehensive income (loss). Income and
expense accounts are translated into U.S. dollars at
average rates of exchange prevailing during the periods
presented. All assets and liabilities denominated in a foreign
currency are translated into U.S. dollars at the exchange
rates in effect on the balance sheet dates.
Net foreign currency transaction losses of approximately
$0.4 million, $0.1 million and $0.1 million, for
fiscal 2010, 2009 and 2008, respectively, were primarily the
result of the settlement of inter-company transactions and are
included in other expense.
Derivative
Financial Instruments
The majority of the Companys sales are denominated in
United States dollars; however, there are some sales
transactions denominated in foreign currencies. In addition, the
Companys foreign subsidiaries pay their expenses in local
currency. Therefore, movements in exchange rates could cause net
sales and expenses to fluctuate, affecting
70
the Companys profitability and cash flows. The
Companys general practice is to use foreign currency
forward contracts to reduce its exposure to foreign currency
exchange rate fluctuations. Unrealized gains and losses
associated with these foreign currency contracts are reflected
in the Companys balance sheet and recorded in prepaid
expenses and other current assets or accrued expenses and other
current liabilities. Changes in fair value and premiums paid for
foreign currency contracts are recorded directly in other income
and expense in the consolidated statements of income. Cash flows
from such derivatives are classified as operating activities.
The objective of these contracts is to reduce the impact of
foreign currency exchange rate movements on the Companys
net income. During fiscal 2010, 2009 and 2008, the Company
considered the net results of the use of foreign currency
forward contracts to be an effective mechanism to minimize the
fluctuations and movements in exchange rates that affect the
Companys profitability and cash flows. All of the
Companys foreign currency forward contracts mature within
12 months from the balance sheet date. The Company does not
use derivatives for speculative or trading purposes, nor does
the Company designate its derivative instruments as hedging
instruments, as defined by the Financial Accounting Standard
Board (FASB) under Accounting Standards Codification
(ASC) Topic 815, Accounting for Derivative
Instruments in Hedging Activities (ASC 815).
As of April 30, 2010, and 2009, the notional amount of
outstanding foreign currency derivatives classified as other
accrued liabilities not designated as hedging instruments under
the guidance was $0.3 million and $1.4 million,
respectively. As of April 30, 2010, approximately 60%, 24%,
and 15% of the notional amount of the Companys outstanding
foreign currency derivatives were attributable to the Canadian
dollar, Euro and British Pound Sterling currencies,
respectively, and all will expire within 60 days. As of
April 30, 2009, approximately 97% and 3% of the notional
amount of the Companys outstanding foreign currency
derivatives were attributable to the Canadian dollar and British
Pound Sterling currencies, respectively. As of April 30,
2010 and 2009, the fair value gain or (loss) adjustment to mark
these instruments to market was ($2,000) and $28,000,
respectively, and are included in accrued expenses and other
accrued liabilities in the accompanying condensed consolidated
balance sheets. For fiscal 2010, 2009 and 2008, the Company
recorded losses of $1,000, $0.1 million and $36,000,
respectively, in other income (expense), net, associated with
foreign currency derivative contracts.
Concentration
of Credit Risk and Business Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash
equivalents, marketable securities, foreign currency forward
contracts and accounts receivable. The Company is exposed to
credit risk in the event of default by the financial
institutions holding its cash, cash equivalents, marketable
securities, and foreign currency forward contracts to the extent
recorded on its balance sheet. Risks associated with cash
equivalents, marketable securities, and foreign currency forward
contracts are mitigated by banking with high-credit quality
institutions. Cash deposits and investments may be in excess of
insured limits. Management believes that the financial
institutions that hold the Companys investments are
financially sound and, accordingly, minimal credit risk exists
with respect to these investments. To date, the Company has not
experienced any losses on its cash, cash equivalents and
marketable securities and minimal losses attributable to
mark-to-market
adjustment on its foreign currency forward contracts. The
Company performs periodic evaluations of the relative credit
standing of the financial institutions.
The Company sells its products, maintenance and services
directly to customers or through resellers in Asia Pacific,
Europe, the Middle East and Africa (collectively,
EMEA) and the Americas, with the majority of its
sales in the United States. The Company monitors its exposure
within accounts receivable and records an allowance against
doubtful accounts as necessary. The Company performs ongoing
credit evaluations of its customers and extends credit in the
normal course of business and generally does not require
collateral. Historically, the Company has not experienced
significant credit losses on its accounts receivable. Management
believes that any risk of loss for trade receivables is
mitigated by the Companys ongoing credit evaluations of
its customers.
No customer or reseller accounted for more than 10% of total
revenues for fiscal 2010, 2009 or 2008. As of April 30,
2010, the Company had two resellers with accounts receivable
balances greater than 10% of the Companys net accounts
receivable, with balances of 15% and 10% of net accounts
receivable. As of April 30, 2009, the Company had two
customers with accounts receivable balances greater than 10% of
the Companys net accounts receivable, with balances of 17%
and 11% of net accounts receivable. Reseller accounts receivable
balances greater than 10% are comprised of multiple customers
and often multiple transactions with those customers. In fiscal
2010,
71
2009 and 2008, the Company derived 32%, 22% and 20% of our
revenues, respectively, from contracts with agencies of the
U.S. federal government.
The majority of the Companys revenues are derived from
sales of the Companys security and compliance management
products, primarily ArcSight ESM and Logger, and the Company
expects this to continue for the foreseeable future. The Company
primarily uses one source for manufacturing and fulfillment for
its Logger and other appliance products. Demand for the
Companys products is affected by a number of factors, some
of which are beyond the Companys control, including the
timing of development and release of new products by the Company
and its competitors, technological change,
lower-than-expected
growth or a contraction in the worldwide market for enterprise
security and compliance management solutions and other risks.
Revenue
Recognition
The Company derives its revenues from three sources:
(1) sales of software licenses and related appliances
(products); (2) fees for maintenance to provide
unspecified upgrades and customer technical support
(maintenance); and (3) fees for services, which
includes services performed in connection with
time-and-materials
based consulting agreements (services).
For all sales, revenues are recognized in accordance with GAAP,
subject to the guidance for Software Revenue
Recognition under ASC Topic
985-605
(ASC
985-605),
as amended.
The Company enters into software license agreements through
direct sales to customers and through resellers. The license
agreements include post-contract customer support and may
include professional services deliverables. Post-contract
customer support includes rights to receive unspecified software
product updates and upgrades, maintenance releases and patches
released during the term of the support period, and Internet and
telephone access to technical support personnel and content.
Professional services include installation and implementation of
the Companys software, staffing and management services
for customer security operation centers (SOCs) and
customer training. Professional services are not essential to
the functionality of the associated licensed software.
For all sales, revenues attributable to an element in a customer
arrangement are recognized when persuasive evidence of an
arrangement exists and delivery has occurred, provided the fee
is fixed or determinable and collectibility is reasonably
assured.
The Company typically uses a binding purchase order in
conjunction with either a signed contract or reference on the
purchase order to the terms and conditions of the Companys
shrinkwrap or end-user license agreement as evidence of an
arrangement. In circumstances where the customer does not issue
purchase orders separate from a signed contract, the Company
uses the signed contract as evidence of the arrangement. Sales
through its significant resellers are evidenced by a master
agreement governing the relationship.
Resellers and systems integrators purchase products for specific
end-users and do not hold inventory. Resellers and systems
integrators perform functions that include delivery to the end
customer, installation or integration and post-sales service and
support. The agreements with these resellers and systems
integrators have terms that are generally consistent with the
standard terms and conditions for the sale of the Companys
products and services to end-users and do not provide for
product rotation or pricing allowances. For sales to direct
end-users, resellers and systems integrators, the Company
recognizes product revenue upon transfer of title and risk of
loss, which is generally upon shipment, provided all other
criteria for revenue recognition have been met. Where sales are
made through resellers, revenue is generally recorded only upon
shipment to the end-users, when all other criteria for revenue
recognition have been met. In a limited number of instances,
where delivery is to be made to a reseller upon the request of
either the end-user or the reseller, and all other criteria for
revenue recognition have been met, it is the Companys
practice to recognize revenue on shipment to a reseller but only
where an end-user has been identified prior to shipment. For
end-users, resellers and system integrators, the Company
generally has no significant obligations for future performance
such as rights of return or pricing credits.
At the time of each transaction, the Company assesses whether
the fees associated with the transaction are fixed or
determinable. If a significant portion of a fee is due after the
Companys normal payment terms, currently up to three
months (payment terms beyond three months are considered to be
extended terms), or if as a result of customer acceptance
provisions, the price is subject to refund or forfeiture,
concession or other adjustment, then the
72
Company considers the fee to not be fixed or determinable. In
the limited instances in which these cases occur, revenues are
deferred and recognized when payments become due and payable, or
the right to refund or forfeiture, concession or adjustment, if
any, lapses upon customer acceptance.
The Company assesses whether collection is reasonably assured
based on a number of factors including the creditworthiness of
the customer as determined by credit checks and analysis, past
transaction history, geographic location and financial
viability. The Company generally does not require collateral
from customers. If the determination is made at the time of the
transaction that collection of the fee is not reasonably
assured, then all of the related revenues are deferred until the
time that collection becomes reasonably assured, which in some
cases requires the collection of cash prior to recognition of
the related revenues.
The Company uses shipping documents, contractual terms and
conditions and customer acceptance, when applicable, to verify
delivery to the customer. For software license fees in
arrangements that do not include customization, or services that
are not considered essential to the functionality of the
licenses, delivery is deemed to occur when the product is
delivered to the customer. Services and consulting arrangements
that are not essential to the functionality of the licensed
product are recognized as revenues as these services are
provided. Delivery of maintenance agreements is considered to
occur on a straight-line basis ratably over the life of the
contract, typically 12 months.
Vendor-specific objective evidence of fair value
(VSOE) for maintenance and support services is based
on separate sales
and/or
renewals to other customers or upon renewal rates quoted in
contracts when the quoted renewal rates are deemed substantive
in both rate and term. VSOE for professional services is
established based on prices charged to customers when such
services are sold separately. For deliverables and multiple
element arrangements subject to the guidance, when VSOE exists
for all of the undelivered elements of the arrangement, but does
not exist for the delivered elements in the arrangement, the
Company recognizes revenues under the residual method. Under the
residual method, at the outset of the arrangement with a
customer, revenues are deferred for the fair value of the
undelivered elements and revenues are recognized for the
remainder of the arrangement fee attributable to the delivered
elements (typically products) when all of the applicable
criteria in the guidance have been met. In the event that VSOE
for maintenance services does not exist, and this represents the
only undelivered element, revenues for the entire arrangement
are recognized ratably over the performance period. Revenues
from maintenance and support agreements are recognized on a
straight-line basis ratably over the life of the contract.
Revenues from time-based (term) license sales that include
ongoing delivery obligations throughout the term of the
arrangement are recognized ratably over the term because the
Company does not have VSOE for the undelivered elements.
Many of the Companys product contracts include
implementation and training services. When products are sold
together with consulting services, license fees are recognized
upon delivery, provided that (i) the criteria of software
revenue recognition have been met, (ii) payment of the
license fees is not dependent upon the performance of the
services, and (iii) the services do not provide significant
customization of the products and are not essential to the
functionality of the software that was delivered. The Company
does not typically provide significant customization of its
software products. These services are typically recognized on a
time-and-materials
basis.
The cost of providing the Companys products, maintenance
and services consists primarily of direct material costs for
products and the fully burdened cost of the Companys
service organization for maintenance and services. Shipping and
handling charges incurred and billed to customers for product
shipments are recorded in product revenue and related cost of
product revenues in the accompanying consolidated statements of
income. If it becomes probable that the amount allocated to an
undelivered element will result in a loss on that element of the
arrangement, the loss is recognized.
Deferred revenues consist primarily of deferred product
revenues, deferred maintenance fees and deferred services fees.
Deferred revenues are recorded net of pre-billed services,
post-contract customer support billings for which the term has
not commenced and invoices for cash basis customers. Deferred
product revenues generally relate to product sales being
recognized ratably over the term of the licensing arrangement,
and, to a lesser extent, partial shipments when the Company does
not have VSOE for the undelivered elements and products that
have been delivered but await customer acceptance. Deferred
maintenance fees and consulting services generally relate to
73
payments for maintenance and consulting services in advance of
the time of delivery of services. These deferred amounts are
expected to be recognized as revenues based on the policy
outlined above.
Allowance
for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for
potential future estimated losses resulting from the inability
or unwillingness of certain customers to make all of their
required payments. The allowance for doubtful accounts is based
on the Companys assessment of the collectibility of
customer accounts. The Company regularly reviews the allowance
by considering factors such as historical experience, credit
quality, the age of the accounts receivable balances, and
current economic conditions that may affect a customers
ability to pay. This assessment requires significant judgment.
When facts and circumstances indicate the collection of specific
amounts or from specific customers is at risk, the Company
assesses the impact on amounts recorded for bad debts and, if
necessary, records a charge in the period the determination is
made. If the financial condition of its customers or any of the
other factors the Company uses to analyze creditworthiness were
to worsen, additional allowances may be required, resulting in
future operating losses that are not included in the allowance
for doubtful accounts as of April 30, 2010.
The following describes activity in the allowance for doubtful
accounts for fiscal 2010, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addition
|
|
|
|
|
|
|
Balance at
|
|
Charged to
|
|
|
|
Balance at
|
|
|
Beginning
|
|
Costs and
|
|
|
|
End
|
Period
|
|
of Period
|
|
Expenses
|
|
Deductions(1)
|
|
of Period
|
|
2008
|
|
$
|
123
|
|
|
$
|
33
|
|
|
$
|
(23
|
)
|
|
$
|
133
|
|
2009
|
|
$
|
133
|
|
|
$
|
142
|
|
|
$
|
(13
|
)
|
|
$
|
262
|
|
2010
|
|
$
|
262
|
|
|
$
|
134
|
|
|
$
|
(140
|
)
|
|
$
|
256
|
|
|
|
|
(1) |
|
Uncollectible amounts written off, net of recoveries. |
Restricted
Cash
Restricted cash consisted of a deposit in a money market account
amounting to $0.8 million as of April 30, 2009 that
was held to secure a standby letter of credit required in
connection with the operating lease for the Companys
headquarters in Cupertino, California, which is included in
other long-term assets on the Companys Consolidated
Balance Sheets. As a result of achieving specified operational
milestones the restricted cash balance was released during
fiscal 2010, and as of April 30, 2010 this balance is zero.
Capitalized
Software License Obligations
On May 31, 2009, the Company renewed the software license
agreement with Oracle USA, Inc. that authorizes the Company to
integrate Oracle database software with the ArcSight ESM
products and distribute ArcSight ESM products with the embedded
database software as a component of the product. The agreement
has a two year term that commenced on May 31, 2009 when the
prior agreement with Oracle expired. The supporting royalty and
technical support payments total $4.8 million over the
license term. These software licenses represent purchases by the
Company of the right to utilize and incorporate as a component
of its product, the intellectual property of certain third
parties. As a result of these purchases, the Company is
contractually obligated to pay minimum royalties on fixed and
determinable dates over a two-year period regardless of product
sales being generated. These purchases have been recorded on the
accompanying consolidated balance sheets based on the discounted
present value of the Companys contractual payment
obligations. During fiscal 2010, 2009 and 2008, payments under
these agreements amounted to $2.4, million
$1.9 million and $1.9 million with related interest
expense of $0.1 million, $0.1 million and
$0.2 million, respectively.
The capitalized software licenses are being amortized ratably
over the respective two-year terms of the agreements and are
included as a component of cost of product revenues and cost of
maintenance revenues in the amount of $1.7 million and
$0.7 million, $1.4 million and $0.6 million, and
$1.7 million and $0.5 million for fiscal 2010, 2009
and 2008, respectively.
74
Impairment
of Long-Lived Assets
Long-lived assets, such as property, plant and equipment and
acquired intangible assets subject to amortization, are reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Among the factors and circumstances considered by
management in determining assessments of recoverability are:
(i) a significant decrease in the market price of a
long-lived asset; (ii) a significant adverse change in the
extent or manner in which a long-lived asset is being used or in
its physical condition; (iii) a significant adverse change
in legal factors or in the business climate that could affect
the value of a long-lived asset, including an adverse action or
assessment by a regulator; (iv) an accumulation of costs
significantly in excess of the amount originally expected for
the acquisition or construction of a long-lived asset;
(v) current-period operating or cash flow loss combined
with a history of operating or cash flow losses or a projection
or forecast that demonstrates continuing losses associated with
the use of a long-lived asset; and (vi) a current
expectation that, more likely than not, a long-lived asset will
be sold or otherwise disposed of significantly before the end of
its previously estimated useful life. Under the guidance,
recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized in the
amount by which the carrying amount of the asset exceeds the
fair value of the asset. There have been no indicators of
impairment and no impairment losses have been recorded by the
Company in any period presented.
Property
and Equipment, Net
Property and equipment are carried at cost, net of accumulated
depreciation and amortization. Depreciation is computed using
the straight-line method over the estimated useful lives of the
property and equipment typically ranging from two to five years.
Leasehold improvements are recorded at cost with any
reimbursement from the landlord being accounted for as an offset
to rent expense using the straight-line method over the lease
term. Leasehold improvements are amortized over the shorter of
the remaining operating lease term or the useful lives of the
assets.
Business
Combinations
We account for business combinations in accordance with ASC
Topic 805, Business Combinations (ASC
805), which requires the purchase method of accounting for
business combinations. In accordance with the guidance, we
determine the recognition of intangible assets based on the
following criteria: (i) the intangible asset arises from
contractual or other rights; or (ii) the intangible asset
is separable or divisible from the acquired entity and capable
of being sold, transferred, licensed, returned or exchanged. In
accordance with the guidance, we allocate the purchase price of
our business combinations to the tangible assets, intangible
assets and liabilities acquired based on their estimated fair
values. We record the excess of the purchase price over the
total of those fair values as goodwill.
Our valuations require significant estimates, especially with
respect to intangible assets. Critical estimates in valuing
certain intangible assets include, but are not limited to,
future expected cash flows from customer contracts, customer
lists and distribution agreements and discount rates. We
estimate fair value based upon assumptions we believe to be
reasonable, but which are inherently uncertain and
unpredictable, and, as a result, actual results may differ from
our estimates.
Goodwill
Goodwill is not amortized, but rather it is periodically
assessed for impairment.
The Company tests goodwill for impairment annually on November 1
of each fiscal year, and more frequently if events merit. The
Company performs this fair-value based test in accordance with
ASC Topic 350, Goodwill and Other Intangible Assets
(ASC 350). Future goodwill impairment tests could
result in a charge to earnings.
75
Software
Development Costs
Costs incurred for the development of new software products are
expensed as incurred until technological feasibility is
established. Development costs are capitalized beginning when a
products technological feasibility has been established
and ending when the product is available for general release to
customers. Technological feasibility is reached when the product
reaches the beta stage using the working model approach. To
date, the period of time between the establishment of a
technologically feasible working model and the subsequent
general release of the product have been of a relatively short
duration of time and have resulted in insignificant amounts of
costs qualifying for capitalization for all periods presented.
Thus, all software development costs have been expensed as
incurred in research and development expense.
Cost
of Computer Software Developed or Obtained for Internal
Use
The Company capitalizes certain costs incurred for computer
software developed or obtained for internal use, which are
incurred during the application development stage. These
capitalized costs are to be amortized on a straight-line basis
over the expected useful life of the software. Costs related to
preliminary project activities and post-implementation
activities are expensed as incurred. For fiscal 2010 the Company
has capitalized software costs for the development of internal
use software amounting to $3.0 million. No such software
costs were capitalized for fiscal 2009. Amortization of these
costs capitalized in accordance with the guidance will begin
when the new software is ready for its intended use and will be
amortized over the estimated useful life of the software
generally on a straight-line basis unless another systematic and
rational basis is more representative of the softwares use.
Research
and Development Expenses
The Company expenses research and development expenses in the
period in which these costs are incurred.
Advertising
Expenses
Advertising costs are expensed as incurred. The Company incurred
$0.2 million in advertising expenses in each of fiscal
years 2010, 2009 and 2008.
Income
Taxes
The Company uses the liability method of accounting for income
taxes in accordance with ASC 740 Accounting for
Income Taxes, (ASC 740). The Company estimates
income taxes in each of the jurisdictions in which it operates.
This process involves determining income tax expense together
with calculating the deferred income tax expense (benefit)
related to temporary differences resulting from the differing
treatment of items for tax and accounting purposes, such as
deferred revenue or deductibility of certain intangible assets.
Deferred income taxes are recorded for the expected tax
consequences of temporary differences between the tax bases of
assets and liabilities for financial reporting purposes and
amounts recognized for income tax purposes. Deferred tax assets
and liabilities are measured using tax rates currently in effect
for the year in which those temporary differences are expected
to be recovered or settled. Deferred tax assets are recognized
for deductible temporary differences, along with net operating
loss carry-forwards, if it is more likely than not that the tax
benefits will be realized. These temporary differences result in
deferred tax assets and liabilities. To the extent a deferred
tax asset cannot be recognized under the preceding criteria, a
valuation allowance is established. Changes in these estimates
may result in significant increases or decreases to the
Companys tax provision in a period in which such estimates
are charged, which would affect net income.
The Company adopted ASC 740, Accounting for
Uncertainty in Income Taxes, an interpretation of the
guidance under
ASC 740-10,
on May 1, 2007.
ASC 740-10
prescribes a recognition threshold and measurement attributes
for the financial statement recognition and measurement of
uncertain tax positions taken or expected to be taken in a
companys income tax return.
ASC 740-10
also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods,
disclosure and transition with respect to income tax
uncertainty. Management judgment is required to determine if the
weight of available evidence indicates that a
76
tax position is more likely than not to be sustained, as well as
the largest amount of benefit from each sustained position that
is more likely than not to be realized.
As of April 30, 2010 and in accordance with ASC 740,
the Company evaluated its need for a valuation allowance based
on historical evidence, trends in profitability and expectations
of future taxable income, and determined that the valuation
allowance was no longer necessary. As such, we released
$18.6 million of the valuation allowance as an offset
against all of our U.S. and state deferred tax assets
resulting in a net benefit in our provision for income taxes.
Stock-Based
Compensation Expense
Effective May 1, 2006, the Company adopted the provisions
and guidance under ASC Topic 718 Compensation-Stock
Compensation (ASC 718), using the
prospective-transition method. In accordance with the guidance,
beginning on May 1, 2006 measurement and recognition of
compensation expense for all awards made to employees and
directors is recognized based on estimated fair values. In
accordance with the guidance, the Company uses the
Black-Scholes-Merton (Black-Scholes) pricing model
to determine the fair value of the stock options on the grant
dates, and the Company amortizes the fair value of compensation
on a straight-line basis.
The Companys 2007 Employee Stock Purchase Plan
(ESPP) became effective upon the effectiveness of
the Companys IPO on February 14, 2008. The ESPP is
compensatory and results in compensation cost accounted for
under the guidance. The Black-Scholes option pricing model is
used to estimate the fair value of rights to acquire stock
granted under the ESPP, and the Company amortizes the fair value
over the offering period.
Comprehensive
Income (Loss)
Comprehensive income (loss) includes certain unrealized gains
and losses that are recorded as a component of
stockholders equity and excluded from the determination of
net income. The Companys accumulated other comprehensive
income (loss) consisted of cumulative currency translation
adjustments resulting from the translation of the financial
statements of its foreign subsidiaries and unrealized losses on
marketable securities. The tax effects on the foreign currency
translation adjustments and unrealized gains and losses on
marketable securities have not been significant.
Fair
Value Measurement
In accordance with the guidance under ASC Topic
820-10
Fair Value Measurements and Disclosures (ASC
820-10),
the Company measures its financial assets and liabilities at
fair value. On May 1, 2009, the Company adopted the
guidance for non-financial assets and liabilities measured at
fair value. Non-recurring non-financial assets and non-financial
liabilities include those measured at fair value and tested for
impairment, including goodwill and intangible assets. The
adoption of the guidance did not impact the consolidated results
of operations, financial condition or cash flows.
The guidance clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a
market-based measurement that should be determined based on
assumptions that market participants would use in pricing an
asset or liability. The guidance establishes a three-tier value
hierarchy, which prioritizes the inputs used in measuring fair
value as follows:
|
|
|
|
|
Level 1 observable inputs such as
unadjusted quoted prices in active markets for identical assets
and liabilities;
|
|
|
|
Level 2 observable inputs such as quoted
prices for similar assets and liabilities in active markets that
are observable either directly or indirectly; and
|
|
|
|
Level 3 unobservable inputs in which
there is little or no market data, which require the Company to
develop its own assumptions.
|
This hierarchy requires the Company to use observable market
data, when available, and to minimize the use of unobservable
inputs when determining fair value. A financial asset or
liabilitys classification within the hierarchy
77
is determined based on the lowest level input that is
significant to the fair value measurement. On a recurring basis,
the Company measures certain financial assets, comprised of
money market accounts, certificates of deposit and
U.S. treasury bills based on Level 1 inputs at fair
value. The Company is required to measure and disclose the fair
value of outstanding financial liabilities on a recurring basis.
The fair value of financial obligations relating to the
capitalized software licenses, based on quoted interest rates
(Level 2 inputs) for the remaining duration of the
liabilities, approximated carrying value.
In accordance with the guidance, the following table represents
the Companys fair value hierarchy for its financial assets
and liabilities measured at fair value on a recurring basis as
of April 30, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
As of April 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
137,358
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
137,358
|
|
Marketable securities
|
|
|
12,013
|
|
|
|
|
|
|
|
|
|
|
|
12,013
|
|
Capitalized software license obligations
|
|
|
|
|
|
|
2,832
|
|
|
|
|
|
|
|
2,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
149,371
|
|
|
$
|
2,832
|
|
|
|
|
|
|
$
|
152,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
As of April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
90,467
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
90,467
|
|
Restricted cash
|
|
|
842
|
|
|
|
|
|
|
|
|
|
|
|
842
|
|
Capitalized software license obligations
|
|
|
|
|
|
|
363
|
|
|
|
|
|
|
|
363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
91,309
|
|
|
$
|
363
|
|
|
$
|
|
|
|
$
|
91,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2010, there were approximately
$15.0 million in U.S. Treasury bills maturing in less
than 3 months and included in cash and cash equivalents,
approximately $7.0 million in certificates of deposit
maturing within the next three months, and approximately
$5.0 million in U.S. treasury bills maturing within
the next five months. For the year ended April 30, 2010,
there were unrealized gains of approximately $2,000 attributable
to interest rate changes, the amount of which is considered
insignificant and temporary in nature.
Recent
Accounting Pronouncements
In May 2009, the FASB issued revised guidance under ASC Topic
855-10,
Subsequent Events (ASC
855-10),
which establishes principles and requirements for subsequent
events. Subsequent events are events or transactions that occur
after the balance sheet date but before financial statements are
issued or are available to be issued. There are two types of
subsequent events: (i) the first type consists of events or
transactions that provide additional evidence about conditions
that existed at the date of the balance sheet and (ii) the
second type consists of events that provide evidence about
conditions that did not exist at the date of the balance sheet
but arose after that date. An entity shall recognize in its
financial statements the effects of all subsequent events that
provide additional evidence about conditions that existed at the
date of the balance sheet, including the estimates inherent in
the process of preparing financial statements. This
guidance was effective for interim or annual financial periods
ending after June 15, 2009. The Company adopted this
guidance effective May 1, 2009.
In February 2010, the FASB issued ASU
No. 2010-09,
amending Subsequent Events (Topic 855) Certain Recognition
and Disclosure Requirements (ASU
2010-09).
This guidance addresses the interaction between Topic 855 and
related SEC reporting requirements. The amendment removes the
requirement for SEC filers to disclose a date through which
subsequent events have been evaluated. The amendment is
effective upon issuance and has been adopted by the Company for
the fiscal quarter ended January 31, 2010, the adoption of
which did not impact the condensed consolidated results of
operations, financial condition or cash flows.
In June 2009, the FASB issued ASC Topic
105-10
The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles
(ASC
105-10),
which approved the FASB Accounting
78
Standards Codification (Codification) as the single
source of authoritative United States accounting and reporting
standards for all non-governmental entities, except for guidance
issued by the SEC. The Codification, which changes the
referencing of financial standards, is effective for interim or
annual financial periods ending after September 15, 2009.
The Company adopted the guidance effective August 1, 2009.
All references made to generally accepted accounting principles
in the United States (U.S. GAAP) will use the
new Codification numbering system prescribed by the FASB. As the
Codification is not intended to change or alter existing
U.S. GAAP, it did not have any impact on the Companys
condensed consolidated results of operations, financial
condition or cash flows.
In October 2009, the FASB issued Accounting Standards Update
(ASU)
No. 2009-13,
Revenue Recognition (Topic 605) Multiple-Deliverable
Element Arrangements a consensus of the FASB
Emerging Issues Task Force (ASU
2009-13).
This guidance impacts the determination of when the individual
deliverables included in a multiple-element arrangement may be
treated as separate units of accounting. Additionally, this
guidance modifies the manner in which the transaction
consideration is allocated across the separately identified
deliverables by no longer permitting the residual method of
allocating arrangement consideration. This revised guidance is
effective for annual financial periods beginning after
June 15, 2010, and early adoption is permitted. The Company
is currently evaluating the potential impact, if any, the
adoption of this new guidance will have on its consolidated
results of operations, financial condition or cash flows.
In October 2009, the FASB issued ASU
No. 2009-14,
Software (Topic 985) Certain Arrangements That Contain
Software Elements a consensus of the FASB Emerging
Issues Task Force (ASU
2009-14).
This guidance amends the scope of pre-existing software revenue
guidance by removing from the guidance non-software components
of tangible products and certain software components of tangible
products. This revised guidance is effective for annual
financial periods beginning after June 15, 2010, and early
adoption is permitted. The Company is currently evaluating the
potential impact, if any, the adoption of this new guidance will
have on its consolidated results of operations, financial
condition or cash flows.
|
|
3.
|
Net
Income (Loss) Per Common Share
|
On February 20, 2008, the closing date of the IPO, and
pursuant to the amended and restated certificate of
incorporation, all outstanding shares of convertible preferred
stock converted into an aggregate of 14,000,441 shares of
common stock. Additionally, in connection with the conversion of
the shares of convertible preferred stock, warrants to purchase
shares of convertible preferred stock and common stock were also
converted to a net 19,202 shares of common stock.
Basic and diluted net income (loss) per common share is computed
using the weighted-average number of shares of common stock
outstanding during the period. Diluted net income (loss) per
share is computed giving effect to all potentially dilutive
common shares that were outstanding during the period on a
weighted average basis. Potentially dilutive common shares
consist of various employee stock awards including, common
shares issuable upon exercise of stock options, and shares
purchasable under the ESPP.
79
The following table sets forth the computation of basic and
diluted net income (loss) per share (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Numerator for basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
28,387
|
|
|
$
|
9,913
|
|
|
$
|
(2,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares, net of weighted-average shares
subject to repurchase, used in computing net income (loss) per
common share-basic
|
|
|
33,434
|
|
|
|
31,233
|
|
|
|
25,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used above, basic
|
|
|
33,434
|
|
|
|
31,233
|
|
|
|
25,936
|
|
Stock options
|
|
|
2,763
|
|
|
|
2,266
|
|
|
|
|
|
Shares subject to repurchase
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share:
|
|
|
36,197
|
|
|
|
33,550
|
|
|
|
25,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.85
|
|
|
$
|
0.32
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.78
|
|
|
$
|
0.30
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As the Company had a net loss for fiscal 2008, basic and diluted
net loss per share are the same. The weighted-average shares
used in the computation of basic and diluted net loss per share
for the 2008 net loss period presented is net of shares
subject to repurchase.
The following table sets forth the weighted-average number of
shares subject to potentially dilutive outstanding securities
(i.e., convertible preferred stock, common stock options, common
stock subject to repurchase and warrants) that were excluded
from the computation of diluted net income (loss) per share for
the periods presented because including them would have had an
anti-dilutive effect (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Convertible preferred stock (as converted)
|
|
|
|
|
|
|
|
|
|
|
11,046
|
|
Options to purchase common stock
|
|
|
291
|
|
|
|
1,354
|
|
|
|
2,484
|
|
Common stock subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
153
|
|
Warrants to purchase common stock and convertible preferred
stock (as converted)
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
291
|
|
|
|
1,354
|
|
|
|
13,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
Property
and Equipment, Net
Property and equipment as of April 30, 2010 and 2009
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Computers and equipment
|
|
$
|
7,341
|
|
|
$
|
7,064
|
|
Furniture and fixtures
|
|
|
1,595
|
|
|
|
1,072
|
|
Software
|
|
|
3,784
|
|
|
|
788
|
|
Leasehold improvements
|
|
|
2,538
|
|
|
|
2,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,258
|
|
|
|
11,261
|
|
Less: accumulated depreciation and amortization
|
|
|
(7,084
|
)
|
|
|
(6,845
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
8,174
|
|
|
$
|
4,416
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $1.9 million, $2.1 million
and $1.6 million for fiscal 2010, 2009 and 2008,
respectively. Amortization expense was $0.6 million,
$0.4 million and $0.3 million for fiscal 2010, 2009
and 2008, respectively. Assets acquired until capital lease
obligations, reflected in computers and equipment balances as of
April 30, 2010 and 2009 amount to $0.8 million and
$0.1 million, respectively. As of April 30, 2010,
remaining capital lease obligations for 2011, 2012 and 2013 are
$0.3 million, $0.3 million and $0.1 million,
respectively. Amortization of assets acquired under capital
lease obligations is included in depreciation and amortization.
Goodwill
and Intangible Assets, Net
The estimated useful lives, gross carrying amount, accumulated
amortization and net book value of goodwill and intangible
assets as of April 30, 2010 and 2009 are as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Useful Lives
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
As of April 30, 2010:
|
|
in Years
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Core and developed technologies
|
|
|
5.00
|
|
|
$
|
1,970
|
|
|
$
|
(1,611
|
)
|
|
$
|
359
|
|
Customer installed-base relationships
|
|
|
6.00
|
|
|
|
80
|
|
|
|
(66
|
)
|
|
|
14
|
|
Employee non-compete agreements
|
|
|
5.00
|
|
|
|
1,160
|
|
|
|
(1,103
|
)
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
3,210
|
|
|
$
|
(2,780
|
)
|
|
$
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Useful Lives
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
As of April 30, 2009:
|
|
in Years
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Core and developed technologies
|
|
|
5.00
|
|
|
$
|
1,970
|
|
|
$
|
(960
|
)
|
|
$
|
1,010
|
|
Customer installed-base relationships
|
|
|
6.00
|
|
|
|
80
|
|
|
|
(53
|
)
|
|
|
27
|
|
Employee non-compete agreements
|
|
|
5.00
|
|
|
|
1,160
|
|
|
|
(878
|
)
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
3,210
|
|
|
$
|
(1,891
|
)
|
|
$
|
1,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired intangible assets other than goodwill are amortized
over their respective estimated useful lives to match the
amortization to the benefits received. The total amortization
expense related to intangible assets was $0.9 million,
$0.8 million and $0.6 million for fiscal 2010, 2009,
and 2008, respectively.
81
There was no impairment of goodwill or intangible assets for
fiscal 2010 or 2009.
As of April 30, 2010, future estimated amortization costs
per year for the Companys existing intangible assets other
than goodwill are estimated as follows (in thousands):
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortization
|
|
As of April 30, 2010:
|
|
Expense
|
|
|
Fiscal 2011
|
|
|
425
|
|
Fiscal 2012
|
|
|
5
|
|
|
|
|
|
|
Total
|
|
$
|
430
|
|
|
|
|
|
|
Accrued
Compensation and Benefits
Accrued compensation and benefits consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Accrued bonus
|
|
$
|
5,264
|
|
|
$
|
5,441
|
|
Accrued commissions
|
|
|
3,985
|
|
|
|
2,807
|
|
Accrued vacation
|
|
|
2,832
|
|
|
|
2,273
|
|
Accrued payroll taxes
|
|
|
727
|
|
|
|
667
|
|
Accrued ESPP
|
|
|
520
|
|
|
|
346
|
|
Other compensation and benefits
|
|
|
731
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
Total accrued compensation and benefits
|
|
$
|
14,059
|
|
|
$
|
11,671
|
|
Less accrued compensation and benefits, current portion
|
|
|
(13,633
|
)
|
|
|
(11,671
|
)
|
|
|
|
|
|
|
|
|
|
Accrued compensation and benefits, non-current
|
|
$
|
426
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Revenues
Deferred revenues consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred product revenues
|
|
$
|
10,757
|
|
|
$
|
9,786
|
|
Deferred maintenance revenues
|
|
|
46,675
|
|
|
|
32,408
|
|
Deferred services revenues
|
|
|
3,479
|
|
|
|
2,854
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenues
|
|
|
60,911
|
|
|
|
45,048
|
|
Less deferred revenues, current portion
|
|
|
(49,674
|
)
|
|
|
(36,160
|
)
|
|
|
|
|
|
|
|
|
|
Deferred revenues, non-current
|
|
$
|
11,237
|
|
|
$
|
8,888
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Commitments
and Contingencies
|
The Company and its subsidiaries operate from leased premises in
the United States, Asia and Europe with lease periods expiring
through fiscal 2018. In November 2009, the Company entered into
a lease extension through May 2017, adding additional office
space to the lease for its corporate headquarters. This lease
agreement includes a rent escalation clause of 3% per annual
lease term through expiration in May 2017. The Company
recognizes expense for scheduled rent increases on a
straight-line basis over the lease term beginning with the date
the Company takes possession of the leased space.
82
Future minimum lease payments under the Companys
noncancelable operating leases as of April 30, 2010 are as
follows (in thousands):
|
|
|
|
|
|
|
Amount of
|
|
Fiscal Year Ending April 30:
|
|
Payments
|
|
|
2011
|
|
$
|
3,354
|
|
2012
|
|
|
3,024
|
|
2013
|
|
|
3,045
|
|
2014
|
|
|
3,137
|
|
2015 and thereafter
|
|
|
10,273
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
22,833
|
|
|
|
|
|
|
Rent expense under all operating leases was approximately
$3.6 million, $3.5 million and $3.0 million for
fiscal 2010, 2009 and 2008, respectively.
From time to time, the Company is subject to various claims,
complaints and legal actions in the normal course of business.
The Company does not believe it is party to any currently
pending litigation, the outcome of which will have a material
adverse effect on its operations or financial position.
|
|
6.
|
Indemnification
and Warranties
|
The Company from time to time enters into certain types of
contracts that contingently require it to indemnify various
parties against claims from third parties. These contracts
primarily relate to (i) certain real estate leases under
which the Company may be required to indemnify property owners
for environmental and other liabilities and other claims arising
from the Companys use of the applicable premises,
(ii) the Companys bylaws, under which it must
indemnify directors and executive officers, and may indemnify
other officers and employees, for liabilities arising out of
their relationship, (iii) contracts under which the Company
must indemnify directors and certain officers for liabilities
arising out of their relationship, (iv) contracts under
which the Company may be required to indemnify customers or
resellers against certain claims, including claims that a
Company product infringes a patent, copyright or other
intellectual property right, and (v) procurement,
consulting, or license agreements under which the Company may be
required to indemnify vendors, consultants or licensors for
certain claims, including claims that may be brought against
them arising from the Companys acts or omissions with
respect to the supplied products or technology.
In the event that one or more of these matters were to result in
a claim against the Company, an adverse outcome, including a
judgment or settlement, may cause a material adverse effect on
the Companys future business, operating results or
financial condition. It is not possible to determine the maximum
potential amount under these indemnification agreements due to
the limited history of prior indemnification claims and the
unique facts and circumstances involved in each particular
agreement.
The Company maintains director and officer insurance, which may
cover certain liabilities arising from its obligation to
indemnify its directors.
From time to time, the Company may receive indemnification
claims in the normal course of business. The Company does not
believe it is party to any currently pending claims the outcome
of which will have a material adverse effect on its operations
or financial position.
The Company generally provides a warranty for its products and
services to its customers and accounts for its warranties under
ASC 450-10.
To date, the Companys product warranty expense has not
been significant. Accordingly, the Company has not recorded a
warranty reserve as of April 30, 2010 or April 30,
2009.
Common
Stock
In February 2008, the Company completed an IPO of common stock
in which it sold 6,000,000 shares of common stock, at an
issue price of $9.00 per share. The Company raised a total of
$54.0 million in gross proceeds
83
from the IPO, or $45.9 million in net proceeds after
deducting underwriting discounts of $3.8 million and
offering expenses of $4.3 million. Upon the closing of the
IPO, all shares of convertible preferred stock outstanding
automatically converted into 14,000,441 shares of common
stock.
Preferred
Stock
The Companys Board of Directors is authorized, subject to
limitations prescribed by Delaware law, to issue at its
discretion preferred stock in one or more series, to establish
from time to time the number of shares to be included in each
series and to fix the designation, powers, preferences and
rights of the shares of each series and any of such series
qualifications, limitations or restrictions. The Board of
Directors also can increase or decrease the number of authorized
shares of any series, but not below the number of shares of that
series then outstanding, without any further vote or action by
the Companys stockholders. There are
10,000,000 shares of undesignated preferred stock
authorized, none of which were issued and outstanding as of
April 30, 2010 and 2009.
Common
Stock Reserved for Issuance
Number of shares of common stock reserved for future issuance is
as follows:
|
|
|
|
|
|
|
As of April 30,
|
|
|
2010
|
|
Options available for future grant under the 2007 Equity
Incentive Plan
|
|
|
4,222,243
|
|
Options outstanding under the stock option plans
|
|
|
6,734,350
|
|
Shares reserved for future issuance under the 2007 Employee
Stock Purchase Plan
|
|
|
1,068,798
|
|
|
|
|
|
|
Total shares reserved
|
|
|
12,025,391
|
|
|
|
|
|
|
Stock
Plans
2007 Equity Incentive Plan. In November 2007,
the Board of Directors and the Companys stockholders
approved the 2007 Equity Incentive Plan, which became effective
in February 2008. A total of 4,569,015 shares of the
Companys common stock were originally authorized for
future issuance under the 2007 Equity Incentive Plan, including
shares that became available for grant upon the concurrent
termination of the Companys 2002 Stock Plan. The number of
shares available for grant and issuance under the 2007 Equity
Incentive Plan will automatically increase on each January 1 of
2009 through 2012 by an amount equal to 4% of the Companys
shares outstanding on the immediately preceding
December 31, unless the Companys Board of Directors,
in its discretion, determines to make a smaller increase. During
fiscal 2009 and 2010, the Company registered 2,618,006
additional shares of the Companys common stock to be
issuable under the 2007 Equity Incentive Plan. In addition,
shares subject to outstanding grants under the Companys
2000 Stock Option Plan and the Companys 2002 Stock Plan
that expire or are otherwise forfeited automatically roll into
and are made available for issuance under the 2007 Equity
Incentive Plan. As of April 30, 2010, since adoption of the
2007 Equity Incentive Plan, an aggregate of 914,499 of
additional shares issued under the Companys 2000 Stock
Option Plan and the Companys 2002 Stock Plan have become
available for grant and issuance as a result of expiration,
forfeitures or repurchases by the Company.
2007 Employee Stock Purchase Plan. In November
2007, the Board of Directors and the Companys stockholders
approved the 2007 Employee Stock Purchase Plan, which became
effective in February 2008. A total of 1,000,000 shares of
the Companys common stock were originally authorized. The
number of shares reserved for issuance under the Companys
2007 Employee Stock Purchase Plan will increase automatically on
January 1 of each of the first eight years commencing with 2009
by the number of shares equal to 1% of the Companys total
outstanding shares as of the immediately preceding December 31
(rounded to the nearest whole share). The Board of Directors or
its compensation committee may reduce the amount of the increase
in any particular year. During fiscal 2009 and 2010, a total of
654,501 additional shares were registered for issuance under the
ESPP.
84
Stock
Plan Activity
A summary of the Companys stock option activity during
fiscal 2010, 2009 and 2008, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
|
|
|
Shares
|
|
|
|
Exercise
|
|
Remaining
|
|
Aggregate
|
|
|
Available
|
|
Number of
|
|
Price
|
|
Contractual
|
|
Intrinsic
|
|
|
for Grant
|
|
Shares
|
|
per Share
|
|
Term (Years)
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Options outstanding as of April 30, 2007
|
|
|
1,675,840
|
|
|
|
5,772,812
|
|
|
|
3.95
|
|
|
|
8.31
|
|
|
$
|
31,003
|
|
Options authorized
|
|
|
4,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,731,313
|
)
|
|
|
1,731,313
|
|
|
|
9.78
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(402,260
|
)
|
|
|
2.30
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
414,820
|
|
|
|
(414,820
|
)
|
|
|
6.10
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
6,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of April 30, 2008
|
|
|
4,366,192
|
|
|
|
6,687,045
|
|
|
|
5.43
|
|
|
|
7.89
|
|
|
|
15,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options authorized
|
|
|
1,260,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,752,950
|
)
|
|
|
1,752,950
|
|
|
|
7.73
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(852,793
|
)
|
|
|
2.40
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
646,206
|
|
|
|
(646,206
|
)
|
|
|
8.42
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of April 30, 2009
|
|
|
4,520,099
|
|
|
|
6,940,996
|
|
|
|
6.10
|
|
|
|
7.30
|
|
|
|
62,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options authorized
|
|
|
1,357,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,038,986
|
)
|
|
|
2,038,986
|
|
|
|
20.44
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(1,862,092
|
)
|
|
|
21.02
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
383,540
|
|
|
|
(383,540
|
)
|
|
|
12.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of April 30, 2010
|
|
|
4,222,243
|
|
|
|
6,734,350
|
|
|
|
10.41
|
|
|
|
7.34
|
|
|
|
83,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of April 30, 2010, net of
anticipated forfeitures
|
|
|
|
|
|
|
5,865,619
|
|
|
|
10.41
|
|
|
|
7.34
|
|
|
|
72,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of April 30, 2010
|
|
|
|
|
|
|
3,466,228
|
|
|
|
6.08
|
|
|
|
6.29
|
|
|
|
58,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic values shown in the table above are
equal to the difference between the per share exercise price of
the underlying stock options and the fair value of the
Companys common stock as of the respective dates in the
table.
85
The following table summarizes additional information regarding
outstanding options as of April 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Options Vested and Exercisable
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Number of
|
|
|
Exercise
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Shares
|
|
|
Price per Share
|
|
|
$0.12-0.80
|
|
|
633,177
|
|
|
|
3.72
|
|
|
|
633,177
|
|
|
$
|
0.46
|
|
$4.00-5.98
|
|
|
688,745
|
|
|
|
6.56
|
|
|
|
486,030
|
|
|
|
4.13
|
|
$6.08-6.80
|
|
|
1,551,285
|
|
|
|
6.54
|
|
|
|
1,359,174
|
|
|
|
6.59
|
|
$7.17-8.95
|
|
|
1,064,397
|
|
|
|
7.95
|
|
|
|
406,407
|
|
|
|
8.24
|
|
$9.00-10.00
|
|
|
851,613
|
|
|
|
7.47
|
|
|
|
504,588
|
|
|
|
9.81
|
|
$11.08-17.65
|
|
|
259,917
|
|
|
|
9.05
|
|
|
|
17,742
|
|
|
|
12.14
|
|
$18.00-24.47
|
|
|
1,097,758
|
|
|
|
8.71
|
|
|
|
59,110
|
|
|
|
21.90
|
|
$24.49-28.15
|
|
|
587,458
|
|
|
|
9.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,734,350
|
|
|
|
7.34
|
|
|
|
3,466,228
|
|
|
$
|
6.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intrinsic value of options exercised for fiscal 2010, 2009
and 2008 was $30.2 million, $6.6 million and
$3.0 million, respectively, determined at the date of
option exercise.
|
|
8.
|
Stock-Based
Compensation
|
During fiscal 2010, 2009 and 2008, the Company recorded
stock-based compensation under ASC 718 as described below
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Stock-based compensation under ASC 718
|
|
$
|
8,959
|
|
|
$
|
5,117
|
|
|
$
|
4,186
|
|
Stock-based compensation under prospective transition method for
option awards granted prior to the adoption of ASC 718
|
|
|
|
|
|
|
19
|
|
|
|
91
|
|
Amortization of restricted stock awards in connection with the
acquisition of Enira Technologies, LLC
|
|
|
|
|
|
|
34
|
|
|
|
404
|
|
Stock-based compensation under Employee Stock Purchase Plan
|
|
|
1,247
|
|
|
|
975
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,206
|
|
|
$
|
6,145
|
|
|
$
|
4,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
for Stock-Based Compensation
On May 1, 2006, the Company adopted ASC 718, which
establishes standards for the accounting of transactions in
which an entity exchanges its equity instruments for goods or
services, primarily focusing on accounting for transactions
where an entity obtains employee services in stock-based payment
transactions. The guidance requires the Company to measure the
cost of employee services received in exchange for an award of
equity instruments, including stock options, based on the
grant-date fair value of the award and to recognize it as
compensation expense over the period the employee is required to
provide service in exchange for the award, usually the vesting
period.
The Company adopted ASC 718 using the
prospective-transition method, which requires the application of
the accounting standard as of May 1, 2006, the first day of
fiscal 2007. The consolidated financial statements for fiscal
2010, 2009 and 2008, reflect the impact of the guidance. In
accordance with the prospective-transition method, the
consolidated financial statements for prior periods have not
been restated to reflect, and do not include, the impact of ASC
718.
The Company used the Black-Scholes option pricing model to
determine the fair value of option awards granted. The
Black-Scholes model requires, among other inputs, an estimate of
the fair value of the underlying common stock on the date of
grant and assumptions as to volatility of the Companys
stock over the term of the related options, the expected term of
the options, the risk-free interest rate and the option
forfeiture rate. These assumptions used in the pricing model are
determined by the Company at each grant date. The expected
volatility of options granted is determined using a combination
of weighted-average measures of the peer group of companies of
the implied volatility and the historical volatility for a
period equal to the expected life of the option, and the
86
Companys historical volatility. The expected life of
options has been determined considering the expected life of
options granted by a group of peer companies and the average
vesting and contractual term of the Companys options. The
risk-free interest rate is based on a zero coupon United States
treasury instrument whose term is consistent with the expected
life of the stock options. As the Company has not paid and does
not anticipate paying cash dividends on outstanding shares of
common stock, the expected dividend yield is assumed to be zero.
In addition, the guidance requires companies to utilize an
estimated forfeiture rate when calculating the expense for the
period. The Company applies an estimated annual forfeiture rate
of 5%, based on its historical forfeiture experience during the
previous six years, in determining the expense recorded in its
consolidated statement of operations. The forfeiture rate is
graded and results in a weighted average effective forfeiture
rate of 12.9%, 8.6%, and 5.5% for fiscal 2010, 2009, and 2008,
respectively.
Cash flows resulting from the tax benefits resulting from tax
deductions in excess of the compensation cost recognized for
those option exercises are classified as financing cash flows.
For fiscal 2010 and 2009, the Company recorded excess tax
benefits resulting from tax deductions in excess of the
compensation cost recognized amounting to $8.3 million and
$1.3 million, respectively. In connection with our adoption
of ASC 718, we use the
with-and-without
approach described in EITF Topic
No. D-32,
Intraperiod Tax Allocation of the tax effect of pre-tax
income from continuing operations, to determine the
recognition and measurement of excess tax benefits. In addition,
we have elected to account for indirect effects of stock-based
awards on other tax attributes, such as research tax credits,
through our statements of operations. Accordingly, we have
elected to recognize excess tax benefits from the exercise of
stock options in additional paid in capital only if an
incremental income tax benefit would be realized after
considering all other tax attributes presently available to us.
The portion of the stock option tax benefits that will be
recorded to equity when the Company reduces taxes payable is
approximately $1.8 million. Pursuant to ASC 718,
section SC4.14 titled Net Operating Loss
Carryforwards, the Company tracks the portion of its
deferred tax assets related to tax benefits resulting from stock
option deductions in a separate memo account. As of
April 30, 2010, these amounts are not included in the
Companys gross or net deferred tax assets.
Valuation
and Expense Information
The weighted-average fair value calculations for options granted
within the period are based on the following weighted-average
assumptions set forth in the table below and assume no dividends
will be paid. Options that were granted in prior periods are
based on assumptions prevailing at the date of grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Risk-free interest rate
|
|
|
2.41
|
%
|
|
|
3.13
|
%
|
|
|
4.22
|
%
|
Expected volatility
|
|
|
57
|
%
|
|
|
52
|
%
|
|
|
55
|
%
|
Expected life (years)
|
|
|
5.64
|
|
|
|
5.74
|
|
|
|
5.25
|
|
Based on these calculations, the weighted-average fair value per
option granted to acquire a share of common stock was $11.00,
$3.96 and $5.17 per share for fiscal 2010, 2009 and 2008,
respectively. The compensation costs that have been included in
the Companys results of operations for these stock-based
compensation arrangements during fiscal 2010, 2009 and 2008, as
a result of the Companys adoption of ASC 718, were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cost of maintenance revenues
|
|
$
|
445
|
|
|
$
|
216
|
|
|
$
|
106
|
|
Cost of services revenues
|
|
|
225
|
|
|
|
142
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense included in cost of revenues
|
|
|
670
|
|
|
|
358
|
|
|
|
221
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,177
|
|
|
|
1,342
|
|
|
|
1,356
|
|
Sales and marketing
|
|
|
3,418
|
|
|
|
2,451
|
|
|
|
2,685
|
|
General and administrative
|
|
|
3,941
|
|
|
|
1,994
|
|
|
|
664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense included in operating expenses
|
|
|
9,536
|
|
|
|
5,787
|
|
|
|
4,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense included in net income (loss)
|
|
$
|
10,206
|
|
|
$
|
6,145
|
|
|
$
|
4,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
Because the amount of stock-based compensation associated with
the Companys cost of products is not significant, no
amounts have been capitalized for any of the periods presented.
On September 25, 2008, in connection with the impending
retirement and resignation of the Companys former CEO, and
in connection with his continued service as chairman of the
Companys Board of Directors, the Company agreed to
accelerate the vesting on certain of his existing stock option
grants to the extent that he continues as the chairman of the
Companys Board of Directors until September 30, 2009.
On March 16, 2009, the Companys former CEO, then the
chairman of the Companys Board of Directors, unexpectedly
resigned as chairman and as a member of the Board of Directors
due to a disability. In connection with his resignation, the
Company agreed to extend the exercise term to one full year from
standard post termination exercise terms of 30 day and
3 month terms on all stock option grants vested as of his
resignation date. As of April 30, 2009, the Company
recorded remaining and modified stock-based compensation expense
attributable to this termination and modification of grants of
approximately $36,000 for services provided through
March 16, 2009.
As of April 30, 2010 and 2009 there was $21.1 million
and $11.1 million, respectively, of total unrecognized
stock based compensation expenses under ASC 718, net of
estimated forfeitures, that the Company expects to recognize
over the requisite service period. As of April 30, 2010 and
2009, total unrecognized stock based compensation expenses
related to non-vested awards are expected to be recognized over
a weighted-average period of 2.85 and 2.61 years,
respectively. The total fair value of all shares vested during
fiscal 2010 was $6.5 million.
During fiscal 2010, the Company granted 2,038,986 options. These
options have exercise prices equal to the closing price of the
Companys common stock as quoted on the NASDAQ on the day
of grant (or the most recent trading day if the date of grant is
not a NASDAQ trading day), with exercise prices ranging from
$14.33 to $28.15 per share at a weighted-average per share price
of $20.44.
Employee
Stock Purchase Plan
In November 2007, the Board of Directors and the Companys
stockholders approved the ESPP, which became effective in
February 2008. A total of 1,654,501 shares of the
Companys common stock have been reserved for issuance
under the ESPP since inception, including the annual increases
each January pursuant to its evergreen provision.
Under the ESPP, employees may purchase shares of common stock at
a price that is 85% of the lesser of the fair market value of
the Companys common stock as of beginning or the end of
each offering period. The ESPP provides for consecutive offering
periods of six months each, except for the first such offering
period which commenced on February 14, 2008 and ended on
September 15, 2008.
During fiscal 2010 and 2009, 212,335 and 373,368 shares
respectively were purchased under the ESPP at a weighted average
purchase price per share of $9.77. Total cash proceeds from the
purchase of shares under the ESPP were $3.0 million and
$2.8 million, respectively. As of April 30, 2010 there
was an aggregate of 1,068,798 shares of common stock
available for issuance pursuant to future rights to acquire
stock under the ESPP.
The ESPP is compensatory and results in compensation cost
accounted for under ASC 718. The Black-Scholes option
pricing model is used to estimate the fair value of rights to
acquire stock granted under the ESPP. The weighted-average fair
value calculations for rights to acquire stock under the ESPP
within the period are based on the following weighted-average
assumptions set forth in the table below, assuming no dividends
will be paid, and based on assumptions prevailing as of the
enrollment date of the offering period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Risk-free interest rate
|
|
|
0.32
|
%
|
|
|
1.32
|
%
|
|
|
2.11
|
%
|
Expected volatility
|
|
|
70
|
%
|
|
|
61
|
%
|
|
|
53
|
%
|
Expected life (years)
|
|
|
0.50
|
|
|
|
0.52
|
|
|
|
0.58
|
|
Based on these calculations, the weighted-average fair value per
right to acquire shares of common stock was $6.10, $3.24 and
$2.77 per share for fiscal 2010, 2009 and 2008, respectively.
For fiscal year ended 2010, 2009 and 2008, the Company recorded
stock-based compensation expense associated with its ESPP of
$1.2 million, $1.0 million and $0.2 million,
respectively. As of April 30, 2010 and 2009 there was
$0.5 million and $0.4 million, respectively, of total
unrecognized compensation expenses under ASC 718, net of
expected forfeitures, related to
88
common stock purchase rights that the Company expects to
amortize over the remaining offering period ending
September 15, 2010.
The Company operates in one industry segment selling security
and compliance management solutions.
Operating segments are defined as components of an enterprise
for which separate financial information is available and is
evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and
in assessing performance. The Companys chief operating
decision maker is the Chief Executive Officer (CEO).
The CEO reviews financial information presented on a
consolidated basis for evaluating financial performance and
allocating resources. There are no segment managers who are held
accountable for operations below the consolidated financial
statement level. Accordingly, the Company has determined that it
operates in a single reportable segment.
The CEO evaluates performance based primarily on revenues in the
geographic locations in which the Company operates. Revenues are
attributable to geographic locations based on the ship-to
location of the Companys customers. The Companys
assets are primarily located in the United States and not
allocated to any specific region. Therefore, geographic
information is presented only for total revenues. As of
April 30, 2010, 2009 and 2008, long-lived assets, which
represent property, plant and equipment, goodwill and intangible
assets, net of accumulated depreciation and amortization,
located outside the Americas were immaterial and less than one
percent of the total net assets as of these dates.
Total revenues by geographical region are based on the ship-to
location and are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Total revenues by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
73,047
|
|
|
$
|
58,189
|
|
|
$
|
40,021
|
|
Maintenance
|
|
|
40,580
|
|
|
|
28,574
|
|
|
|
21,042
|
|
Services
|
|
|
15,967
|
|
|
|
12,897
|
|
|
|
7,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
129,594
|
|
|
|
99,660
|
|
|
|
68,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
23,429
|
|
|
|
11,432
|
|
|
|
12,923
|
|
Maintenance
|
|
|
8,239
|
|
|
|
5,867
|
|
|
|
3,960
|
|
Services
|
|
|
2,082
|
|
|
|
2,110
|
|
|
|
1,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
33,750
|
|
|
|
19,409
|
|
|
|
18,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
4,983
|
|
|
|
4,422
|
|
|
|
3,553
|
|
Maintenance
|
|
|
2,336
|
|
|
|
1,872
|
|
|
|
1,305
|
|
Services
|
|
|
377
|
|
|
|
653
|
|
|
|
619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,696
|
|
|
|
6,947
|
|
|
|
5,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
5,109
|
|
|
|
6,573
|
|
|
|
7,267
|
|
Maintenance
|
|
|
3,581
|
|
|
|
2,208
|
|
|
|
1,301
|
|
Services
|
|
|
1,654
|
|
|
|
1,371
|
|
|
|
710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,344
|
|
|
|
10,152
|
|
|
|
9,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
181,384
|
|
|
$
|
136,168
|
|
|
$
|
101,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
The Companys book income (loss) before provision
(benefit)for income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
18,011
|
|
|
$
|
11,804
|
|
|
$
|
(2,360
|
)
|
Foreign
|
|
|
968
|
|
|
|
673
|
|
|
|
1,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,979
|
|
|
$
|
12,477
|
|
|
$
|
(878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for federal, state and foreign income
tax expense on income from continuing operations consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
7,201
|
|
|
$
|
1,312
|
|
|
$
|
150
|
|
State
|
|
|
1,608
|
|
|
|
731
|
|
|
|
185
|
|
Foreign
|
|
|
351
|
|
|
|
371
|
|
|
|
512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current
|
|
|
9,160
|
|
|
|
2,414
|
|
|
|
847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(12,025
|
)
|
|
|
130
|
|
|
|
250
|
|
State
|
|
|
(6,385
|
)
|
|
|
20
|
|
|
|
34
|
|
Foreign
|
|
|
(157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred
|
|
|
(18,567
|
)
|
|
|
150
|
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit)
|
|
$
|
(9,407
|
)
|
|
$
|
2,564
|
|
|
$
|
1,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income taxes at the statutory federal income
tax rate of 35% for fiscal 2010 and 34% for fiscal years 2009
and 2008 to the income tax expense provision (benefit) included
in the accompanying consolidated statements of operations is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
U.S. federal taxes (benefit) at statutory rate
|
|
$
|
6,643
|
|
|
$
|
4,242
|
|
|
$
|
(298
|
)
|
State tax expense, net
|
|
|
(3,105
|
)
|
|
|
482
|
|
|
|
122
|
|
Foreign taxes
|
|
|
|
|
|
|
1
|
|
|
|
512
|
|
Net operating losses not benefited (benefited)
|
|
|
(448
|
)
|
|
|
(969
|
)
|
|
|
(653
|
)
|
Alternative minimum tax
|
|
|
|
|
|
|
|
|
|
|
149
|
|
Tax credits
|
|
|
(347
|
)
|
|
|
(1,202
|
)
|
|
|
|
|
Stock option expense
|
|
|
199
|
|
|
|
746
|
|
|
|
905
|
|
Meals and entertainment
|
|
|
181
|
|
|
|
131
|
|
|
|
101
|
|
Amortization of tax deductible goodwill
|
|
|
|
|
|
|
150
|
|
|
|
284
|
|
Change in valuation allowance
|
|
|
(12,344
|
)
|
|
|
(725
|
)
|
|
|
|
|
Other
|
|
|
(186
|
)
|
|
|
(292
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit)
|
|
$
|
(9,407
|
)
|
|
$
|
2,564
|
|
|
$
|
1,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
deferred tax assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
1,577
|
|
|
$
|
1,998
|
|
Research credits
|
|
|
1,651
|
|
|
|
2,352
|
|
Non-deductible reserves and accruals
|
|
|
2,030
|
|
|
|
1,403
|
|
Non-deductible stock-based compensation
|
|
|
8,312
|
|
|
|
6,516
|
|
Deferred revenues
|
|
|
4,950
|
|
|
|
3,097
|
|
Intangibles
|
|
|
806
|
|
|
|
492
|
|
Other
|
|
|
129
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
19,455
|
|
|
|
15,949
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Foreign earnings
|
|
|
(20
|
)
|
|
|
(70
|
)
|
Amortization of tax deductible goodwill
|
|
|
(562
|
)
|
|
|
(434
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(582
|
)
|
|
|
(504
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
|
|
|
|
(15,879
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
18,873
|
|
|
$
|
(434
|
)
|
|
|
|
|
|
|
|
|
|
The Company continuously monitors the circumstances impacting
the expected realization of its deferred tax assets for each
jurisdiction. The Company considers all available evidence, both
positive and negative, including historical levels of income in
each jurisdiction, expectations and risks associated with
estimates of future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the
valuation allowance. If the Company determines it is more likely
than not that some or all of its deferred tax assets will not be
realized in the foreseeable future, the Company will consider
the need for a valuation allowance. A change in the
Companys assessment regarding the realization of its
deferred tax assets will impact its effective tax rate in the
period the Company revises its assessment and in subsequent
periods.
As of April 30, 2010 and in accordance with ASC 740,
the Company evaluated of its need of a valuation allowance based
on historical evidence, trends in profitability and expectations
of future taxable income, and determined that the majority of
its valuation allowance was no longer necessary. As such, the
Company released $18.6 million of the valuation allowance
as an offset against all of our U.S. and state deferred tax
assets resulting in a net benefit to our provision for income
taxes.
The valuation allowance decreased by ($18.6) million,
($2.7) million, and ($0.3) million for the fiscal
years ended April 30, 2010, 2009, and 2008, respectively.
On February 20, 2009, California enacted new legislation,
which, among other things, provides for the election of single
factor apportionment formula beginning in 2011. The effect of
the new legislation reduced the carrying value of our California
deferred assets by approximately $0.4 million as of
April 30, 2010.
As of April 30, 2010, the Company had net operating loss
carry-forwards for federal income tax purposes of approximately
$3.4 million, which expire beginning in fiscal 2020 if not
utilized. The Company also has California net operating loss
carry-forwards of approximately $11.0 million which expire
beginning in fiscal 2015. The Company also has federal and
California research and development tax credits of
$3.0 million and $4.2 million for the fiscal year
ended April 30, 2010. The federal research credits will
begin to expire in fiscal 2020, and the California research
credits have no expiration date.
Pursuant to ASC 718, section SC4.14 titled Net
Operating Loss Carryforwards, the Company must tracks the
portion of its deferred tax assets related to tax benefits
resulting from stock option deductions in a separate memo
91
account. Therefore, these amounts are no longer included in the
Companys gross or net deferred tax assets. The portion of
the stock option benefits that will be recorded to equity when
the Company reduces taxes payable is approximately
$1.8 million.
Utilization of the Companys net operating loss may be
subject to substantial annual limitation due to the ownership
change limitations provided by the Internal Revenue Code and
similar state provision. Such an annual limitation could result
in the expiration of the net operating loss before utilization.
The Company has experienced annual limitations in its ability to
utilize its net operating losses due to ownership changes. Our
current annual limitation amounts to $1.3 million as of
April 30, 2010.
During fiscal 2007 the Company acquired substantially all of the
assets of Enira Technologies, LLC in a taxable asset
acquisition. For tax purposes, the goodwill acquired in a
taxable asset acquisition is amortized over a period of
15 years, while ASC 350 provides that goodwill cannot
be amortized but must be analyzed annually for impairment. In
accordance with ASC 740, a deferred tax liability must be
recorded to account for this tax deductible temporary difference
and such liability may not be used as a source of income to
support deferred tax assets. The Company has, therefore,
recorded a non-cash charge of $0.1 million during fiscal
2008 and a corresponding deferred tax liability on the balance
sheet to establish deferred tax liabilities related to the tax
deductible amortization of goodwill since June 2006.
The Company adopted
ASC 740-10,
Accounting for Uncertainty in Income Taxes, on
May 1, 2007. As of April 30, 2010, the liability for
uncertain tax positions increased to $0.4 million. In
addition, as of April 30, 2009, the Company recorded a
$2.5 million reduction to deferred tax assets for
unrecognized tax benefits. As of April 30, 2010, the
unrecognized tax benefit of $2.5 million increased to
$3.0 million.
The Companys total unrecognized tax benefit as of
April 30, 2010, 2009 and 2008 was $3.4 million,
$2.7 million and $2.1 million, respectively. For the
year ended April 30, 2010 if the remaining balance of
$3.4 million of unrecognized tax benefits were realized in
a future period, it would result in a tax benefit and a
reduction of the effective tax rate. For the years ended
April 30, 2009 and 2008 without regard to the valuation
allowance, if the balance of $2.7 million and
$2.1 million, respectively, of unrecognized tax benefits
would have been realized in a future period, it would have
resulted in a tax benefit and a reduction of the effective tax
rate. The Company does not expect any material changes to the
amount of the unrecognized tax benefit associated with its
uncertain tax positions within the next twelve months.
The following is a roll-forward of the total gross unrecognized
tax benefit for fiscal 2010 (in thousands):
|
|
|
|
|
|
|
|
|
Balance as of May 1, 2007
|
|
|
|
|
|
$
|
1,497
|
|
Tax positions related to current year:
|
|
|
|
|
|
|
|
|
Additions for current year items
|
|
|
|
|
|
|
615
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 1, 2008
|
|
|
|
|
|
$
|
2,112
|
|
|
|
|
|
|
|
|
|
|
Tax positions related to current year:
|
|
|
|
|
|
|
|
|
Additions for current year items
|
|
|
|
|
|
|
543
|
|
Additions for prior year items
|
|
|
|
|
|
|
96
|
|
Reductions for prior year items
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2009
|
|
|
|
|
|
|
2,694
|
|
|
|
|
|
|
|
|
|
|
Tax positions related to current year:
|
|
|
|
|
|
|
|
|
Additions for current year items
|
|
|
|
|
|
|
671
|
|
Additions for prior year items
|
|
|
|
|
|
|
24
|
|
Reductions for prior year items
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2010
|
|
|
|
|
|
$
|
3,367
|
|
|
|
|
|
|
|
|
|
|
The Company files income tax returns in the U.S. federal
jurisdiction, California and various state and foreign tax
jurisdictions in which we have a subsidiary or branch operation.
During the fourth quarter of fiscal 2010 the IRS notified the
Company of its intent to audit fiscal years 2007 to 2009. The
IRS will also make a determination
92
regarding R&D tax credit carryforwards from calendar 2000
through April 30, 2009. Tax years 2001 to 2009 remain open
to examination by state tax authorities, and the tax years 2005
to 2009 remain open to examination by the foreign tax
authorities.
The Companys policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of
income tax expense. As of April 30, 2010, 2009, and 2008
the Company had approximately $44,000, $37,000 and $23,000,
respectively, of accrued interest or penalties associated with
unrecognized tax benefits.
|
|
11.
|
Employee
Benefit Plan
|
The Company sponsors a 401(k) savings plan for all employees who
meet certain eligibility requirements. Participants may
contribute, on a pretax basis, up to 100% of their annual
compensation, but not to exceed a maximum contribution pursuant
to Section 401(k) of the Internal Revenue Code. The Company
is not required to contribute, nor has it contributed, to the
plan for any of the periods presented. Administrative expenses
relating to the plan are insignificant.
93
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Our management, with the participation and supervision of our
chief executive officer and chief financial officer, evaluated
the effectiveness of our disclosure controls and procedures
pursuant to
Rule 13a-15
under the Exchange Act. In designing and evaluating the
disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives. In addition, the design of
disclosure controls and procedures must reflect the fact that
there are resource constraints and that management is required
to apply its judgment in evaluating the benefits of possible
controls and procedures relative to their costs.
Based on the aforementioned evaluation, our chief executive
officer and chief financial officer have concluded that as of
April 30, 2010, our disclosure controls and procedures are
designed at a reasonable assurance level and are effective to
provide reasonable assurance that information we are required to
disclose in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms, and that such
information is accumulated and communicated to our management,
including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding
required disclosure.
Internal
Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f)
and
15d-15(f).
Under the supervision and with the participation of our
management, including our chief executive officer and chief
financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
as of April 30, 2010 based on the guidelines established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on the results of this evaluation, our
management has concluded that our internal control over
financial reporting was effective as of April 30, 2010 to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external reporting purposes in accordance with generally
accepted accounting principles. The effectiveness of our
internal control over financial reporting as of April 30,
2010 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in
their report which appears herein.
94
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
ArcSight, Inc.
We have audited ArcSight Inc.s internal control over
financial reporting as of April 30, 2010, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). ArcSight Inc.s
management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting
included in the accompanying Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, ArcSight, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of April 30, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of ArcSight, Inc. as of
April 30, 2010 and 2009, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
April 30, 2010 of ArcSight, Inc. and our report dated
July 9, 2010 expressed an unqualified opinion thereon.
San Jose, California
July 9, 2010
95
Changes
in Internal Control over Financial Reporting
Regulations under the Exchange Act require public companies,
including our company, to evaluate any change in our
internal control over financial reporting as such
term is defined in
Rule 13a-15(f)
and
Rule 15d-15(f)
of the Exchange Act. In connection with their evaluation of our
disclosure controls and procedures as of the end of the period
covered by this Annual Report on
Form 10-K,
our chief executive officer and chief financial officer did not
identify any changes in our internal control over financial
reporting during our fiscal fourth quarter ended April 30,
2009 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Except as set forth below, the information required by this item
is incorporated by reference to our Proxy Statement for our 2010
Annual Meeting of Stockholders to be filed with the SEC within
120 days after the end of the fiscal year ended
April 30, 2010.
We maintain a Code of Business Conduct and Ethics that
incorporates our code of ethics applicable to all employees,
including all officers. Our Code of Business Conduct and Ethics
is published on the Investor Relations section of our website at
www.arcsight.com. We intend to disclose future amendments to
certain provisions of our Code of Business Conduct and Ethics,
or waivers of such provisions granted to executive officers and
directors, on this website within four business days following
the date of such amendment or waiver.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2010 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the fiscal year ended April 30, 2010.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item with respect to
Item 403 of
Regulation S-K
regarding security ownership of certain beneficial owners and
management is incorporated by reference to our Proxy Statement
for our 2010 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of the fiscal year ended
April 30, 2010. For the information required by this item
with respect to Item 201(d) of
Regulation S-K
regarding securities authorized for issuance under equity
compensation plans, see Item 5: Market for
Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities Equity
Compensation Plan Information.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2010 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the fiscal year ended April 30, 2010.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2010 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the fiscal year ended April 30, 2010.
96
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Financial Statements: The
financial statements filed as part of this Annual Report on
Form 10-K
are listed on the index to financial statements on page 55.
(2) No Financial Statement Schedules were required to be
filed as part of this report because the required information is
not present or is not present in amounts sufficient to require
submission of the schedules or because the information required
is included in the Consolidated Financial Statements or Notes
thereto.
(b) Exhibits. The exhibits listed on the
Exhibit Index (following the Signatures section of this
report) are included, or incorporated by reference, in this
Annual Report on
Form 10-K.
97
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, on July 9, 2010, the
Registrant has duly caused this Annual Report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
ARCSIGHT,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Thomas
J. Reilly
Thomas
J. Reilly
President and Chief Executive Officer
(Principal Executive Officer)
|
|
By:
|
|
/s/ Stewart
Grierson
Stewart
Grierson
Chief Financial Officer
(Principal Financial Officer)
|
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Thomas J.
Reilly and Stewart Grierson as his attorneys-in-fact, with the
power of substitution, for him in any and all capacities, to
sign any amendments to this Annual Report on
Form 10-K,
and to file the same, with exhibits thereto and other documents
in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said
attorney-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Thomas
J. Reilly
Thomas
J. Reilly
|
|
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
July 9, 2010
|
|
|
|
|
|
/s/ Stewart
Grierson
Stewart
Grierson
|
|
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
July 9, 2010
|
|
|
|
|
|
/s/ Sandra
Bergeron
Sandra
Bergeron
|
|
Director
|
|
July 9, 2010
|
|
|
|
|
|
/s/ William
P. Crowell
William
P. Crowell
|
|
Director
|
|
July 9, 2010
|
|
|
|
|
|
/s/ E.
Stanton McKee, Jr.
E.
Stanton McKee, Jr.
|
|
Director
|
|
July 9, 2010
|
|
|
|
|
|
/s/ Craig
Ramsey
Craig
Ramsey
|
|
Director
|
|
July 9, 2010
|
|
|
|
|
|
/s/ Scott
A. Ryles
Scott
A. Ryles
|
|
Director
|
|
July 9, 2010
|
|
|
|
|
|
/s/ Ted
Schlein
Ted
Schlein
|
|
Director
|
|
July 9, 2010
|
|
|
|
|
|
/s/ Roger
Siboni
Roger
Siboni
|
|
Director
|
|
July 9, 2010
|
|
|
|
|
|
/s/ Ernest
von Simson
Ernest
von Simson
|
|
Director
|
|
July 9, 2010
|
98
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Provided
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Date
|
|
Herewith
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation of ArcSight, Inc., as
currently in effect.
|
|
S-1/A
|
|
333-145974
|
|
|
3
|
.2
|
|
11/23/07
|
|
|
|
3
|
.2
|
|
Amended and Restated Bylaws of ArcSight, Inc., as currently in
effect.
|
|
S-1/A
|
|
333-145974
|
|
|
3
|
.4
|
|
11/23/07
|
|
|
|
4
|
.1
|
|
Form of ArcSight, Inc. common stock certificate.
|
|
S-1/A
|
|
333-145974
|
|
|
4
|
.1
|
|
11/23/07
|
|
|
|
4
|
.2
|
|
Amended and Restated Investors Rights Agreement, dated as
of October 24, 2002, between ArcSight, Inc. and certain
security holders of ArcSight, Inc.
|
|
S-1/A
|
|
333-145974
|
|
|
4
|
.2
|
|
9/11/07
|
|
|
|
10
|
.1
|
|
Form of Indemnity Agreement entered into between ArcSight, Inc.
and its directors and executive officers.
|
|
S-1/A
|
|
333-145974
|
|
|
10
|
.1
|
|
10/29/07
|
|
|
|
10
|
.2
|
|
2000 Stock Incentive Plan.
|
|
S-1/A
|
|
333-145974
|
|
|
10
|
.2
|
|
9/11/07
|
|
|
|
10
|
.3
|
|
Forms of Stock Option Agreement and Stock Option Exercise
Agreement under the 2000 Stock Incentive Plan.
|
|
S-1/A
|
|
333-145974
|
|
|
10
|
.3
|
|
9/11/07
|
|
|
|
10
|
.4
|
|
2002 Stock Plan, as amended.
|
|
S-1/A
|
|
333-145974
|
|
|
10
|
.4
|
|
9/11/07
|
|
|
|
10
|
.5
|
|
Forms of Stock Option Agreement and Stock Option Exercise
Agreement under the 2002 Stock Plan.
|
|
S-1/A
|
|
333-145974
|
|
|
10
|
.5
|
|
9/11/07
|
|
|
|
10
|
.6
|
|
2007 Equity Incentive Plan.
|
|
S-1/A
|
|
333-145974
|
|
|
10
|
.6
|
|
11/23/07
|
|
|
|
10
|
.7
|
|
Form of Stock Option Agreement, Stock Option Exercise Agreement,
Restricted Stock Agreement, Restricted Stock Units Award
Agreement, Stock Appreciation Right Award Agreement, Performance
Shares Award Agreement and Stock Bonus Award Agreement
under the 2007 Equity Incentive Plan.
|
|
S-1/A
|
|
333-145974
|
|
|
10
|
.7
|
|
11/23/07
|
|
|
|
10
|
.8
|
|
2007 Employee Stock Purchase Plan.
|
|
S-1/A
|
|
333-145974
|
|
|
10
|
.8
|
|
11/23/07
|
|
|
|
10
|
.9
|
|
Form of Subscription Agreement under the 2007 Employee Stock
Purchase Plan.
|
|
S-1/A
|
|
333-145974
|
|
|
10
|
.9
|
|
11/23/07
|
|
|
|
10
|
.10
|
|
Offer Letter, dated June 1, 2000, between ArcSight, Inc.
and Hugh S. Njemanze.
|
|
S-1/A
|
|
333-145974
|
|
|
10
|
.11
|
|
9/20/07
|
|
|
|
10
|
.11
|
|
Offer Letter, dated January 24, 2003, between ArcSight,
Inc. and Stewart Grierson, as amended.
|
|
S-1/A
|
|
333-145974
|
|
|
10
|
.12
|
|
11/23/07
|
|
|
|
10
|
.12
|
|
Offer Letter, dated October 5, 2006, between ArcSight, Inc.
and Thomas Reilly, as amended.
|
|
S-1/A
|
|
333-145974
|
|
|
10
|
.14
|
|
11/23/07
|
|
|
|
10
|
.13
|
|
Fiscal Year 2011 Management Bonus Plan
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.14
|
|
Sales Commission Plan FY 2011 (Kevin P. Mosher).
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.15
|
|
Lease Agreement, dated April 24, 2007, between ArcSight,
Inc. and ECI Two Results LLC.
|
|
S-1/A
|
|
333-145974
|
|
|
10
|
.17
|
|
9/11/07
|
|
|
|
10
|
.16
|
|
First Amendment to Lease, dated November 18, 2009, between
ArcSight, Inc. and ECI Two Results LLC.
|
|
10-Q
|
|
001-33923
|
|
|
10
|
.01
|
|
12/9/09
|
|
|
|
10
|
.17
|
|
Oracle PartnerNetwork Embedded Software License Distribution
Agreement, dated May 31, 2009, as amended, between
ArcSight, Inc. and Oracle USA, Inc.
|
|
10-K
|
|
001-33923
|
|
|
10
|
.16
|
|
7/9/09
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Provided
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Date
|
|
Herewith
|
|
|
21
|
.1
|
|
Subsidiaries of ArcSight, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
31
|
.01
|
|
Certification of Principal Executive Officer Pursuant to
Securities Exchange Act
Rule 13a-14(a).
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
31
|
.02
|
|
Certification of Principal Financial Officer Pursuant to
Securities Exchange Act
Rule 13a-14(a).
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
32
|
.01
|
|
Certification of Principal Executive Officer Pursuant to
18 U.S.C. Section 1350 and Securities Exchange Act
Rule 13a-14(b).*
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
32
|
.02
|
|
Certification of Principal Financial Officer Pursuant to
18 U.S.C. Section 1350 and Securities Exchange Act
Rule 13a-14(b).*
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
Certain portions of this exhibit have been omitted and have been
filed separately with the SEC pursuant to a request for
confidential treatment under
Rule 24b-2
as promulgated under the Securities Exchange Act of 1934, as
amended. |
|
* |
|
This certification is not deemed filed for purposes
of Section 18 of the Securities Exchange Act, or otherwise
subject to the liability of that section. Such certification
will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent that ArcSight, Inc.
specifically incorporates it by reference. |
100