e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-33445
NETEZZA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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04-3527320 |
(State or Other Jurisdiction of Incorporation or
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(I.R.S. Employer Identification No.) |
Organization) |
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26 Forest Street
Marlborough, MA 01752
(Address of Principal Executive Offices) (Zip Code)
(508) 382-8200
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. 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 o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of August 31, 2008, there were 59,152,019 shares of the registrants common stock outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NETEZZA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
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July 31, |
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January 31, |
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2008 |
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2008 |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
99,051 |
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$ |
46,184 |
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Short term marketable securities |
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1,999 |
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37,149 |
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Accounts receivable |
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17,263 |
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19,999 |
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Inventory |
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28,194 |
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31,611 |
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Restricted cash |
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379 |
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379 |
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Other current assets |
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4,404 |
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4,038 |
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Total current assets |
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151,290 |
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139,360 |
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Property and equipment, net |
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6,513 |
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5,467 |
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Goodwill |
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3,304 |
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Intangible assets, net |
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3,301 |
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Long term marketable securities |
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51,321 |
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53,775 |
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Restricted cash |
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639 |
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Other long term assets |
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906 |
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150 |
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Total assets |
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$ |
217,274 |
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$ |
198,752 |
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Liabilities and Stockholders Equity |
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Current liabilities |
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Accounts payable |
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$ |
3,759 |
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$ |
5,533 |
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Accrued expenses |
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5,891 |
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5,494 |
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Accrued compensation and benefits |
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4,039 |
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5,244 |
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Deferred revenue |
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44,904 |
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30,588 |
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Total current liabilities |
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58,593 |
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46,859 |
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Long term deferrred revenue |
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14,499 |
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15,418 |
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Total long term liabilities |
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14,499 |
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15,418 |
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Total liabilities |
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73,092 |
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62,277 |
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Commitments and contingencies (Note 15) |
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Stockholders equity: |
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Preferred stock, $0.001 par value; 5,000,000 shares authorized at July
31, 2008 and January 31, 2008; none outstanding |
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Common stock, $0.001 par value; 500,000,000 shares authorized at
July 31, 2008 and January 31, 2008; 59,069,814 and 57,729,903 shares
issued at July 31, 2008 and January 31, 2008, respectively |
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59 |
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58 |
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Treasury stock, at cost; 139,062 shares at July 31, 2008 and January
31, 2008, respectively |
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(14 |
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(14 |
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Accumulated other comprehensive income |
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(3,755 |
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(682 |
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Additional paid-in capital |
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221,759 |
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216,253 |
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Accumulated deficit |
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(73,867 |
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(79,140 |
) |
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Total stockholders equity |
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144,182 |
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136,475 |
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Total liabilities and stockholders equity |
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$ |
217,274 |
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$ |
198,752 |
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See accompanying Notes to Condensed Consolidated Financial Statements
1
NETEZZA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
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Three Months Ended July 31, |
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Six Months Ended July 31, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue |
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Product |
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$ |
35,134 |
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$ |
22,933 |
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$ |
66,460 |
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$ |
43,510 |
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Services |
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11,901 |
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5,467 |
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20,151 |
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10,232 |
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Total revenue |
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47,035 |
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28,400 |
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86,611 |
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53,742 |
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Cost of revenue |
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Product |
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14,005 |
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9,481 |
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26,599 |
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17,876 |
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Services |
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2,888 |
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1,956 |
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4,992 |
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3,604 |
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Total cost of revenue |
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16,893 |
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11,437 |
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31,591 |
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21,480 |
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Gross margin |
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30,142 |
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16,963 |
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55,020 |
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32,262 |
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Operating expenses |
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Sales and marketing |
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15,292 |
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9,962 |
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28,622 |
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19,631 |
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Research and development |
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8,014 |
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5,572 |
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15,262 |
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11,056 |
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General and administrative |
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3,669 |
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1,978 |
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6,782 |
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3,733 |
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Total operating expenses |
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26,975 |
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17,512 |
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50,666 |
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34,420 |
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Operating income (loss) |
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3,167 |
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(549 |
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4,354 |
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(2,158 |
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Interest income |
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1,036 |
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195 |
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2,779 |
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217 |
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Interest expense |
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502 |
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715 |
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Other income (expense), net |
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(86 |
) |
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51 |
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(219 |
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220 |
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Income (loss) before income taxes
and accretion to preferred stock |
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4,117 |
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(805 |
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6,914 |
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(2,436 |
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Income tax provision |
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976 |
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291 |
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1,641 |
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565 |
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Net income (loss) |
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3,141 |
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(1,096 |
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5,273 |
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(3,001 |
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Accretion to preferred stock |
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(1,370 |
) |
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(2,853 |
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Net income (loss) attributable to
common stockholders |
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$ |
3,141 |
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$ |
(2,466 |
) |
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$ |
5,273 |
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$ |
(5,854 |
) |
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Net income (loss) per share
attributable to common
stockholders: |
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Basic: |
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Net income (loss) per share |
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$ |
0.05 |
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$ |
(0.09 |
) |
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$ |
0.09 |
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$ |
(0.29 |
) |
Accretion to preferred stock |
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(0.11 |
) |
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(0.27 |
) |
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Net income (loss) per share
attributable to common
stockholders: |
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$ |
0.05 |
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$ |
(0.20 |
) |
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$ |
0.09 |
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$ |
(0.56 |
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Diluted: |
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Net income (loss) per share |
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$ |
0.05 |
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$ |
(0.09 |
) |
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$ |
0.08 |
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$ |
(0.29 |
) |
Accretion to preferred stock |
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(0.11 |
) |
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(0.27 |
) |
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Net income (loss) per share
attributable to common
stockholders: |
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$ |
0.05 |
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$ |
(0.20 |
) |
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$ |
0.08 |
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$ |
(0.56 |
) |
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Weighted average common shares
outstanding basic |
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58,692 |
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12,374 |
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58,322 |
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10,444 |
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Weighted average common shares
outstanding diluted |
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66,541 |
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12,374 |
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|
66,908 |
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|
10,444 |
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See accompanying Notes to Condensed Consolidated Financial Statements
2
NETEZZA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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For the six months ended July 31, |
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2008 |
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2007 |
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Cash flows from operating activities |
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Net income (loss) |
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$ |
5,273 |
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$ |
(3,001 |
) |
Adjustments to reconcile net income (loss) to net cash provided
by operating activites |
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Depreciation and amortization |
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2,319 |
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|
1,456 |
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Stock based compensation expense |
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3,616 |
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|
1,852 |
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Change in carrying value of preferred stock warrant liability |
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|
257 |
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Noncash interest expense related to issuance of warrants |
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|
183 |
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Changes in
assets and liabilities, net of effects of business acquired |
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Accounts receivable |
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3,202 |
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|
13,214 |
|
Inventory |
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|
1,907 |
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(6,936 |
) |
Other assets |
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(641 |
) |
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|
(2,705 |
) |
Accounts payable |
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|
(1,845 |
) |
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|
(9,520 |
) |
Accrued compensation and benefits |
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|
(1,234 |
) |
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|
(273 |
) |
Accrued expenses |
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|
(78 |
) |
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|
450 |
|
Deferred revenue |
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|
12,787 |
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|
12,863 |
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Net cash provided by operating activities |
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|
25,306 |
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|
7,840 |
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Cash flows from investing activities |
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Purchase of investments |
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(7,377 |
) |
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Sales and maturities of investments |
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41,877 |
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Acquisition of business, net of cash acquired |
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(6,201 |
) |
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Purchases of property and equipment |
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(1,629 |
) |
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|
(2,814 |
) |
Change in other long term assets |
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|
(422 |
) |
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Increase in restricted cash |
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|
(639 |
) |
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Net cash provided by (used in) investing activities |
|
|
25,609 |
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|
(2,814 |
) |
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Cash flows from financing activities |
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Proceeds from note payable |
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|
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|
8,000 |
|
Repayment of note payable |
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|
|
|
|
|
(14,639 |
) |
Proceeds from issuance of common stock, net |
|
|
1,892 |
|
|
|
113,778 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,892 |
|
|
|
107,139 |
|
|
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|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
52,807 |
|
|
|
112,165 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
60 |
|
|
|
(625 |
) |
Cash and cash equivalents, beginning of year |
|
|
46,184 |
|
|
|
5,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Cash and cash equivalents, end of year |
|
$ |
99,051 |
|
|
$ |
116,558 |
|
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Supplemental disclosure of cash flow information |
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Cash paid for interest |
|
$ |
|
|
|
$ |
740 |
|
Cash paid for taxes |
|
$ |
1,350 |
|
|
$ |
181 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
3
NETEZZA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business
Netezza Corporation (the Company) is a leading provider of data warehouse appliances. The
Companys product, the Netezza Performance Server, or NPS, integrates database, server and storage
platforms in a purpose-built unit to enable detailed queries and analyses on large volumes of
stored data. The results of these queries and analyses, often referred to as business intelligence,
provide organizations with actionable information to improve their business operations. The NPS
data warehouse appliance was designed specifically for analysis of terabytes of data at higher
performance levels and at a lower total cost of ownership with greater ease of use than can be
achieved via traditional data warehouse systems. The NPS appliance performs faster, deeper and more
iterative analyses on larger amounts of detailed data, giving customers greater insight into trends
and anomalies in their businesses, thereby enabling them to make better strategic decisions.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include those of the Company and
its wholly-owned subsidiaries, after elimination of all intercompany accounts and transactions. The
Company has prepared the accompanying consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America (GAAP).
The condensed balance sheet at January 31, 2008 was derived from audited financial statements,
but does not include all disclosures required by GAAP. The accompanying unaudited financial
statements as of July 31, 2008 and for the three and six months ended July 31, 2008 and 2007 have
been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules
and regulations. However, the Company believes that the disclosures are adequate to make the
information presented not misleading. These condensed consolidated financial statements should be
read in conjunction with the Companys audited consolidated financial statements and the notes
thereto included in its Annual Report on Form 10-K for the fiscal year ended January 31, 2008,
filed with the SEC on April 18, 2008.
In the opinion of management, all adjustments, consisting only of normal recurring adjustments
necessary to present a fair statement of the Companys financial position as of July 31, 2008 and
results of operations and cash flows for the three and six months ended July 31, 2008 and 2007 have
been made. The results of operations and cash flows for the three and six months ended July 31,
2008 are not necessarily indicative of the results of operations and cash flows that may be
expected for the year ending January 31, 2009 or any future periods.
Use of Estimates
The preparation of these financial statements in conformity with GAAP requires the Company to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, management
evaluates these estimates and judgments, including those related to revenue recognition, warranty
claims, the write down of inventory to net realizable value, valuation of investments, valuation
of goodwill and acquired intangible assets, stock-based compensation and income taxes. The Company
bases these estimates on historical and anticipated results and trends and on various other
assumptions that the Company believes are reasonable under the circumstances, including assumptions
as to future events. These estimates form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. By their nature,
estimates are subject to an inherent degree of uncertainty. Actual results may differ from the
Companys estimates.
Cash, Cash Equivalents and Restricted Cash
4
The Company considers all highly liquid investments with an original or remaining maturity of
three months or less at the time of purchase to be cash equivalents. Cash equivalents and
restricted cash consist primarily of investments in money market funds of major financial
institutions. Accordingly, investments are subject to minimal credit and market risk. At July
31, 2008 and January 31, 2008, cash equivalents were comprised of money market funds totaling $87.6
million and $31.7 million, respectively. These cash equivalents are carried at cost which
approximates fair value. Restricted cash represents the amount of cash equivalents required to be
maintained by the Company under letters of credit to comply with the requirements of office space
lease agreements. The letters of credit totaled $1.0 million and $0.4 million at July 31, 2008 and
January 31, 2008, respectively.
Investments
The Company accounts for and classifies its investments as either held-to-maturity,
available-for-sale, or trading, in accordance with the guidance outlined in Statement of
Financial Accounting Standards (SFAS) No. 115 Accounting for Certain Investments in Debt and
Equity Securities, (SFAS 115). The determination of the appropriate classification by the
Company is based on a variety of factors, including managements intent at the time of purchase.
Held-to-maturity securities are those securities which the Company has the ability and intent
to hold until maturity and are recorded at amortized cost, adjusted for the amortization or
accretion of premiums or discounts. Premiums and discounts are amortized or accreted over the life
of the related held-to-maturity security as an adjustment to yield using the effective interest
method. At July 31, 2008, the Company had no investments which were classified as held-to-maturity.
Available-for-sale securities are those securities which the Company views as available for
use in current operations. Accordingly, at July 31, 2008, the Company has classified all of its
investments as available-for-sale securities. Some securities have been classified as short-term
investments, even though the stated maturity date may be one year or more beyond the current
balance sheet date due to the Companys ability and intent to liquidate these investments within
twelve months. At July 31, 2008, the Company has classified $51.3 million of auction rate
securities as long-term marketable securities due to managements estimate of its inability to
liquidate these investments within the next twelve months. Available-for-sale investments are
stated at fair value with their unrealized gains and losses included as a separate component of
stockholders equity entitled Accumulated other comprehensive loss, until such gains and losses
are realized.
Trading securities are those securities which are bought and held principally for the purpose
of selling them in the near term. Accordingly, these securities are classified as short-term
investments, even though the stated maturity date may be one year or more beyond the current
balance sheet date. Trading securities are stated at fair value with their unrealized gains and
losses included in current earnings. At July 31, 2008, the Company had no investments which were
classified as trading.
The fair value of the Companys investments is determined from quoted market prices. The
Company has investments in auction rate securities that consist entirely of municipal debt
securities, which are typically recorded in its financial statements at cost, which approximates fair market
value (unless the auction fails) due to their variable interest rates, which reset through an
auction process typically every 28 days. This auction mechanism generally allows existing investors
to continue to own their securities with a revised interest rate based on the auction or liquidate
their holdings by selling these auction rate securities at par value. Because of the short
intervals between interest reset dates, the Company monitors the auctions to ensure they are
successful, which provides evidence that the recorded values of these investments approximate their
fair values. To the extent an auction were to fail such that the securities were deemed to be not
liquid, the Company would need to seek other alternatives to determine the fair value of these
securities, which may not be based on quoted market transactions (Note 3). Due to the Companys
inability to quickly liquidate these investments, the Company has reclassified those investments
with failed auctions and which have not been subsequently liquidated, as long-term assets in its
consolidated balance sheet based on managements estimate of its inability to liquidate these
investments within the next twelve months.
5
Investments are considered to be impaired when a decline in fair value below cost basis is
determined to be other than temporary. The Company periodically employs a methodology in evaluating
whether a decline in fair value below cost basis is other than temporary that considers available
evidence regarding the Companys marketable securities. In the event that the cost basis of a
security exceeds its fair value, the Company evaluates, among other factors, the duration of the
period that, and extent to which, the fair value is less than cost basis; the financial health of
and business outlook for the investee, including industry and sector performance, changes in
technology, and operational and financing cash flow factors; overall market conditions and trends;
and the Companys intent and ability to hold the investment. Once a decline in fair value is
determined to be other than temporary, the Company will record a write-down in its Statement of
Operations and a new cost basis in the security is established. There were no unrealized losses in
the Companys investments which were deemed to be other than temporary in the three or six months
ended July 31, 2008. Realized gains and losses are determined on the specific identification method
and are included in interest income in the Statements of Operations. Interest income is accrued as
earned.
Derivatives
The Company applies SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) which established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other contracts, and for hedging
activities. All derivatives, whether designated in a hedging relationship or not, are required to
be recorded on the balance sheet at fair value. SFAS 133 also requires that changes in the
derivatives fair value be recognized currently in earnings unless specific hedge accounting
criteria are met, and that the Company formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. The effectiveness of the derivative as a hedging
instrument is based on changes in its market value being highly correlated with changes in the
market value of the underlying hedged item.
Derivatives are financial instruments whose values are derived from one or more underlying
financial instruments, such as foreign currency. The Company enters into derivative transactions,
specifically foreign currency forward contracts, to manage the Companys exposure to fluctuations
in foreign exchange rates that arise, primarily from the Companys foreign currency-denominated
receivables and payables. The contracts are primarily in British Pounds, Australian Dollars and
Japanese Yen, typically have maturities of one month and require an exchange of foreign currencies
for U.S. dollars at maturity of the contracts at rates agreed to at inception of the contracts. The
Company does not enter into or hold derivatives for trading or speculative purposes. Generally, the
Company does not designate foreign currency forward contracts as hedges for accounting purposes,
and changes in the fair value of these instruments are recognized immediately in current earnings.
Because the Company enters into forward contracts only as an economic hedge, any gain or loss on
the underlying foreign-denominated balance would be offset by the loss or gain on the forward
contract. Gains and losses on forward contracts and foreign denominated receivables and payables
are included in other income (expense), net.
At July 31, 2008, the Company had outstanding foreign currency forward contracts with an
aggregate notional value of $11.0 million, denominated in British Pounds, Australian Dollars and
Japanese Yen. The mark-to-market effect associated with these contracts was a net unrealized loss
of approximately $23,000 at July 31, 2008. Net realized gains and losses associated with exchange
rate fluctuations on forward contracts and the underlying foreign currency exposure being hedged
were immaterial for all periods presented.
Foreign Currency Translation
The financial statements of the Companys foreign subsidiaries are translated in accordance
with SFAS No. 52, Foreign Currency Translation. The functional currency for the Companys foreign
subsidiaries is the applicable local currency. For financial reporting purposes, assets and
liabilities of subsidiaries outside the United States of America are translated into U.S. dollars
using period-end exchange rates. Revenue and expense accounts are translated at the average rates
in effect during the period. The effects of foreign currency translation adjustments are included
in accumulated other comprehensive income as a component of stockholders equity. Transaction gains
(losses) for the three and six months ended July 31, 2008 were $(0.1) million, and $(0.2) million
respectively, and
6
for the three and six months ended July 31, 2007 were $0.2 million and $0.6 million, respectively,
and were recorded as other income (expense), net in the consolidated statements of operations.
Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts and its investments in brokerage
accounts at high quality financial institutions. The individual balances, at times, may exceed
federally insured limits. However, the Company does not believe that it is subject to unusual
credit risk beyond the normal credit risk associated with commercial banking relationships.
Financial instruments which potentially expose the Company to concentrations of credit risk
consist of accounts receivable. At July 31, 2008, one customer accounted for 11% of total accounts
receivable. At January 31, 2008, two customers accounted for 28% and 11%, respectively of total
accounts receivable. One customer accounted for 18% of revenue for the six months ended July 31, 2008, while two accounted for 11% and 10% of
revenue for the six months ended July 31, 2007.
Stock-Based Compensation
The Company accounts for employee stock-based compensation under SFAS No. 123(R), Share-Based
Payment,(SFAS 123(R)) a revision of SFAS No. 123, which requires companies to expense the fair
value of employee stock options and other forms of stock-based compensation. In accordance with
SFAS 123(R), the Company will recognize the compensation cost of employee stock-based awards in the
statement of operations using the straight line method over the vesting period of the award.
The Company accounts for stock-based compensation expense for non-employees using the fair
value method prescribed by EITF 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services and the
Black-Scholes option pricing model, and records the fair value of non-employee stock options as an
expense over the vesting term of the option.
Under
SFAS 123(R), the
Companys expected volatility assumption used in the Black-Scholes option-pricing model was based on peer group volatility. The expected
life assumption is based on the simplified method in accordance with
the SECs Staff Accounting Bulletin No. 110 (SAB 110).
The simplified method is based on the vesting period and contractual
term for each vesting tranche of awards. The mid-point between
the vesting date and the expiration date is used as the expected term under this method. The risk-free interest rate used in the
Black-Scholes model is based on the implied yield curve available on U.S. Treasury zero-coupon issues at the date of grant with a
remaining term equal to the Companys expected term assumption. The Company has never declared or paid a cash dividend and has no
current plans to pay cash dividends.
Net Income (Loss) Per Share
The Company computes basic net income (loss) per share attributable to common stockholders by
dividing its net income (loss) attributable to common stockholders for the period by the weighted
average number of common shares outstanding during the period. Diluted net income (loss) per share
reflects the potential dilution using the treasury stock method that could occur if securities or
other contracts to issue common stock were exercised or converted into common stock, or resulted in
the issuance of common stock that then shared in the earnings of the entity. Net income (loss)
attributable to common stockholders is calculated using the two-class method; however, preferred
stock dividends were not included in the Companys diluted net loss per share calculations for the
three and six months ended July 31, 2007 because to do so would be anti-dilutive.
The components of the net income (loss) per share attributable to common stockholders were as
follows (in thousands except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
Six Months Ended July 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income (loss)
attributable to
common stockholders |
|
$ |
3,141 |
|
|
$ |
(2,466 |
) |
|
$ |
5,273 |
|
|
$ |
(5,854 |
) |
Weighted average
shares used to
compute net income
(loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
58,692 |
|
|
|
12,374 |
|
|
|
58,322 |
|
|
|
10,444 |
|
Dilutive options
to purchase
common stock |
|
|
7,849 |
|
|
|
|
|
|
|
8,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
66,541 |
|
|
|
12,374 |
|
|
|
66,908 |
|
|
|
10,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
per share
attributable to
common
stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.05 |
|
|
$ |
(0.20 |
) |
|
$ |
0.09 |
|
|
$ |
(0.56 |
) |
Diluted |
|
$ |
0.05 |
|
|
$ |
(0.20 |
) |
|
$ |
0.08 |
|
|
$ |
(0.56 |
) |
7
The following unvested
restricted shares, options and warrants to purchase common stock,
have been excluded from the computation of diluted net income (loss) per share, because including
the unvested restricted shares options and warrants would be anti-dilutive. The Company has excluded the
convertible preferred stock from the basic earnings per share calculation as the preferred
stockholders did not have a contractual obligation to share in the losses of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
Six Months Ended July 31, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted shares |
|
|
27,708 |
|
|
|
|
|
|
|
27,708 |
|
|
|
|
|
Warrants to purchase common stock |
|
|
|
|
|
|
250,036 |
|
|
|
|
|
|
|
250,036 |
|
Options to purchase common stock |
|
|
4,788,110 |
|
|
|
9,164,311 |
|
|
|
5,693,858 |
|
|
|
9,164,311 |
|
Income Taxes
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprises financial statements in
accordance with SFAS No. 109, Accounting for Income Taxes (SFAS 109). FIN 48 prescribes a
two-step process to determine the amount of tax benefit to be recognized. First, the tax position
must be evaluated to determine the likelihood that it will be sustained upon external examination.
If the tax position is deemed more-likely-than-not to be sustained, the tax position is then
assessed to determine the amount of benefit to recognize in the financial statements. The amount of
the benefit that may be recognized is the largest amount that has a greater than 50 percent
likelihood of being realized upon ultimate settlement. The Company adopted FIN 48 on February 1,
2007 and the adoption did not have an effect on its consolidated results of operations or financial
condition.
Deferred taxes are determined based on the difference between the financial statement and tax
basis of assets and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Valuation allowances are provided if, based upon the weight of
available evidence, it is more likely than not that some or all of the deferred tax assets will not
be realized.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss), adjustments to stockholders equity
for foreign currency translation adjustments and net unrealized gains or losses from investments.
For the purposes of comprehensive income (loss) disclosures, the Company does not record tax
provisions or benefits for the net changes in the foreign currency translation adjustment, as the
Company intends to permanently reinvest undistributed earnings in its foreign subsidiaries.
Accumulated other comprehensive income consists of foreign exchange gains and losses and net
unrealized gains or losses from investments.
The components of comprehensive income (loss) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
Six Months Ended July 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income (loss) |
|
$ |
3,141 |
|
|
$ |
(1,096 |
) |
|
$ |
5,273 |
|
|
$ |
(3,001 |
) |
Other comprehensive income
(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency adjustment, net of tax of $ 0 |
|
|
(2 |
) |
|
|
(189 |
) |
|
|
31 |
|
|
|
(516 |
) |
Net unrealized gain (loss)
from investments, net of tax of $ 0 |
|
|
1,965 |
|
|
|
|
|
|
|
(3,104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
(loss) |
|
$ |
5,104 |
|
|
$ |
(1,285 |
) |
|
$ |
2,200 |
|
|
$ |
(3,517 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
8
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115 (SFAS 159). SFAS 159
allows companies to measure certain financial assets and liabilities at fair value. The fair value
option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new
election date occurs. If the fair value option is elected for an instrument, SFAS 159 specifies
that unrealized gains and losses for that instrument shall be reported in earnings at each
subsequent reporting date. The Company adopted SFAS 159 on February 1, 2008 and elected not to
measure eligible financial assets and liabilities at fair value. Accordingly, the adoption of SFAS
159 did not have a material impact on the Companys financial position and results of operations.
In December 2007,
FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141(R)) and SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting
Research Bulletin No. 51(SFAS 160). SFAS 141(R) will change
how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent
periods. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling
interests and classified as a component of equity. The provisions of SFAS 141(R) and SFAS 160 are effective for fiscal years beginning
on or after December 15, 2008. The Company is currently evaluating the potential impact of adoption of SFAS 141(R) and SFAS 160 and has
not yet determined the impact, if any, that their adoption will have on its results of operations or financial condition.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful
Life of Intangible Assets (FSP 142-3). FSP 142-3 is effective for financial statements issued
for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years; accordingly, the
Company will adopt FSP 142-3 in the fiscal year ending January 31, 2010. FSP 142-3 amends the
factors that should be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS 142). FSP 142-3 is intended to improve the consistency between the useful life of
an intangible asset determined under SFAS 142 and the period of expected cash flows used to measure
the fair value of the asset under SFAS 141(R) and other United States generally accepted accounting
principles. The Company is currently evaluating the impact, if any, of the adoption of FSP 142-3
will have on its consolidated financial position, results of operations and cash flows.
In June 2008, the
FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions
Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and therefore need to be included in calculating earnings per
share under the two-class method described in SFAS No. 128,
Earnings per Share. Additionally, FSP EITF 03-6-1 requires
companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents
as a separate class of securities in calculating earnings per share and is effective for financial statements issued for fiscal
years beginning after December 15, 2008; early adoption is not permitted. The Company does not expect FSP EITF 03-6-1 to affect
its results of operations or earnings per share.
From time to time, new accounting pronouncements are issued by the FASB that are adopted by
the Company as of the specified effective date. Unless otherwise discussed, the Company believes
that the impact of recently issued standards, which are not yet effective, will not have a material
impact on the Companys consolidated financial statements upon adoption.
3. Fair Value Measurements
In September 2006, the FASB, issued SFAS No. 157, Fair Value Measurements (SFAS 157),
which addresses how companies should measure fair value when they are required to use a fair value
measure for recognition or disclosure purposes under generally accepted accounting principles. SFAS
157 defines fair value, establishes a framework for measuring fair value under generally accepted
accounting principles and expands the requirements for disclosure about fair value measurements.
SFAS 157 does not require any new fair value measurements but may change current practice for some
entities. SFAS 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those years. In February 2008, the FASB issued Staff
Position FAS No. 157-2, Partial Deferral of the Effective Date of Statement No. 157, (FSP
157-2). FSP 157-2 delays the effective date of SFAS 157 for non-financial assets and liabilities
that are not measured or disclosed on a recurring basis to fiscal years beginning after November
15, 2008. The adoption of this accounting pronouncement effective February 1, 2008 did not have a
material effect on the Companys consolidated financial statements for financial assets and
financial liabilities. The Company is currently in the process of evaluating the impact of adopting
this pronouncement effective as of February 1, 2009 for other non-financial assets or liabilities.
SFAS 157 requires disclosure about how fair value is determined for assets and liabilities and
establishes a three-tiered value hierarchy into which these assets and liabilities must be grouped,
based upon significant levels of inputs as follows:
|
Level 1 |
|
Quoted prices in active markets for identical assets or liabilities. |
9
|
Level 2 |
|
Observable inputs, other than Level 1 prices, such as quoted prices in active
markets for similar assets and liabilities, quoted prices for identical or similar assets
and liabilities in markets that are not active, or other inputs that are observable or
can be corroborated by observable market data. |
|
|
Level 3 |
|
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities. This includes certain
pricing models, discounted cash flow methodologies and similar techniques that use
significant unobservable inputs. |
The following table summarizes the composition of the Companys investments at July 31, 2008
and January 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification on Balance Sheet |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Short Term |
|
|
Long Term |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Aggregate |
|
|
Marketable |
|
|
Marketable |
|
July 31, 2008 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
Securities |
|
|
Securities |
|
U.S. treasury and
government agency
securities |
|
$ |
1,977 |
|
|
$ |
22 |
|
|
$ |
|
|
|
$ |
1,999 |
|
|
$ |
1,999 |
|
|
$ |
|
|
Auction Rate Securities |
|
|
54,175 |
|
|
|
|
|
|
|
(2,854 |
) |
|
|
51,321 |
|
|
|
|
|
|
|
51,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
56,152 |
|
|
$ |
22 |
|
|
$ |
(2,854 |
) |
|
$ |
53,320 |
|
|
$ |
1,999 |
|
|
$ |
51,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification on Balance Sheet |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Short Term |
|
|
Long Term |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Aggregate |
|
|
Marketable |
|
|
Marketable |
|
January 31, 2008 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
Securities |
|
|
Securities |
|
Corporate debt
securities |
|
$ |
9,867 |
|
|
$ |
103 |
|
|
$ |
|
|
|
$ |
9,970 |
|
|
$ |
9,970 |
|
|
$ |
|
|
U.S. treasury and
government agency
securities |
|
|
2,001 |
|
|
|
3 |
|
|
|
|
|
|
|
2,004 |
|
|
|
2,004 |
|
|
|
|
|
Commercial Paper |
|
|
16,709 |
|
|
|
166 |
|
|
|
|
|
|
|
16,875 |
|
|
|
16,875 |
|
|
|
|
|
Auction Rate
Securities |
|
|
62,075 |
|
|
|
|
|
|
|
|
|
|
|
62,075 |
|
|
|
8,300 |
|
|
|
53,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
90,652 |
|
|
$ |
272 |
|
|
$ |
|
|
|
$ |
90,924 |
|
|
$ |
37,149 |
|
|
$ |
53,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details the fair value measurements within the fair value hierarchy of the
Companys financial assets and liabilities at July 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting |
|
|
|
Total Fair Value at |
|
|
Date Using |
|
|
|
July 31, 2008 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
87,576 |
|
|
|
87,576 |
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
|
1,018 |
|
|
|
1,018 |
|
|
|
|
|
|
|
|
|
U.S. treasury and
government agency
securities |
|
|
1,999 |
|
|
|
1,999 |
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
|
51,321 |
|
|
|
|
|
|
|
|
|
|
|
51,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
141,914 |
|
|
$ |
90,593 |
|
|
$ |
|
|
|
$ |
51,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
forward contracts |
|
|
23 |
|
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23 |
|
|
$ |
|
|
|
$ |
23 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects the activity for the Companys major classes of assets measured
at fair value using level 3 inputs (in thousands):
10
|
|
|
|
|
|
|
Auction Rate |
|
|
|
Securities |
|
|
Balance as of January 31, 2008 |
|
$ |
|
|
Transfers in from level 1 |
|
|
55,875 |
|
Unrealized losses included in accumulated other comprehensive loss |
|
|
(4,809 |
) |
|
|
|
|
Balance as of April 30, 2008 |
|
$ |
51,066 |
|
|
|
|
|
Sales of securities |
|
|
(1,700 |
) |
Change in unrealized losses included in accumulated other comprehensive loss |
|
|
1,955 |
|
|
|
|
|
Balance as of July 31, 2008 |
|
$ |
51,321 |
|
|
|
|
|
At July 31, 2008 auction rate securities (ARSs) represented 36% of total financial assets
measured at fair value.
At July 31, 2008, the Company grouped money market funds, certificates of deposit and U.S.
government securities using a level 1 valuation because market prices were readily available. At
July 31, 2008, the foreign currency forward contract valuation inputs were based on quoted prices
and quoted pricing intervals from public data and did not involve management judgment. Accordingly,
these have been classified within Level 2 of the fair value hierarchy. At July 31, 2008, the fair
value of the Companys assets grouped using a level 3 valuation consisted of ARSs, most of which
were AAA-rated bonds collateralized by federally guaranteed student loans. ARSs are long-term
variable rate bonds tied to short-term interest rates that are reset through a Dutch auction
process that typically occurs every 7 to 35 days. Historically, the carrying value (par value) of
the ARSs approximated fair market value due to the resetting of variable interest rates.
Beginning in late February 2008, however, the auctions for ARSs then held by the Company were
unsuccessful. As a result, the interest rates on ARSs reset to the maximum rate per the applicable
investment offering statements. The Company will not be able to liquidate affected ARSs until a
future auction on these investments is successful, a buyer is found outside the auction process,
the securities are called or refinanced by the issuer, or the securities mature. Due to these
liquidity issues, the Company performed a discounted cash flow analysis to determine the estimated
fair value of these investments. The discounted cash flow analysis performed by the Company
considered the timing of expected future successful auctions, the impact of extended periods of
maximum interest rates, collateralization of underlying security investments and the
creditworthiness of the issuer. The discounted cash flow analysis included the following
assumptions:
|
|
|
|
|
Expected Term |
|
3 Years |
|
Illiquidity Discount |
|
|
1.5-1.8 |
% |
Discount Rate |
|
|
4.57 |
% |
The discount rate was determined using a proxy based upon the current market rates for
successful auctions within the AAA-rated ARS market. The expected term was based on managements
estimate of future liquidity. The illiquidity discount was based on the levels of federal insurance
or FFELP backing for each security.
As a result, as of July 31, 2008, the Company recorded an unrealized loss of $2.9 million
related to the temporary impairment of the ARSs, which was included in accumulated other
comprehensive loss within stockholders equity.
In addition, as of July 31, 2008, $1.0 million of the Companys marketable securities were
classified as restricted. These securities represent collateral for irrevocable letters of credit
in favor of third-party beneficiaries, related to facility leases; $0.6 million of these securities
are classified as long-term and $0.4 million are classified as short-term on the unaudited
consolidated balance sheet as of July 31, 2008. The restrictions on these marketable securities
lapse as the Company fulfills its obligations or as such obligations expire as provided by the
letters of credit. These restrictions are expected to lapse at various times through May 2015.
4. Change in Accounting Principle
11
On June 29, 2005, the FASB issued Staff Position 150-5, Issuers Accounting under FASB
Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares That Are
Redeemable (FSP 150-5). FSP 150-5 affirms that warrants of this type are subject to the
requirements in SFAS No. 150, regardless of the redemption price or the timing of the redemption
feature. Therefore, under SFAS No. 150, the freestanding warrants to purchase the Companys
convertible preferred stock were liabilities that were required to be recorded at fair value.
The Company adopted FSP 150-5 as of August 1, 2005 and recorded an expense of $0.2 million for
the cumulative effect of the change in accounting principle to reflect the estimated fair value of
these warrants as of that date. In the three and six months ended July 31, 2007, the Company
recorded $0.3 million and $0.3, respectively, of additional expense to reflect the increase in
fair value between February 1, 2007 and the closing of the Companys initial public offering.
These warrants were subject to revaluation at each balance sheet date, and any change in fair
value was recorded as a component of other income (expense). Prior to the Companys initial public
offering, the warrants to purchase convertible redeemable preferred stock were either exercised or,
for those that remained outstanding at the closing of the initial public offering, were converted
to warrants to purchase common stock. Accordingly, effective as of the closing of the Companys
initial public offering, the liability related to the convertible redeemable preferred stock
warrants was transferred to additional paid-in-capital and is no longer required to be adjusted at
each reporting period.
5. Inventory
Inventory consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 31, |
|
|
January 31, |
|
|
|
2008 |
|
|
2008 |
|
Raw materials |
|
$ |
1,109 |
|
|
$ |
2,203 |
|
Finished goods |
|
|
27,085 |
|
|
|
29,408 |
|
|
|
|
|
|
|
|
|
|
$ |
28,194 |
|
|
$ |
31,611 |
|
|
|
|
|
|
|
|
6. Property and Equipment
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 31, |
|
|
January 31, |
|
|
|
2008 |
|
|
2008 |
|
Engineering test equipment |
|
$ |
12,557 |
|
|
$ |
11,047 |
|
Computer equipment and software |
|
|
4,766 |
|
|
|
4,329 |
|
Furniture and fixtures |
|
|
755 |
|
|
|
215 |
|
Leasehold improvements |
|
|
762 |
|
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
18,840 |
|
|
|
15,857 |
|
Less: accumulated depreciation |
|
|
12,327 |
|
|
|
10,390 |
|
|
|
|
|
|
|
|
|
|
$ |
6,513 |
|
|
$ |
5,467 |
|
|
|
|
|
|
|
|
Depreciation expense for the three months ended July 31, 2008 and 2007 was $1.1 million and $0.8
million, respectively. Depreciation expense for the six months ended July 31, 2008 and 2007 was
$2.2 million and $1.5 million, respectively. During the six months ended July 31, 2008, $1.5
million of inventory was reclassified to fixed assets, representing a non-cash increase in property
and equipment. During the six months ended July 31, 2008, the
Company disposed of leasehold improvements of $0.2 million resulting
in a loss on disposal of approximately $23,000.
7. Acquisition
12
On May 9, 2008, the Company acquired by merger all of the outstanding capital stock of NuTech
Solutions, Inc., (NuTech), a privately held advanced analytics and optimization solutions company
based in Charlotte, North Carolina. The results of NuTechs operations have been included in the
consolidated financial statements of the Company since that date.
The aggregate purchase price was approximately $6.5 million, including $0.1 million of
capitalized acquisition costs. Capitalized acquisition costs consist of fees for legal,
consulting and accounting services. The acquisition was accounted for using the purchase method of
accounting in accordance with SFAS No. 141, Business
Combinations, and SFAS 142. The allocation
of the purchase price is preliminary and is subject to finalization of the Companys valuation
estimates. The Company expects to finalize the purchase price allocation during the fiscal quarter
ending October 31, 2008 and anticipates that the allocations to identifiable intangible assets,
including the determination of estimated useful lives, and deferred revenues may change, as well as
the amount of resulting goodwill. The following table summarizes the preliminary allocation of the
purchase price (in thousands):
|
|
|
|
|
Total Consideration: |
|
|
|
|
Cash paid |
|
$ |
6,392 |
|
Transaction costs |
|
|
147 |
|
|
|
|
|
|
|
|
|
|
Total purchase consideration |
|
$ |
6,539 |
|
|
|
|
|
|
|
|
|
|
Allocation of the purchase consideration: |
|
|
|
|
Cash and cash equivalents |
|
$ |
338 |
|
Accounts receivable |
|
|
476 |
|
Prepaid expenses and other assets |
|
|
60 |
|
Property and equipment |
|
|
83 |
|
Identifiable intangible assets |
|
|
3,450 |
|
Goodwill |
|
|
3,304 |
|
|
|
|
|
|
|
|
|
|
Total assets acquired |
|
|
7,711 |
|
|
|
|
|
Total liabilities assumed |
|
|
1,172 |
|
|
|
|
|
|
|
|
|
|
Total net assets acquired |
|
$ |
6,539 |
|
|
|
|
|
The preliminary purchase price allocation resulted in $3.3 million of goodwill, none of which
is deductible for income tax purposes. The resulting amount of goodwill reflects the Companys
expectations of the following synergistic benefits: (1) the potential to extend the Companys
capabilities in advanced analytics by leveraging NuTechs intellectual property and expertise and
(2) the potential to sell the Companys products into NuTechs traditional customer base.
The following table reflects the fair value of the acquired identifiable intangible assets and
related estimates of useful lives (in thousands):
13
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
Useful Life |
|
|
|
Value |
|
|
(Years) |
|
Developed technology |
|
$ |
1,100 |
|
|
|
7 |
|
Order backlog |
|
|
300 |
|
|
|
2 |
|
Customer relationships |
|
|
1,300 |
|
|
|
6 |
|
Trademark and tradename |
|
|
500 |
|
|
|
6 |
|
Net beneficial leases |
|
|
250 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the pro forma statements of operations obtained by combining the
historical consolidated statements of operations of the Company and NuTech for the three and six
months ended July 31, 2008 and 2007, giving effect to the merger as if it occurred on May 1, 2008
and 2007 and February 1, 2008 and 2007, respectively (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 31 |
|
|
July 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Pro forma revenue |
|
$ |
47,035 |
|
|
$ |
29,552 |
|
|
$ |
88,262 |
|
|
$ |
55,811 |
|
Pro forma operating income
(loss) |
|
$ |
3,147 |
|
|
$ |
(851 |
) |
|
$ |
4,345 |
|
|
$ |
(2,840 |
) |
Pro forma net income (loss) |
|
$ |
3,114 |
|
|
$ |
(1,467 |
) |
|
$ |
5,152 |
|
|
$ |
(3,817 |
) |
Pro forma accretion to
preferred stock |
|
$ |
|
|
|
$ |
(1,370 |
) |
|
$ |
|
|
|
$ |
(2,853 |
) |
Pro forma net income (loss)
attributable to common
stockholders |
|
$ |
3,114 |
|
|
$ |
(2,837 |
) |
|
$ |
5,152 |
|
|
$ |
(6,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
per share attributable to
common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net
income (loss) per
share |
|
$ |
0.05 |
|
|
$ |
(0.12 |
) |
|
$ |
0.09 |
|
|
$ |
(0.37 |
) |
Pro forma
accretion to
preferred stock |
|
|
|
|
|
|
(0.11 |
) |
|
|
|
|
|
|
(0.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net
income (loss) per
share
attributable to
common
stockholders |
|
$ |
0.05 |
|
|
$ |
(0.23 |
) |
|
$ |
0.09 |
|
|
$ |
(0.64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net
income (loss) per
share |
|
$ |
0.05 |
|
|
$ |
(0.12 |
) |
|
$ |
0.08 |
|
|
$ |
(0.37 |
) |
Pro forma
accretion to
preferred stock |
|
|
|
|
|
|
(0.11 |
) |
|
|
|
|
|
|
(0.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net
income (loss) per
share
attributable to
common
stockholders |
|
$ |
0.05 |
|
|
$ |
(0.23 |
) |
|
$ |
0.08 |
|
|
$ |
(0.64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
58,692 |
|
|
|
12,374 |
|
|
|
58,322 |
|
|
|
10,444 |
|
Diluted |
|
|
66,541 |
|
|
|
12,374 |
|
|
|
66,908 |
|
|
|
10,444 |
|
The pro forma net income (loss) and net income (loss) per share for each period presented
primarily includes adjustments for amortization of intangibles, interest income and interest
expense. This pro forma information does not purport to indicate the results that would have actually been obtained had the acquisition been
completed on the assumed dates, or which may be realized in the future.
14
8. Goodwill and Acquired Intangible Assets
Goodwill
The carrying amount of goodwill of the Company was $3.3 million as of July 31, 2008 and $0 as
of January 31, 2008. The Companys goodwill resulted from the acquisition of NuTech in May 2008
(see Note 7). In accordance with SFAS 142, goodwill is not amortized, but instead is reviewed for
impairment at least annually or more frequently when events and circumstances occur indicating that
the recorded goodwill may be impaired. During the quarter ended July 31, 2008, the Company did not
record any impairments to its goodwill. In the future, the Company will perform the annual test
for impairment during its fourth fiscal quarter.
The change in the carrying amount of goodwill for the six months ended July 31, 2008 is as follows
(in thousands):
|
|
|
|
|
Balance as of January 31, 2008 |
|
$ |
0 |
|
Goodwill related to the acquisition of NuTech |
|
|
3,304 |
|
|
|
|
|
|
|
|
|
|
Balance as of July 31, 2008 |
|
$ |
3,304 |
|
|
|
|
|
Acquired Intangible Assets
The carrying amount of acquired intangible assets was $3.3 million as of July 31, 2008 and $0
as of January 31, 2008. Intangible assets acquired in a business combination are recorded under the
purchase method of accounting at their estimated fair values at the date of acquisition. The
Company amortizes acquired intangible assets over their estimated
useful lives.
Acquired intangible assets consist of the following as of July 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Cost |
|
|
Amortization |
|
|
Net |
|
Developed technology |
|
$ |
1,100 |
|
|
$ |
(36 |
) |
|
$ |
1,064 |
|
Order backlog |
|
|
300 |
|
|
|
(34 |
) |
|
|
266 |
|
Customer relationships |
|
|
1,300 |
|
|
|
(49 |
) |
|
|
1,251 |
|
Trademark and tradename |
|
|
500 |
|
|
|
(19 |
) |
|
|
481 |
|
Net beneficial leases |
|
|
250 |
|
|
|
(11 |
) |
|
|
239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,450 |
|
|
$ |
(149 |
) |
|
$ |
3,301 |
|
|
|
|
|
|
|
|
|
|
|
15
Amortization of acquired intangible assets was approximately $149,000 for the three and six
months ended July 31, 2008.
The following is the expected future amortization expense of the Companys acquired intangible
assets as of July 31, 2008 for the respective fiscal years ending January 31 (in thousands):
|
|
|
|
|
2009 (remaining six months) |
|
$ |
331 |
|
2010 |
|
|
657 |
|
2011 |
|
|
547 |
|
2012 |
|
|
507 |
|
2013 |
|
|
509 |
|
Thereafter |
|
|
750 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,301 |
|
|
|
|
|
The weighted average useful life of acquired intangible assets is 6 years.
9. Accrued Expenses
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 31, |
|
|
January 31, |
|
|
|
2008 |
|
|
2008 |
|
Warranty |
|
$ |
948 |
|
|
$ |
1,141 |
|
Inventory items |
|
|
78 |
|
|
|
630 |
|
Corporate taxes |
|
|
1,028 |
|
|
|
660 |
|
Professional
services |
|
|
787 |
|
|
|
751 |
|
Partner fees |
|
|
455 |
|
|
|
168 |
|
Sales meetings and events |
|
|
1,120 |
|
|
|
930 |
|
Other |
|
|
1,475 |
|
|
|
1,214 |
|
|
|
|
|
|
|
|
|
|
$ |
5,891 |
|
|
$ |
5,494 |
|
|
|
|
|
|
|
|
10. Lines of Credit
In June 2005, the Company entered into a credit line agreement with an outside party. Under
this agreement, the Company was able to borrow up to $8.0 million. The Company was required to make
interest only payments on any amounts borrowed through June 2006 and was then required to make 36
equal consecutive monthly installments of principal and interest through June 2009. The Company had
borrowed the full $8.0 million as of June 30, 2006. Interest rates were fixed for the term of the
loan at the time of each advance and were 10%, 10.75%, 11.75% and 12%. The loan was secured by all
assets of the Company, excluding intellectual property. All borrowings under this credit line were
repaid in full in July 2007. In addition, in conjunction with the line of credit, the Company
issued warrants to purchase 125,490 shares of Series D preferred stock at a price of $2.55 per
share. These warrants were exercised in July 2007. As the credit line was no longer outstanding,
the remaining debt discount and premium were recorded as interest expense during the three months
ended July 31, 2007.
16
In January 2007, the Company entered into a revolving credit line agreement with an outside
party. Under this agreement, the Company could borrow up to $15.0 million. Borrowings under the
line were due and payable on the maturity date of January 31, 2008. The interest on this revolving
credit line was a floating rate of 1% below the prime rate, payable monthly. This revolving line of
credit agreement contained a financial covenant that provided that the Company must achieve certain
minimum revenue targets for each of the six consecutive fiscal quarters ending on April 30, 2008.
The Company was in compliance with this covenant as of January 31, 2007. The loan was secured by
all assets of the Company, excluding intellectual property. This agreement contained both a
subjective acceleration clause and a requirement to maintain a lock-box arrangement. These
conditions result in a short-term classification of the line of credit in accordance with EITF
Issue No. 95-22, Balance Sheet Classification of Borrowings Outstanding under revolving Credit
Agreements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement. The
Company borrowed $4.0 million in April 2007 and $4.0 million in May 2007 under the revolving line
of credit. The Company repaid the outstanding balance under the revolving line of credit of $8.0
million in July 2007. This agreement expired on January 31, 2008.
11. Warrants for Preferred Stock
In conjunction with obtaining and drawing down on lines of credit, the Company issued warrants
to purchase 80,000 shares of Series A convertible preferred stock and 36,000 shares of Series B
convertible redeemable preferred stock. Upon the closing of the initial public offering, these
warrants converted into warrants to purchase 58,000 shares of common stock. As discussed in Note 4,
in August 2005, in accordance with FSP 150-5, the Company reclassified all of its freestanding
preferred stock warrants as a liability and began adjusting the warrants to their respective fair
values at each reporting period. Upon the closing of the initial public offering in July 2007, the
preferred stock warrant liability was reclassified to additional paid-in capital and is no longer
required to be adjusted at each reporting period.
In conjunction with obtaining and drawing down on a line of credit, the Company issued
warrants to purchase 125,490 shares of Series D convertible preferred stock. These warrants were
exercised in July 2007 prior to the closing date of the initial public offering.
As discussed in Note 4, the Company reclassified all of its freestanding preferred stock
warrants as a liability and began adjusting the warrants to their respective fair values at each
reporting period. Upon exercise of the warrants, the liability was adjusted to the intrinsic value
plus cash consideration and reclassified as preferred stock in the mezzanine section of the balance
sheet. The line of credit was closed, therefore, the remaining debt premium and debt discounts
which were recorded at the issuance of the warrants were recorded as interest expense during the
second quarter of fiscal 2008.
12. Options and Warrants for Common Stock
During the fiscal year ended January 31, 2001, the Company issued a warrant to purchase 5,893
shares of common stock to a consultant in consideration for services rendered. The warrant is fully
vested, has an exercise price of $0.002 per share and expires ten years from the date of grant. The
fully vested warrant remains unexercised at July 31, 2008.
During the fiscal year ended January 31, 2002, the Company issued an option to purchase 5,000
shares of common stock to a consultant. The option is fully vested, has an exercise price of $0.10
per share and expires ten years from the date of grant. The fully vested option remains unexercised
at July 31, 2008.
During the fiscal year ended January 31, 2002, the Company issued an option to purchase 12,000
shares of common stock to a consultant. The option is fully vested, has an exercise price of $0.20
per share and expires ten years from the date of grant. The fully vested option remains unexercised
at July 31, 2008.
During the fiscal year ended January 31, 2003, the Company issued an option to purchase 5,000
shares of common stock to a consultant. The option is fully vested, has an exercise price of $0.20
per share and expires ten years from the date of grant. The fully vested option remains unexercised
at July 31, 2008.
17
During the fiscal year ended January 31, 2003, the Company issued an option to purchase 12,000
shares of common stock to a consultant. The option is fully vested, has an exercise price of $0.20
per share and expires ten years from the date of grant. The fully vested option remains unexercised
at July 31, 2008.
During the fiscal year ended January 31, 2004, the Company issued an option to purchase 5,000
shares of common stock to a consultant. The option was exercised in full during the six months
ended July 31, 2008. The option vested over two years, had an exercise price of $0.20 per share and
would have expired ten years from the date of grant.
During the fiscal year ended January 31, 2006, the Company issued an option to purchase 5,000
shares of common stock to a consultant. The option is fully vested, has an exercise price of $1.00
per share and expires ten years from the date of grant. The option is fully vested and 2,500 shares
remain unexercised at July 31, 2008.
During the fiscal year ended January 31, 2008, the Company issued an option to purchase 5,000
shares of common stock to a consultant. The option vests over two years, has an exercise price of
$12.92 per share and expires seven years from the date of grant. At July 31, 2008, options for
1,250 shares were fully vested and unexercised, and options for 3,750 shares were outstanding and
unvested.
At July 31, 2008, nonstatutory options and warrants to purchase 47,393 shares of common stock
remain outstanding, of which 43,643 are fully vested and exercisable.
13. Stock Option Plans
The Company has two stock plans. The Companys 2007 Stock Incentive Plan (2007 Plan), was
adopted by the board of directors on March 21, 2007 and approved by stockholders on April 27, 2007.
The 2007 Plan permits the Company to make grants of incentive and nonqualified stock options, stock
appreciation rights, restricted stock, restricted stock units and other stock-based awards. These
awards may be granted to the Companys employees, officers, directors, consultants, and advisors.
Upon approval of the plan, the Company reserved 2,000,000 shares of its common stock for the
issuance under the 2007 Plan. On February 1, 2008, 2,015,679 shares were added to the shares
issuable under the 2007 Plan.
The Companys 2000 Stock Incentive Plan, as amended (2000 Plan) provided for the grant of
incentive stock options and nonqualified stock options, restricted stock, warrants and stock grants
for the purchase of up to 15,721,458 shares of common stock, to employees, officers, directors and
consultants of the Company. The 2000 Plan is administered by the Companys board of directors. In
connection with the adoption of the 2007 Plan, the board of directors determined not to grant any
further awards under the 2000 Plan subsequent to the closing of the Companys initial public
offering.
Under SFAS 123(R), the Company calculates the fair value of stock option grants using the
Black-Scholes option-pricing model. Determining the appropriate fair value model and calculating
the fair value of stock-based awards require the use of highly subjective assumptions, including
the expected life of the stock-based awards and stock price volatility. The assumptions used in
calculating the fair value of stock-based payment awards represent managements best estimates, but
the estimates involve inherent uncertainties and the application of management judgment.
The amounts included in the consolidated statements of operations for the three and six months
ended July 31, 2008 and 2007 relating to share-based expense under SFAS 123(R) are as follows (in
thousands):
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
Six Months Ended July 31, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Cost of products |
|
$ |
43 |
|
|
$ |
23 |
|
|
$ |
86 |
|
|
$ |
45 |
|
Cost of services |
|
|
66 |
|
|
|
27 |
|
|
|
111 |
|
|
|
53 |
|
Sales and marketing |
|
|
601 |
|
|
|
257 |
|
|
|
1,172 |
|
|
|
506 |
|
Research and development |
|
|
559 |
|
|
|
177 |
|
|
|
1,000 |
|
|
|
325 |
|
General and administrative |
|
|
673 |
|
|
|
452 |
|
|
|
1,233 |
|
|
|
886 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,942 |
|
|
$ |
936 |
|
|
$ |
3,602 |
|
|
$ |
1,815 |
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys stock option activity for the six months ended
July 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
Shares |
|
Number of |
|
Average |
|
Average |
|
Aggregate |
|
|
Available for |
|
Options |
|
Exercise |
|
Remaining |
|
Intrinsic |
|
|
Grant |
|
Outstanding |
|
Price |
|
Life in Years |
|
Value |
Outstanding at January 31,
2008 |
|
|
1,394,500 |
|
|
|
9,414,667 |
|
|
$ |
4.12 |
|
|
|
|
|
|
|
|
|
Additional Shares Authorized |
|
|
2,015,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Granted |
|
|
(2,790,500 |
) |
|
|
2,790,500 |
|
|
$ |
10.39 |
|
|
|
|
|
|
|
|
|
Restricted Shares Granted |
|
|
(27,708 |
) |
|
|
|
|
|
$ |
12.99 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
(1,339,911 |
) |
|
$ |
1.41 |
|
|
|
|
|
|
|
|
|
Forfeited, cancelled or
expired (1) |
|
|
23,500 |
|
|
|
(200,134 |
) |
|
$ |
6.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2008 |
|
|
615,471 |
|
|
|
10,665,122 |
|
|
$ |
6.06 |
|
|
7.20 years |
|
$73.2 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at July 31, 2008 |
|
|
|
|
|
|
3,427,270 |
|
|
$ |
2.48 |
|
|
6.80 years |
|
$35.6 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Options cancelled under the 2000 Plan after July 24, 2007 are not considered available for
grant, as the Company is no longer granting options under this plan. For the six months ended July
31, 2008, options for 176,634 shares granted under the 2000 Plan have been cancelled. |
The fair value of each option granted during the three and six months ended July 31, 2008 and
2007 was estimated on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 31, |
|
July 31, |
Stock Options |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Dividend yield |
|
None |
|
|
None |
|
|
None |
|
|
None |
|
Expected volatility |
|
|
42.0 |
% |
|
|
68.4 |
% |
|
|
45.4 |
% |
|
|
73.4 |
% |
Risk-free interest rate |
|
|
3.37 |
% |
|
|
4.90 |
% |
|
|
2.7 |
% |
|
|
4.6 |
% |
Expected life (in years) |
|
|
5.0 |
|
|
|
6.5 |
|
|
|
5.0 |
|
|
|
6.5 |
|
Weighted-average fair value at grant date |
|
$ |
5.30 |
|
|
$ |
8.12 |
|
|
$ |
4.45 |
|
|
$ |
3.84 |
|
In June 2008, the Company awarded each of its non-employee directors shares of restricted
Company common stock under the 2007 Plan having a market value on the date of grant of $60,000. The
vesting term of these awards is one year, assuming continued service. The vested shares under these
awards can not be sold until the directors separation from the Company, or upon an earlier
acquisition of the Company. The Company amortizes the fair market value of the awards at the time
of the grant to expense over the period of vesting. Recipients of restricted stock have the right
to vote such shares and receive dividends. The fair value of restricted stock awards is
19
determined based on the number of shares granted and the market value of the Companys common stock
on the grant date, adjusted for any forfeiture factor.
A summary of the status of the Companys restricted stock as of July 31, 2008 and changes
during the six months then ended are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Grant Date Fair |
|
|
Shares |
|
Par value |
|
Value |
Non-vested as of January 31,
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
27,708 |
|
|
$ |
0.001 |
|
|
$ |
12.99 |
|
Vested |
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of July 31, 2008 |
|
|
27,708 |
|
|
$ |
0.001 |
|
|
$ |
12.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At July 31 2008, unrecognized compensation expense related to unvested stock options and
unvested restricted shares was $29.4 million, which is expected to be recognized over a
weighted-average period of 3.7 years.
The Company accounts for stock-based compensation expense for non-employees using the fair
value method prescribed by EITF 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services and the
Black-Scholes option pricing model, and recorded the fair value of non-employee stock options as an
expense over the vesting term of the option.
Stock-based compensation expense for non-employees for the three months ended July 31, 2008
and 2007 was approximately $7,000 and $19,000, respectively. Stock-based compensation expense for
non-employees for the six months ended July 31, 2008 and 2007 was approximately $14,000 and
$37,000, respectively.
14. Income Taxes
The Company recorded a provision for income taxes of $1.0 million and $0.3 million for the
three months ended July 31, 2008 and 2007, respectively and $1.6 million and $0.6 million for the
six months ended July 31, 2008 and 2007, respectively. The Companys effective income tax rate was
23.7% and (36.1%) for the three months ended July 31, 2008 and 2007, respectively and 23.7% and
(23.2%) for the six months ended July 31, 2008 and 2007, respectively. Although the Company
recorded a net loss for the three and six months ended July 31, 2007, due to the federal
alternative minimum tax, state income taxes and tax on the earnings of certain foreign
subsidiaries, the Company recorded a provision for this period. The effective income tax rate is
based upon the estimated annual effective tax rate in compliance with SFAS 109 and other related
guidance. The Company updates the estimate of its annual effective tax rate at the end of each
quarterly period. The Companys estimate takes into account estimations of annual pre-tax income,
the geographic mix of pre-tax income and its interpretations of tax laws and the possible outcomes
of current and future audits.
The Company continued to provide a full valuation allowance for its net deferred tax assets at
July 31, 2008, as the Company believes it is more likely than not that the future tax benefits from
accumulated net operating losses and deferred taxes will not be realized. The Company continues to
assess the need for the valuation allowance at each balance sheet date based on all available
evidence. However, it is possible that the more likely than not criterion could be met in fiscal
2009 or a future period, which could result in the reversal of a significant portion or all of the
valuation allowance, which, at that time, would be recorded as a tax benefit in the consolidated
statement of operations. Any reversal of the valuation allowance
associated with the NuTech acquisition, approximately $5.7 million as
of July 31, 2008, would reduce goodwill, and then non-current
intangible assets to zero, with any remaining amount to be recorded
as a tax benefit.
The Company has an
unrecognized tax benefit of approximately $0.3 million, as of January 31, 2008
and $1.6 million as of July 31, 2008. The increase from January 31, 2008 was based on new information
causing the
20
reassessment of the measurement and recognition of the Companys tax attributes. The change in
the unrecognized tax benefit does not have an impact on the effective tax rate.
In general, the rules of Section 382 of the Internal Revenue Code (the Code) limit a
corporations ability to utilize existing net operating loss carryovers (NOLs) if the corporation
experiences an ownership change within the meaning of that Code section (an Ownership Change). An
Ownership Change results from transactions increasing the ownership of certain existing
stockholders and/or, new stockholders in the stock of a corporation by more than 50 percentage
points during a three year testing period.
The Company has determined that as a result of several Ownership Changes, the utilization of
its NOLs is subject to annual limitations. In addition, approximately $0.3 million of the federal NOLs
will expire unused and cannot be used by the Company.
The Companys practice is to recognize interest and/or penalties related to income tax matters
in income tax expense. The Company had no accrual for interest or penalties on the Companys
balance sheets at July 31, 2008 and 2007, and has not recognized interest or penalties in the
statement of operations for the three and six months ended July 31, 2008 or 2007.
The major domestic tax jurisdictions that remain subject to examination are: U.S. Federal
fiscal years 2004-2007 and U.S. states fiscal years 2004-2007. The Company is no longer
subject to examination by the U.S. Internal Revenue Service (IRS) for fiscal years prior to 2004,
although carryforward attributes that were generated prior to 2004 may still be adjusted upon
examination by the IRS if they either have been or will be used in a future period. There are
currently no state audits in progress. Within limited exceptions, the Company is no longer subject
to state or local examinations for years prior to 2004; however, carryforward attributes that were
generated prior to 2004 may still be adjusted upon examination by state or local tax authorities if
they either have been or will be used
in a future period. The major international tax jurisdictions that remain subject to
examination are: UK fiscal years 2004-2007, Japan fiscal years 2006-2007 and Australia
fiscal years 2005-2007.
15. Commitments and Contingencies
Guarantees and Indemnification Obligations
The Company enters into standard indemnification agreements in the ordinary course of
business. Pursuant to these agreements, the Company indemnifies and agrees to reimburse the
indemnified party for losses incurred by the indemnified party, generally the Companys customers,
in connection with any patent, copyright, trade secret or other proprietary right infringement
claim by any third party with respect to the Companys products. The term of these indemnification
agreements is generally perpetual. Based on historical information and information known as of July
31, 2008, the Company does not expect it will incur any significant liabilities under these
indemnification agreements.
Warranty
The Company provides warranties on most products and has established a reserve for warranty
based on identified warranty costs. The reserve is included as part of accrued expenses (Note 9) in
the accompanying balance sheets.
Activity related to the warranty accrual was as follows (in thousands):
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
Six Months Ended July 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Balance at beginning of period |
|
$ |
1,068 |
|
|
$ |
1,015 |
|
|
$ |
1,141 |
|
|
$ |
1,093 |
|
Provision |
|
|
506 |
|
|
|
496 |
|
|
|
948 |
|
|
|
930 |
|
Warranty usage * |
|
|
(626 |
) |
|
|
(581 |
) |
|
|
(1,141 |
) |
|
|
(1,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
948 |
|
|
$ |
930 |
|
|
$ |
948 |
|
|
$ |
930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Warranty usage includes expiration of product warranty |
16. Industry Segment and Geographic Information
SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information,
establishes standards for reporting information about operating segments. Operating segments are
defined as components of an enterprise for which separate financial information is available and
evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding
how to allocate resources and in assessing performance. The Company is organized as, and operates
in, one reportable segment: the development and sale of data warehouse appliances. The Companys
chief operating decision-maker is its Chief Executive Officer. The Companys Chief Executive
Officer reviews financial information presented on a consolidated basis, accompanied by information
about revenue by geographic region, for purposes of evaluating financial performance and allocating
resources. The Company and its Chief Executive Officer evaluate performance based primarily on
revenue in the geographic locations in which the Company operates. Revenue is attributed by
geographic location based on the location of the end customer.
Revenue, classified by the major geographic areas in which the Companys customers are
located, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
Six Months Ended July 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
North America |
|
$ |
36,796 |
|
|
$ |
20,695 |
|
|
$ |
65,197 |
|
|
$ |
42,059 |
|
International |
|
|
10,239 |
|
|
|
7,705 |
|
|
|
21,414 |
|
|
|
11,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
47,035 |
|
|
$ |
28,400 |
|
|
$ |
86,611 |
|
|
$ |
53,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys total assets, by geographic location (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
July 31, |
|
|
January 31, |
|
|
|
2008 |
|
|
2008 |
|
North America |
|
$ |
200,969 |
|
|
$ |
189,403 |
|
International |
|
|
16,305 |
|
|
|
9,349 |
|
|
|
|
|
|
|
|
Total |
|
$ |
217,274 |
|
|
$ |
198,752 |
|
|
|
|
|
|
|
|
17. Subsequent Event
On August 6, 2008, the Company entered into a purchase and distribution agreement with
Intelligent Integration Systems, Inc. to acquire technology including spatial analytic capabilities
and an extended SQL toolkit. Under the terms of the agreement, the Company will pay up to $6.0
million in cash through August 6, 2011 in exchange for an exclusive license to the technology with
transfer of ownership to the Company upon completion of the cash payments.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
22
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the unaudited condensed consolidated financial statements and
the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited
consolidated financial statements and notes thereto and managements discussion and analysis of
financial condition and results of operations included in the Companys Annual Report on Form 10-K
for the year ended January 31, 2008, which was filed with the Securities and Exchange Commission
(SEC) on April 18, 2008. This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of 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 below, and those discussed in
the section titled Risk Factors, set forth in Part II, Item 1A of this Quarterly Report on Form
10-Q. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views
as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and
developments will cause our views to change. However, while we may elect to update these
forward-looking statements at some point in the future, we have no current intention of doing so
except to the extent required by applicable law. You should, therefore, not rely on these
forward-looking statements as representing our views as of any date subsequent to the date of this
Report on Form 10-Q.
Overview
We were founded in August 2000 to develop data warehouse appliances that enable real-time
business intelligence. Our NPS appliance integrates database, server and storage platforms in a
purpose-built unit to enable detailed queries and analyses on large volumes of stored data. The
results of these queries and analyses provide organizations with actionable information to improve
their business operations. The amount of data that is being generated and stored by organizations
is exploding. As the volume of data continues to grow, enterprises have recognized the value of
analyzing such data to significantly improve their operations and competitive position. This
increasing amount of data and the importance of data analysis have led to a heightened demand for
data warehouses that provide the critical framework for data-driven enterprise decision-making and
business intelligence. Many traditional data warehouse systems were initially designed to aggregate
and analyze smaller quantities of data, using general-purpose database, server and storage
platforms patched together as a data warehouse system. Such patchwork architectures are often used
by default to store and analyze data, despite the fact that they are not optimized to handle
terabytes of constantly growing and changing data and as a result, are not as effective in handling
the in-depth analyses that large businesses are now requiring of their data warehouse systems. The
increasing number of users accessing the data warehouse and the sophistication of the queries
employed by these users is making the strain of using these legacy systems even more challenging
for many organizations.
Business intelligence solutions are still in their early stages of growth and their continued
adoption and growth in the marketplace remain uncertain. Additionally, our appliance approach
requires our customers to run their data warehouses in new and innovative ways and often requires
our customers to replace their existing equipment and supplier relationships, which they may be
unwilling to do, especially in light of the often critical nature of the components and systems
involved and the significant capital and other resources they may have previously invested.
Furthermore, purchases of our products involve material changes to established purchasing patterns
and policies. Even if prospective customers recognize the need for our products, they may not
select our NPS solution because they choose to wait for the introduction of products and
technologies that serve as a replacement or substitute for, or represent an improvement over, our
NPS solutions. Therefore, our future success also depends on our ability to maintain our leadership
position in the data warehouse market and to proactively address the needs of the market and our
customers to further drive the adoption of business intelligence and to sustain our competitive
advantage versus competing approaches to business intelligence and alternate product offerings.
We are currently headquartered in Marlborough, Massachusetts. Our personnel and operations are
also located throughout the United States, as well as in Canada, the United Kingdom, Australia,
France, Germany, Italy,
Japan, Korea and Poland. We expect to continue to add personnel in the United States and
internationally to provide
23
additional geographic sales and technical support coverage. Our fiscal
year ends on January 31. When we refer to a particular fiscal year, we are referring to the fiscal
year ended January 31 of that year. For example, fiscal 2009, refers to the fiscal year ended
January 31, 2009.
Revenue
We derive our revenue from sales of products and related services. We sell our data warehouse
appliances worldwide to large global enterprises, mid-market companies and government agencies
through our direct sales force as well as indirectly via distribution partners. To date, we have
derived the substantial majority of our revenue from customers located in the United States. For
each of the six months ended July 31, 2008 and 2007, U.S. customers accounted for approximately 70%
of our revenue. For fiscal 2008, 2007 and 2006, U.S. customers accounted for approximately 80%, 76%
and 88% of our revenue, respectively. On May 9, 2008, we acquired NuTech, an advanced analytics and
optimization solutions company. The results of NuTechs operations are
included in our consolidated financial statements since that date.
For the three and six months ended
July 31, 2008, NuTech accounted for approximately 4% and 2% of
our revenue, respectively. Its revenue is classified as
services revenue in our consolidated financial statements.
Product Revenue. The significant majority of our revenue is generated through the sale of our
NPS appliances, primarily to companies in the following vertical industries: telecommunications,
e-business, retail, financial services, analytic service providers, government and healthcare. Our
future revenue growth will depend in significant part upon further sales of our NPS appliances to
our existing customer base. In addition, increasing our sales to new customers in existing vertical
industries we currently serve and in other vertical industries that depend upon high-performance
data analysis is an important element of our strategy. We consider the further development of our
direct and indirect sales channels in domestic and international markets to be a key to our future
revenue growth and the global acceptance of our products. Our future revenue growth will also
depend on our ability to sustain the high levels of customer satisfaction generated by providing
high-touch, high-quality support. In addition, the market for our products is characterized by
rapid technological change, frequent new product introductions and evolving industry standards. Our
future revenue growth is dependent on the successful development and introduction of new products
and enhancements. Such new introductions and enhancements could reduce demand for our existing
products and cause customers to delay purchasing decisions until such new products and enhancements
are introduced. To address these risks we will seek to expand our sales and marketing efforts,
continue to pursue research and development as well as acquisition opportunities to expand and
enhance our product offering.
Services Revenue. We sell product maintenance services to our customers. In addition, we
offer installation, training and professional services to our customers. The percentage of our
total revenue derived from services was 23% for the six months ended July 31, 2008, 19% in each of
fiscal 2008 and 2007 and 15% in fiscal 2006.
Included in our service revenues for the six months ended July 31, 2008 is $1.7 million of
service revenues from NuTech. We anticipate that maintenance services will continue to be purchased
by new and existing Netezza customers and that services revenues, Netezza and NuTech consolidated,
will be between 20% and 25% of our total revenue going forward.
Cost of Revenue and Gross Profit
Cost of product revenue consists primarily of amounts paid to Sanmina-SCI Corporation, or
Sanmina, our contract manufacturer, in connection with the procurement of hardware components and
assembly of those components into our NPS appliance systems. Neither we nor Sanmina enter into
long-term supply contracts for our hardware components, which can cause our cost of product revenue
to fluctuate. These product costs are recorded when the related product revenue is recognized. Cost
of revenue also includes shipping, warehousing and logistics expenses, warranty reserves and
inventory write-downs to write down the carrying value of inventory to the lower of cost or market.
Shipping, warehousing and logistics costs are recognized as incurred. Estimated warranty costs are
recorded when the related product revenue is recognized.
24
Cost of services revenue consists primarily of salaries and employee benefits for our support
staff and worldwide installation and technical account management teams and amounts paid to third
parties to provide on-site hardware service.
Our gross profit has been and will continue to be affected by a variety of factors, including
the relative mix of product versus services revenue; our mix of direct versus indirect sales (as
sales through our indirect channels have lower average selling prices and gross profit); and
changes in the average selling prices of our products and services, which can be adversely affected
by competitive pressures. Additional factors affecting gross profit include the timing of new
product introductions, which may reduce demand for our existing product as customers await the
arrival of new products and could also result in additional reserves against older product
inventory, cost reductions through redesign of existing products and the cost of our systems
hardware. The data warehouse market is highly competitive and we expect this competition to
intensify in the future, especially as we move into additional vertical industries. If our market
share in such industries increases, we expect pricing pressure to increase, which will reduce
product gross margins.
If our customer base continues to grow, it will be necessary for us to continue to make
significant upfront investments in our customer service and support infrastructure to support this
growth. The rate at which we add new customers will affect the level of these upfront investments.
The timing of these additional expenditures could materially affect our cost of revenue, both in
absolute dollars and as a percentage of total revenue, in any particular period. This could cause
downward pressure on gross margins.
Operating Expenses
Operating expenses consist of sales and marketing, research and development, and general and
administrative expenses. Personnel-related costs are the most significant component of each of
these expense categories. Our headcount increased to 361 at July 31, 2008, from 225 at January 31,
2007. Included in this headcount increase are 48 employees from the NuTech acquisition. We expect
to continue to hire new employees to support our anticipated growth.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries and employee benefits, sales
commissions, marketing program expenses and allocated facilities expenses. We plan to continue to
invest in sales and marketing by increasing the number of our sales personnel worldwide, expanding
our domestic and international sales and marketing activities, and further building brand
awareness. Accordingly, we expect sales and marketing expenses to continue to increase in total
dollars although we expect these expenses to decrease as a percentage of total revenue. Generally,
sales personnel are not immediately productive and thus sales and marketing expenses related to new
sales hires are not immediately accompanied by higher revenue. Hiring additional sales personnel
may reduce short-term operating margins until the sales personnel become productive and generate
revenue. Accordingly, the timing of hiring sales personnel and the rate at which they become
productive will affect our future performance.
Research and Development Expenses
Research and development expenses consist primarily of salaries and employee benefits, product
prototype expenses, allocated facilities expenses and depreciation of equipment used in research
and development activities. In addition to our U.S. development teams, we use an offshore
development team employed by a contract engineering firm in Pune, India. Research and development
expenses are recorded as incurred. We devote substantial resources to the development of additional
functionality for existing products and the development of new products. We intend to continue to
invest significantly in our research and development efforts because we believe they are essential
to maintaining and increasing our competitive position. We expect research and development expenses
to increase in total dollars, although we expect such expense to decrease as a percentage of total
revenue.
General and Administrative Expenses
25
General and administrative expenses consist primarily of salaries and employee benefits,
allocated facilities expenses, fees for professional services such as legal, accounting and
compliance, investor relation expenses and insurance premiums, including premiums related to
director and officer insurance. We expect general and administrative expenses to continue to
increase in total dollars and to increase slightly as a percentage of revenue in fiscal 2009 as we
continue to invest in infrastructure to support continued growth and incur additional expenses
related to being a publicly traded company.
Other
Interest Income (Expense), Net
Interest income (expense), net primarily consists of interest income on investments and cash
balances and interest expense on our outstanding debt.
Other Income (Expense), Net
Other income (expense), net primarily consists of losses or gains on translation of non-U.S.
dollar transactions into U.S. dollars and mark-to-market adjustments on preferred stock warrants.
As these warrants for our preferred stock are no longer outstanding, there will be no
mark-to-market adjustment expense going forward.
Critical Accounting Policies and Use of Estimates
Our consolidated financial statements are prepared in accordance with GAAP. These accounting
principles require us to make certain estimates, judgments and assumptions that can affect the
reported amounts of assets and liabilities as of the dates of the consolidated financial
statements, the disclosure of contingencies as of the dates of the consolidated financial
statements, and the reported amounts of revenue and expenses during the periods presented. We
evaluate these estimates, judgments and assumptions on an ongoing basis. Although we believe that
our estimates, judgments and assumptions are reasonable under the circumstances, actual results may
differ from those estimates.
We believe that of our significant accounting policies, the following accounting policies
involve the most judgment and complexity:
|
|
|
revenue recognition; |
|
|
|
|
stock-based compensation; |
|
|
|
|
inventory valuation; |
|
|
|
|
warranty reserves; |
|
|
|
|
accounting for income taxes |
|
|
|
|
valuation of investments; and |
|
|
|
|
valuation of goodwill and acquired intangible assets. |
Accordingly, we believe the policies set forth above are the most critical to aid in fully
understanding and evaluating our financial condition and results of operations. If actual results
or events differ materially from the estimates, judgments and assumptions used by us in applying
these policies, our reported financial condition and results of operations could be materially
affected. Additional information about these critical accounting policies may be found in the
Managements Discussion and Analysis of Financial Condition and Results of Operations
26
section
included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2008. The critical
accounting policies included in our Annual Report on Form 10-K for the fiscal year ended
January 31, 2008 have not materially changed, other than that the critical accounting policy
entitled Valuation of Goodwill and Acquired Intangible Assets has been added as a result of our
acquisition of NuTech.
Goodwill
and Acquired Intangible Assets
Intangible assets are valued based on estimates of future
cash flows and amortized over their estimated useful lives. We evaluate goodwill
and intangible assets for impairment annually and when events occur or circumstances
change that may reduce the value of the asset below its carrying amount using forecasts
of discounted future cash flows. Events or circumstances that might require an interim
evaluation include unexpected adverse business conditions, economic factors, unanticipated
technological changes or competitive activities, loss of key personnel and acts by governments
and courts. Goodwill and intangible
assets totaled $3.3 million and $3.3 million, respectively, at July 31, 2008. Estimates of
future cash flows require
assumptions related to revenue and operating income growth, asset-related expenditures,
working capital levels and other factors. Different assumptions from
those made in our analysis could materially affect projected cash flows
and our
evaluation of goodwill for impairment. Should the fair value of our
goodwill or indefinite-lived intangible assets decline because of reduced operating performance,
market declines, or other indicators of impairment, or as a result of changes in the discount
rate, charges for impairment may be necessary.
Results of Operations
The following table sets forth our consolidated results of operations for the periods shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Change |
|
|
|
Three Months Ended July 31, |
|
|
Six Months Ended July 31, |
|
|
Three Months |
|
|
Six Months |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Ended July 31, |
|
|
Ended July 31, |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
35,134 |
|
|
$ |
22,933 |
|
|
$ |
66,460 |
|
|
$ |
43,510 |
|
|
|
53.2 |
% |
|
|
52.7 |
% |
Services |
|
|
11,901 |
|
|
|
5,467 |
|
|
|
20,151 |
|
|
|
10,232 |
|
|
|
117.7 |
% |
|
|
96.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
47,035 |
|
|
|
28,400 |
|
|
|
86,611 |
|
|
|
53,742 |
|
|
|
65.6 |
% |
|
|
61.2 |
% |
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
|
14,005 |
|
|
|
9,481 |
|
|
|
26,599 |
|
|
|
17,876 |
|
|
|
47.7 |
% |
|
|
48.8 |
% |
Services |
|
|
2,888 |
|
|
|
1,956 |
|
|
|
4,992 |
|
|
|
3,604 |
|
|
|
47.6 |
% |
|
|
38.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of
revenue |
|
|
16,893 |
|
|
|
11,437 |
|
|
|
31,591 |
|
|
|
21,480 |
|
|
|
47.7 |
% |
|
|
47.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
30,142 |
|
|
|
16,963 |
|
|
|
55,020 |
|
|
|
32,262 |
|
|
|
77.7 |
% |
|
|
70.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
15,292 |
|
|
|
9,962 |
|
|
|
28,622 |
|
|
|
19,631 |
|
|
|
53.5 |
% |
|
|
45.8 |
% |
Research and
development |
|
|
8,014 |
|
|
|
5,572 |
|
|
|
15,262 |
|
|
|
11,056 |
|
|
|
43.8 |
% |
|
|
38.0 |
% |
General and
administrative |
|
|
3,669 |
|
|
|
1,978 |
|
|
|
6,782 |
|
|
|
3,733 |
|
|
|
85.5 |
% |
|
|
81.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses |
|
|
26,975 |
|
|
|
17,512 |
|
|
|
50,666 |
|
|
|
34,420 |
|
|
|
54.0 |
% |
|
|
47.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
3,167 |
|
|
|
(549 |
) |
|
|
4,354 |
|
|
|
(2,158 |
) |
|
|
|
|
|
|
|
|
Interest income |
|
|
1,036 |
|
|
|
195 |
|
|
|
2,779 |
|
|
|
217 |
|
|
|
431.3 |
% |
|
|
1180.6 |
% |
Interest expense |
|
|
|
|
|
|
502 |
|
|
|
|
|
|
|
715 |
|
|
|
|
|
|
|
|
|
Other income (expense),
net |
|
|
(86 |
) |
|
|
51 |
|
|
|
(219 |
) |
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
income taxes |
|
|
4,117 |
|
|
|
(805 |
) |
|
|
6,914 |
|
|
|
(2,436 |
) |
|
|
|
|
|
|
|
|
Income tax provision |
|
|
976 |
|
|
|
291 |
|
|
|
1,641 |
|
|
|
565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
3,141 |
|
|
$ |
(1,096 |
) |
|
$ |
5,273 |
|
|
$ |
(3,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue was $47.0 million and $28.4 million in the three months ended July 31, 2008 and
2007, respectively, representing an increase of 66%. Total revenue was $86.6 million and $53.7
million for the six months ended July 31, 2008 and 2007, respectively, representing an increase of
61%, of which 3% was attributable to revenue generated by NuTech.
27
Revenue growth in the three and six months ended July 31, 2008 reflects both organic growth
and revenue from the NuTech acquisition. NuTech revenue has been
included in our results of operations since May 9, 2008. Accordingly, results for the three and six
months ended July 31, 2007 do not include NuTech revenue, while results for the three and six
months ended July 31, 2008 include approximately three months of NuTech revenue.
Product revenue was $35.1 million and $22.9 million in the three months ended July 31, 2008
and 2007, respectively, representing an increase of 53%. This increase was primarily driven by a
growing acceptance and need for data warehouse systems and is indicative of customers valuing the
capabilities and return on investment that they provide. This increase was based on increased sales
volume, due primarily to sales to existing customers rather than price increases. Product revenue
related to existing customer sales increased $11.0 million. This increase was the result of typical fluctuations in our revenue and was not caused by any unusual transaction during the periods presented, nor is it indicative of any additional increases that we may expect to occur in future periods. Product revenue related to new customer sales
increased by $1.2 million, as the number of new customers added increased to 18 in the three months
ended July 31, 2008, from 8 new customers added in the three months ended July 31, 2007, bringing
our total installed base of Netezza customers to 209.
Geographically, 81% of our product revenue was in North America and 19% was international for
the three months ended July 31, 2008, as compared to 71% of our product revenue in North America
and 29% international for the three months ended July 31 2007. The number of sales and marketing employees increased to 135 at July
31, 2008, from 96 at July 31, 2007. Our enhanced visibility and reputation in our industry, as our
base of referenceable customers has grown, was an important factor in generating additional
sales.
Product revenue was $66.5 million and $43.5 million in the six months ended July 31, 2008 and
2007, respectively, representing an increase of 53%. This increase was based on increased sales
volume, due primarily to
sales to existing customers rather than price increases. Product revenue related to existing
customer sales increased $14.2 million. This increase was the result of typical fluctuations in our revenue and was not caused by any unusual transaction during the periods presented, nor is it indicative of any additional increases that we may expect to occur in future periods. Product revenue related to new customer sales increased by $8.8 million
as the number of new customers increased to 49 in the six months ended July 31, 2008, from 22 new
customers in the six months ended July 31, 2007.
Geographically, 76% of our product revenue was in North America and 24% was international for
both the six months ended July 31, 2008 and 2007.
Services revenue was $11.9 million and $5.5 million in the three months ended July 31, 2008
and 2007, respectively, representing an increase of 118%, of which
31% was attributable to service revenue generated by NuTech. This increase was the result of increased
product sales, and
accompanying sales of new maintenance and support contracts, combined with the renewal of
maintenance and support contracts by existing customers. In addition, we recorded $1.7 million of
service revenue generated by NuTech in the three months ended July 31, 2008.
Services revenue was $20.2 million and $10.2 million in the six months ended July 31, 2008 and
2007, respectively, representing an increase of 97%, of which 17% was
attributable to service revenue generated by NuTech. This increase was the result of increased
product sales, and accompanying sales of new maintenance and support contracts combined with the
renewal of maintenance and support contracts by existing customers. In addition, we recorded $1.7
million of service revenue generated by NuTech in the six months ended July 31, 2008. All of our
customers to date have purchased first-year annual maintenance and support services and
substantially all of our customers renewed their maintenance and support agreements.
Gross Margin
28
Total gross margin was 64% for both the three and six months ended July 31, 2008 and 60% for
both the three and six months ended July 31, 2007.
Product gross margin was 60% for both the three and six months ended July 31, 2008 and 59% for
both the three and six months ended July 31, 2007. These increases in the three and six months
ended July 31, 2008 were due primarily to a reduction in the cost of our hardware components.
Services gross margin was 76% and 64% for the three months ended July 31, 2008 and 2007,
respectively. The increase in the services gross margin for the three months ended July 31, 2008
was a result of our services revenue growth of 118% while cost of service revenue increased only
48%. Services headcount increased 44% to 46 at July 31, 2008
from 32 at July 31, 2007. This headcount increase includes 11 as a result of the NuTech
acquisition.
Services gross margin was 75% and 65% for the six months ended July 31, 2008 and 2007,
respectively. The increase in the six months ended July 31, 2008 was a result of our services
revenue growth of 97% while cost of service revenue increased only 39%.
Sales and Marketing Expenses
Sales and
marketing expenses increased $5.3 million, or 54%, of which 3%
was attributable to NuTech expenses, to $15.3 million in the three
months ended July 31, 2008 from $10.0 million in the three months ended July 31, 2007. As a
percentage of revenue, sales and marketing expenses were 33% and 35% for the three months ended
July 31, 2008 and 2007, respectively, as a result of our revenue growth and attainment of economies of scale.
Sales and marketing
expenses increased $9.0 million, or 46%, of which 2% was
attributable to NuTech expenses, to $28.6 million in the six
months ended July 31, 2008 from $19.6 million in the six months ended July 31, 2007. As a
percentage of revenue, sales and marketing expenses were 33% and 37% for the six months ended July 31, 2008 and 2007, respectively, as a result of our revenue growth and attainment of economies of scale.
The increase in sales and marketing expenses of $5.3 million in the three months ended July
31, 2008 was due to increases of $1.5 million in salaries and employee benefits, $1.3 million in
sales commissions, $0.6 million in sales travel, $0.5 million in sales office rent and office costs
to support the continued geographic expansion of the
sales force, $0.4 million in marketing programs, $0.3 million in stock-based compensation
expense, $0.2 million in partner referral fees, and $0.2 million in recruiting fees.
The increase in sales and marketing expenses of $9.0 million in the six months ended July 31,
2008 was due to increases of $2.8 million in sales commissions, $2.2 million in salaries and
employee benefits, $0.8 million in sales travel, $0.8 million in partner referral fees, $0.8
million in sales office rent and office costs to support the continued geographic expansion of the
sales force, $0.7 million in stock-based compensation expense, $0.5 million in marketing programs,
and $0.4 million in recruiting fees.
The number of sales and marketing employees increased to 135 at July 31, 2008, which includes
2 as a result of the NuTech acquisition, from 96 at July 31, 2007, in order to expand our sales
force to provide better geographic distribution and market penetration.
Research and Development Expenses
Research and development expenses increased $2.4 million, or 44%, to $8.0 million in the three
months ended July 31, 2008 from $5.6 million in the three months ended July 31, 2007. As a
percentage of revenue, research and development expenses were 17% and 20% for the three months
ended July 31, 2008 and 2007, respectively, as a result of our revenue growth and attainment of economies of scale.
Research and development expenses increased $4.2 million, or 38%, to $15.3 million in the six
months ended July 31, 2008 from $11.1 million in the six months ended July 31, 2007. As a
percentage of revenue, research and development expenses were 18% and 21% for the six months ended
July 31, 2008 and 2007, respectively, as a result of our revenue growth and attainment of economies of scale.
29
The increase in research and development expenses of $2.4 million in the three months ended
July 31, 2008 was due primarily to increases of $1.3 million in salaries, benefits and offshore
consulting costs, $0.4 million in stock-based compensation expense, $0.2 million in allocated
facility expense, $0.2 million in depreciation expense, and $0.2 million in prototype expense and
inventory expense.
The increase in research and development expenses of $4.2 million in the six months ended July
31, 2008 was due to increases of $2.2 million in salaries, benefits and offshore consulting costs,
$0.7 million in stock-based compensation expense, $0.6 million in depreciation expense, $0.4
million in prototype expense and inventory expense, and $0.3 million in allocated facility expense.
The number of research and development employees increased to 107 at July 31, 2008 from 86 at
July 31, 2007, to help us broaden and improve the development of new technology and product
enhancements. The offshore development team from our contract engineering firm increased to 65
people at July 31, 2008 from 54 people at July 31, 2007, in order to take advantage of the cost
efficiencies associated with offshore research and development resources.
General and Administrative Expenses
General and
administrative expenses increased $1.7 million, or 85%, of which
25% was attributable to NuTech expenses, to $3.7 million in the
three months ended July 31, 2008 from $2.0 million in the three months ended July 31, 2007. As a
percentage of revenue, general and administrative expenses were 8% and 7% for the three months
ended July 31, 2008 and 2007, respectively.
General and administrative
expenses increased $3.1 million, or 82%, of which 14% was
attributable to NuTech expenses, to $6.8 million in the six
months ended July 31, 2008 from $3.7 million in the six months ended July 31, 2007. As a percentage
of revenue, general and administrative expenses were 8% and 7% for the six months ended July 31,
2008 and 2007, respectively.
The increase in general and administrative expenses of $1.7 million in the three months ended
July 31, 2008 was due primarily to increases of $0.8 million in salaries and benefits, $0.2 million
in audit, tax, legal, insurance and consulting costs, all of which increased as a result of being a
public company, $0.2 million in stock-based compensation
expense, $0.2 million in computer equipment and software
costs, and $0.1 million in allocated facility expense.
The increase in general and administrative expenses of $3.1 million in the six months ended
July 31, 2008 was due primarily to increases of $1.1 million in salaries and benefits, $0.9 million
in audit, tax, legal, insurance and consulting costs, $0.3 million in stock-based compensation
expense, $0.4 million in computer equipment and software costs, and $0.2 million in allocated facility expense.
The number of general and administrative employees increased to 32 at July 31, 2008, which
includes 3 as a result of the NuTech acquisition, from 19 at July 31, 2007 to ensure we had
appropriate infrastructure to support the growth of our organization and to support the additional
demands of public company compliance.
Interest Income (Expense), Net
We recorded $1.0 million of interest income, net in the three months ended July 31, 2008 as
compared to $0.3 million of interest expense, net in the three months ended July 31, 2007. This
change was primarily due to an increase of $0.8 million in interest income resulting from the
investment of proceeds from our initial public offering in July 2007 and a decrease in interest
expense of $0.5 million due to the full repayment in July 2007 of our bank loan. We expect interest
income, net to remain near its current level, as we continue to
generate interest on our investments, and currently have no anticipated
borrowings. The components of interest income, net for the three months ended July 31, 2008 were
interest income of $1.0 million and interest expense of $0. The components of interest expense, net
for the three months ended July 31, 2007 were interest expense of $0.5 million and interest income
of $0.2 million.
We recorded $2.8 million of interest income, net in the six months ended July 31, 2008 as
compared to $0.5 million of interest expense, net in the six months ended July 31, 2007. This
change was due to an increase of
30
$2.6 million in interest income resulting from the investment of
proceeds from our initial public offering in July 2007 and a decrease in interest expense of $0.7
million. We expect interest income, net to remain near its current level, as we continue to
generate interest on our investments, and currently have no
anticipated borrowings. The components of interest income, net for the six months ended
July 31, 2008 were interest income of $2.8 million and interest expense of $0. The components of
interest expense, net for the six months ended July 31, 2007 were interest expense of $0.7 million
and interest income of $0.2 million.
Other Income (Expense), Net
We incurred other expense, net of $0.1 million in the three months ended July 31, 2008 as
compared to other income, net of $0.1 million in the three months ended July 31, 2007. The
components of other expense, net, for the three months ended
July 31, 2008 were transaction losses for activities in our foreign
subsidiaries, losses associated with changes in the fair value of foreign currency
forward contracts, and a one time loss on disposal of fixed assets. The components of other income, net
in the three months ended July 31, 2007 were transaction gains for activities in our foreign subsidiaries, partially offset by
early debt repayment fees incurred on our debt payoff.
We incurred other expense, net of $0.2 million in the six months ended July 31, 2008 as
compared to other income, net of $0.2 million in the six months ended July 31, 2007. The components
of other expense, net, for the six months ended July 31, 2008
were transaction losses for activities in our foreign subsidiaries,
losses associated with changes in the fair value of foreign currency
forward contracts, and a
one time loss on disposal of fixed assets. The components of other income, net of $0.2 million in
the six months ended July 31, 2007 were $0.6 million of
transaction gains for activities in our foreign subsidiaries, partially offset by $0.2
million expense from the mark-to-market adjustments on preferred stock warrants and $0.1 million of
early debt repayment fees incurred on our debt payoff.
Provision for Income Taxes
We recorded a provision for income taxes of $1.0 million for the three months ended July 31,
2008, as compared to $0.3 million for the three months ended July 31, 2007.
We recorded a provision for income taxes of $1.6 million for the six months ended July 31,
2008, as compared to $0.6 million for the six months ended July 31, 2007. The provision for all of
these periods was primarily attributable to federal alternative minimum tax, state income taxes and
taxes on the earnings of certain foreign subsidiaries.
Liquidity and Capital Resources
As of July 31, 2008, our principal sources of liquidity were cash and cash equivalents of
$99.1 million, short term investments of $2.0 million and accounts receivable of $17.3 million.
Since our inception, we have funded our operations using a combination of issuances of
convertible preferred stock, which provided us with aggregate net proceeds of $73.3 million, cash
collections from customers and a term loan credit facility and a revolving credit facility with
Silicon Valley Bank. In July 2007, we raised $113.0 million of proceeds, net of underwriting
discounts and expenses, in our initial public offering. In the future, we anticipate that our
primary sources of liquidity will be cash generated from our operating activities, as our credit
facility with Silicon Valley Bank expired as of January 31, 2008 and was not renewed.
Our principal uses of cash historically have consisted of payroll and other operating
expenses, repayments of borrowings, purchases of property and equipment primarily to support the
development of new products and purchases of inventory to support our
sales and the
volume of evaluation units located at customer locations that enable our customers and prospective
customers to test our equipment prior to purchasing. The
31
number of evaluation units has
increased due to our overall growth and an increase in our pipeline of potential
customers.
The following table shows our cash flows from operating activities, investing activities and
financing activities for the stated periods:
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|
|
|
|
|
|
|
|
|
|
Six Months Ended July 31, |
|
|
2008 |
|
2007 |
|
|
(in thousands) |
Net cash provided by operating activities |
|
$ |
25,306 |
|
|
$ |
7,840 |
|
Net cash provided by (used in) investing activities |
|
$ |
25,609 |
|
|
$ |
(2,814 |
) |
Net cash provided by financing activities |
|
$ |
1,892 |
|
|
$ |
107,139 |
|
At July 31, 2008, we held ARSs totaling $51.3 million. These ARSs, most of which are AAA-rated
bonds collateralized by federally guaranteed student loans, are long-term variable rate bonds tied
to short-term interest rates that are reset through a Dutch auction process that typically occurs
every 7 to 35 days. Historically, the carrying value (par value) of the ARSs approximated fair
market value due to the resetting of variable interest rates. Beginning in late February 2008,
however, the auctions for ARSs then held by us were unsuccessful. As a result, the interest rates
on the investments reset to the maximum rate per the applicable investment offering statements. We
will not be able to liquidate the affected ARSs until a future auction on these investments is
successful, a buyer is found outside the auction process, the securities are called or refinanced
by the issuer, or the securities mature. Due to these liquidity issues, we performed a discounted
cash flow analysis to determine the estimated fair value of these investments. The discounted cash
flow analysis performed by us considered the timing of expected future successful auctions, the
impact of extended periods of maximum interest rates, collateralization of underlying security
investments and the credit worthiness of the issuer. The discounted cash flow analysis assumes a
discount rate of 4.57%, expected term of three years and an illiquidity discount of 1.5-1.8%. The
discount rate was determined using a proxy based upon the current market rates for successful
auctions within the AAA-rated ARS market. The expected term was based on managements estimate of
future liquidity. The illiquidity premium was based on the
levels federal insurance or FFELP backing for each security. As a result, as of July 31,
2008, we recorded an unrealized loss of $2.9 million related to the temporary impairment of the
ARSs, which was included in accumulated other comprehensive loss on our consolidated balance sheet.
Our valuation of the ARSs is sensitive to market conditions and managements judgment and could
change significantly based on the assumptions used. If we had
used a term of one year or five years and a discount rate of 3.80% and 5.21% respectively, the
gross unrealized loss would have been $0.6 million or $5.7 million, respectively. If we had used a
term of three years and a discount rate of 3.57% or 5.57%, the gross unrealized loss would have
been $1.4 million or $4.3 million, respectively. If we had used a term of three years and
illiquidity discounts of 1.0% or 2.0%, the gross unrealized loss would have been $2.1 million or
$3.5 million, respectively. Based on our ability to access our cash and short-term investments and
our expected cash flows, we do not anticipate the current lack of liquidity on these ARSs to have a
material impact on our financial conditions or results of operations during fiscal 2009.
Cash Provided By Operating Activities
Net cash provided by operating activities was $25.3 million for the six months ended July 31,
2008 and primarily consisted of an increase in deferred revenues of $12.8 million primarily due to
increased deferred maintenance revenue which is a result of increased product sales, net income of
$5.3 million, a decrease in accounts receivable of $3.2 million primarily due to the receipt of
customer payments, and a decrease in inventory of $1.9 million. In addition, in the six months
ended July 31, 2008 we had stock-based compensation expense of $3.6 million and depreciation and
amortization expense of $2.3 million, each of which is a non-cash expense. These sources of cash
were partially offset by a decrease in accounts payable of $1.8 million, a decrease in accrued
expenses of $1.3 million and an increase in other assets of $0.6 million.
32
Net cash provided by operating activities was $7.8 million for the six months ended July 31,
2007 and primarily consisted of a decrease in accounts receivable of $13.2 million primarily due to
the receipt of customer payments and an increase deferred revenues of $12.9 million primarily due
to increased deferred maintenance revenue which is a result of increased product sales. In
addition, in the six months ended July 31, 2007 we had stock-based compensation expense of $1.9
million and depreciation expense of $1.5 million, each of which is a non-cash expense. These
sources of cash were partially offset by a net decrease in accounts payable and accrued expenses of
$9.3 million, an increase in inventory of $6.9 million used to fund our net increase in inventory
primarily used to provide additional evaluation units to our increasing customer base and
prospective customers, a net loss of $3.0 million, and an increase in other assets of $2.7 million.
Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities was $25.6 million for the six months ended July 31,
2008, which primarily consisted of $41.9 million of sales and maturities of our investments. These
proceeds were partially offset by $7.4 million used to purchase our investments, $6.2 million used
to acquire NuTech, $1.6 million of capital expenditures, and $1.1 million used to purchase other
assets.
Net cash used in investing activities was $2.8 million for the six months ended July 31, 2007,
comprised primarily of capital expenditures.
Cash Provided by Financing Activities
Net cash provided by financing activities was $1.9 million for the six months ended July 31,
2008, which primarily consisted of proceeds received from the issuance of common stock upon the
exercise of stock options.
Net cash provided by financing activities was $107.1 million for the six months ended July 31,
2007, which primarily consisted of $113.8 million of proceeds from issuance of common stock, which
includes proceeds from our initial public offering, and $8.0 million of borrowings under our debt
facilities, partially offset by repayment of $14.6 million under our debt facilities.
Contractual Obligations
The following is a summary of our contractual obligations as of July 31, 2008:
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|
|
|
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|
|
|
|
Less than |
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|
|
|
|
|
|
|
|
More than |
Contractual obligations |
|
Total |
|
1 year |
|
1 3 Years |
|
3 5 Years |
|
5 Years |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
Operating lease
obligations |
|
|
12,568 |
|
|
|
1,388 |
|
|
|
3,478 |
|
|
|
3,456 |
|
|
|
4,246 |
|
Purchase obligations (1) |
|
|
12,386 |
|
|
|
12,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Purchase obligations primarily represent the value of purchase orders issued to our contract
manufacturer, Sanmina, for the procurement of assembled NPS appliance systems for the next
three months. |
We believe that our cash and cash equivalents of $99.1 million, short term investments of $2.0
million and accounts receivable of $17.3 million at July 31, 2008, together with any cash flows
from operations, will be
sufficient to fund our projected operating requirements for the foreseeable future. Our future
working capital requirements will depend on many factors, including the rate of revenue growth, our
introduction of new products or enhancements, our expansion of sales and marketing and product
development activities. However, to the extent that our cash and cash equivalents, our short term
marketable securities and our cash flow from operating activities are insufficient to fund our
future activities, we may need to raise additional funds through bank credit arrangements or a
secondary public offering.
Off-Balance Sheet Arrangements
33
We did not have during the periods presented, and we do not currently have, any off-balance
sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities
or financial partnerships, which are often referred to as structured finance or special purpose
entities, established for the purpose of facilitating financing transactions that do not have to be
reflected on our balance sheet.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115, or SFAS 159. SFAS 159
allows companies to measure certain financial assets and liabilities at fair value. The fair value
option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new
election date occurs. If the fair value option is elected for an instrument, SFAS 159 specifies
that unrealized gains and losses for that instrument shall be reported in earnings at each
subsequent reporting date. We adopted SFAS 159 on February 1, 2008 and elected not to measure
eligible financial assets and liabilities at fair value. Accordingly, the adoption of SFAS 159 did
not have a material impact on our financial position and results of operations.
In December 2007, the FASB issued
SFAS No. 141 (revised 2007), Business Combinations
(SFAS 141(R)) and SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements, an amendment of Accounting
Research Bulletin No. 51(SFAS 160). SFAS 141(R) will change how
business acquisitions are accounted for and will impact financial statements both
on the acquisition date and in
subsequent periods. SFAS 160 will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests and
classified as a component of equity. The provisions of SFAS 141(R) and
SFAS 160 are effective for fiscal years beginning on or after
December 15, 2008. We are currently evaluating the potential impact of
adoption of SFAS 141(R) and SFAS 160 and have not yet determined the impact,
if any, that their adoption will have on our results of operations or financial condition.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful
Life of Intangible Assets, or FSP 142-3. FSP 142-3 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years;
accordingly, we will adopt FSP 142-3 in the fiscal year ending January 31, 2010. FSP 142-3 amends
the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill
and Other Intangible Assets, or SFAS 142. FSP 142-3 is intended to improve the consistency between
the useful life of an intangible asset determined under SFAS 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS 141(R) and other United States
generally accepted accounting principles. We are currently evaluating the impact, if any, of the
adoption of FSP 142-3 will have on our consolidated financial position, results of operations and
cash flows.
In June 2008, the FASB issued
FASB Staff Position EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are
Participating Securities (FSP EITF 03-6-1). FSP
EITF 03-6-1 addresses whether instruments granted in
share-based payment transactions are participating securities
prior to vesting and therefore need to be included in calculating
earnings per share under the two-class method described
in SFAS No. 128, Earnings per Share. Additionally, FSP
EITF 03-6-1 requires companies to treat unvested share-based
payment awards that have non-forfeitable rights to dividend or
dividend equivalents as a separate class of securities in
calculating earnings per share and is effective for financial
statements issued for fiscal years beginning after December 15, 2008; early
adoption is not permitted. We do not expect FSP EITF 03-6-1 to
affect our results of operations or earnings per share.
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Item 3. |
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Quantitative and Qualitative Disclosures About Market Risk |
Foreign Currency Risk
Our international sales and marketing operations incur expenses that are denominated in
foreign currencies. These expenses could be materially affected by currency fluctuations. Our
exposures are to fluctuations in exchange rates for the U.S. dollar versus the British pound,
Australian dollar, the Euro, the Canadian dollar, the Polish zloty. the Korean won and the Japanese
yen. Changes in currency exchange rates could adversely affect our consolidated
results of operations or financial position. Additionally, our international sales and
marketing operations maintain cash balances denominated in foreign currencies. In order to decrease
the inherent risk associated with translation of foreign cash balances into our reporting currency,
we have not maintained excess cash balances in foreign currencies. As of July 31, 2008, we had
$10.1 million of cash in foreign accounts. We enter into derivative transactions, specifically
foreign currency forward contracts, to manage our exposure to fluctuations in foreign exchange
rates that arise, primarily from our foreign currency-denominated receivables and payables. The
contracts are in British pounds, Australian dollars and Japanese yen, typically have maturities of
one month and require an exchange of foreign currencies for U.S. dollars at maturity of the
contracts at rates agreed to at inception of the
34
contracts. We do not enter into or hold
derivatives for trading or speculative purposes. Generally, we do not designate foreign currency
forward contracts as hedges for accounting purposes, and changes in the fair value of these
instruments are recognized immediately in current earnings. Because we enter into forward contracts
only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be
offset by the loss or gain on the forward contract. Gains and losses on forward contracts and
foreign denominated receivables and payables are included in other income (expense), net.
At July 31, 2008, we had outstanding foreign currency forward contracts with an aggregate
notional value of $11.0 million, denominated in British pounds, Australian dollars and Japanese
yen. The mark-to-market effect associated with these contracts was a net unrealized loss of
approximately $23,000 at July 31, 2008. Net realized gains and losses associated with exchange
rate fluctuations on forward contracts and the underlying foreign currency exposure being hedged
were immaterial for all periods presented.
Interest Rate Risk
We had a cash, cash equivalents and investments balance of $152.4 million at July 31, 2008,
which was held for working capital purposes. We do not enter into investments for trading or
speculative purposes. We do not believe that we have any material exposure to changes in the fair
value of these investments as a result of changes in interest rates. Declines in interest rates,
however, will reduce future investment income, and increases in interest rates may increase future
interest expense.
Our exposure to market risk for changes in interest rates relates primarily to our investment
portfolio. We place
our investments with high quality issuers and, by policy, limit the amount of risk by investing
primarily in money market funds, United States Treasury obligations, high-quality corporate
obligations and certificates of deposit.
At July 31, 2008, we held $51.3 million in ARSs that have experienced failed auctions, which
has prevented us from liquidating those investments. As a result, we have classified these
investments as long-term assets in our consolidated balance sheet as of July 31, 2008 and recorded
an unrealized loss of $2.9 million related to the temporary impairment of the ARSs. This
impairment has been included in accumulated other comprehensive loss on our consolidated balance
sheet. See Note 3 to the accompanying financial statements for a description of how we value these
ARSs. Our valuation of the ARSs is sensitive to market conditions and managements judgment and
could change significantly based on the assumptions used. If we had used a term of one year or five
years and a discount rate of 3.80% and 5.21% respectively, the gross unrealized loss would have
been $0.6 million or $5.7 million, respectively. If we had used a term of three years and a
discount rate of 3.57% or 5.57%, the gross unrealized loss would have been $1.4 million or $4.3
million, respectively. If we had used a term of three years and illiquidity discounts of 1.0% or
2.0%, the gross unrealized loss would have been $2.1 million or $3.5 million, respectively. Based
on our ability to access our cash and short-term investments and our expected cash flows, we do not
anticipate the current lack of liquidity on these ARSs to have a material impact on our financial
conditions or results of operations during fiscal 2009.
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Item 4. |
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Controls and Procedures |
Our management, with the participation of our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures as of July 31, 2008.
The term disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended, or the Exchange Act, means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SECs rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the companys management, including its principal executive and
principal financial officers,
35
or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of July 31, 2008, our chief executive officer and chief
financial officer concluded that, as of such date, our disclosure controls and procedures were
effective at the reasonable assurance level.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the three months ended July 31, 2008 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
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Item 1. |
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Legal Proceedings |
From time to time, we may become involved in legal proceedings arising in the ordinary course
of our business. We are not presently a party to any material legal proceedings.
Risks Related to Our Business and Industry
An investment in our common stock involves a high degree of risk. You should carefully
consider the risks and uncertainties described below together with all of the other information
appearing elsewhere in this Quarterly Report on Form 10-Q, including our consolidated financial
statements and the related notes, before deciding whether to purchase shares of our common stock.
Each of these risks could materially adversely affect our business, operating results and financial
condition. As a result, the trading price of our common stock could decline and you might lose all
or part of your investment in our common stock. We have not made any material changes in the risk
factors previously disclosed in our Annual Report on Form 10-K for the year ended January 31, 2008.
We have a history of losses, and we may not maintain profitability in the future.
We were profitable in each of the last four fiscal quarters. We had net income of $2.0 million
in fiscal 2008, but we had not been profitable in any prior fiscal period. We experienced a net
loss of $14.0 million in fiscal 2006 and $8.0 million in fiscal 2007. We expect to make significant
additional expenditures to facilitate the expansion of our business, including expenditures in the
areas of sales, research and development, and customer service and support. Additionally, as a
public company, we expect to incur legal, accounting and other expenses that are substantially
higher than the expenses we incurred as a private company. Furthermore, we may encounter unforeseen
issues that require us to incur additional costs. As a result of these increased expenditures, we
will have to generate and sustain increased revenue to maintain profitability. Accordingly, we may
not be able to maintain profitability and we may incur significant losses in the future.
Our operating results may fluctuate significantly from quarter to quarter and may fall below
expectations in any particular fiscal quarter, which could adversely affect the market price of our
common stock.
Our operating results are difficult to predict and may fluctuate from quarter to quarter due
to a variety of factors, many of which are outside of our control. As a result, comparing our
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. If our revenue or operating results fall
below the expectations of investors or any securities analysts that follow our
36
company in any
period, the price of our common stock would likely decline. Factors that may cause our operating
results to fluctuate include:
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the typical recording of a significant portion of our quarterly sales
in the final month of the quarter, whereby small delays in completion
of sales transactions could have a significant impact on our operating
results for that quarter; |
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the relatively high average selling price of our products and our dependence on a limited number of
customers for a substantial portion of our revenue in any quarterly period, whereby the loss of or
delay in a customer order could significantly reduce our revenue for that quarter; for instance, one
customer accounted for 18% of our total revenues in the six months ended July 31, 2008, four
customers each accounted for greater than 5% of our total revenues during fiscal 2008, and our ten
largest customers accounted for approximately 48% of our total revenues during fiscal 2008; |
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the possibility of seasonality in demand for our products; |
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the addition of new customers or the loss of existing customers; |
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the rates at which customers purchase additional products or additional capacity for existing
products from us; |
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changes in the mix of products and services sold; |
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the rates at which customers renew their maintenance and support contracts with us; |
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our ability to enhance our products with new and better functionality that meet customer requirements; |
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the timing of recognizing revenue as a result of revenue recognition rules, including due to the
timing of delivery and receipt of our products; |
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the length of our product sales cycle; |
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the productivity and growth of our sales force; |
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service interruptions with any of our single source suppliers or manufacturing partners; |
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changes in pricing by us or our competitors, or the need to provide discounts to win business; |
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the timing of our product releases or upgrades or similar announcements by us or our competitors; |
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the timing of investments in research and development related to new product releases or upgrades; |
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our ability to control costs, including operating expenses and the costs of the components used in
our products; |
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volatility in our stock price, which may lead to higher stock compensation expenses pursuant to
Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, which first became
effective for us in fiscal 2007 and requires that employee stock-based compensation be measured based
on fair value on grant date and treated as an expense that is reflected in our financial statements
over the recipients service period; |
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future accounting pronouncements and changes in accounting policies; |
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costs related to the acquisition and integration of companies, assets or technologies; |
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technology and intellectual property issues associated with our products; and |
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general economic trends, including changes in information technology spending or geopolitical events
such as war or incidents of terrorism. |
Most of our operating expenses do not vary directly with revenue and are difficult to adjust
in the short term. As a result, if revenue for a particular quarter is below our expectations, we
could not proportionately reduce operating expenses for that quarter, and therefore this revenue
shortfall would have a disproportionate effect on our expected operating results for that quarter.
Our limited operating history and the emerging nature of the data warehouse market make it
difficult to evaluate our current business and future prospects, and may increase the risk of your
investment.
Our company has only been in existence since August 2000. We first began shipping products in
February 2003 and much of our growth has occurred in the past two fiscal years. Our limited
operating history and the nascent state of the data warehouse market in which we operate makes it
difficult to evaluate our current business and our future prospects. As a result, we cannot be
certain that we will sustain our growth or maintain profitability. We will encounter risks and
difficulties frequently experienced by early-stage companies in rapidly-evolving industries. These
risks include the need to:
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attract new customers and maintain current customer relationships; |
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continue to develop and upgrade our data warehouse solutions; |
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respond quickly and effectively to competitive pressures; |
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offer competitive pricing or provide discounts to customers in order to win business; |
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manage our expanding operations; |
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maintain adequate control over our expenses; |
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maintain adequate internal controls and procedures; |
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maintain our reputation, build trust with our customers and further establish our brand; and |
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identify, attract, retain and motivate qualified personnel. |
If we fail to successfully address these needs, our business, operating results and financial
condition may be adversely affected.
We depend on a single product family, the Netezza Performance Server family, for all of our
revenue, so we are particularly vulnerable to any factors adversely affecting the sale of that
product family.
Our revenue is derived exclusively from sales and service of the NPS product family, and we
expect that this product family will account for substantially all of our revenue for the
foreseeable future. If the data warehouse market declines or the Netezza Performance Server fails
to maintain or achieve greater market acceptance, we will not be able to grow our revenues
sufficiently to maintain profitability.
If we lose key personnel, or if we are unable to attract and retain highly-qualified personnel on a
cost-effective basis, it will be more difficult for us to manage our business and to identify and
pursue growth opportunities.
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Our success depends substantially on the performance of our key senior management, technical,
and sales and marketing personnel. Each of our employees may terminate his or her relationship with
us at any time and the loss of the services of such persons could have an adverse effect on our
business. We rely on our senior management to manage our existing business operations and to
identify and pursue new growth opportunities, and our ability to develop and enhance our products
requires talented hardware and software engineers with specialized skills. In addition, our success
depends in significant part on maintaining and growing an effective sales force. We experience
intense competition for such personnel and we cannot ensure that we will successfully attract,
assimilate, or retain highly qualified managerial, technical or sales and marketing personnel in
the future.
If we are unable to develop and introduce new products and enhancements to existing products, if
our new products and enhancements to existing products do not achieve market acceptance, or if we
fail to manage product transitions, we may fail to increase, or may lose, market share.
The market for our products is characterized by rapid technological change, frequent new
product introductions and evolving industry standards. Our future growth depends on the successful
development and introduction of new products and enhancements to existing products that achieve
acceptance in the market. Due to the complexity of our products, which include integrated hardware
and software components, any new products and product enhancements would be subject to significant
technical risks that could impact our ability to introduce those products and enhancements in a
timely manner. In addition, such new products or product enhancements may not achieve market
acceptance despite our expending significant resources to develop them. If we are unable, for
technological or other reasons, to develop, introduce and enhance our products in a timely manner
in response to changing market conditions or evolving customer requirements, or if these new
products and product enhancements do not achieve market acceptance due to competitive or other
factors, our operating results and financial condition could be adversely affected.
Product introductions and certain enhancements of existing products by us in future periods
may also reduce demand for our existing products or could delay purchases by customers awaiting
arrival of our new products. As new or enhanced products are introduced, we must successfully
manage the transition from older products in order to minimize disruption in customers ordering
patterns, avoid excessive levels of older product inventories and ensure that sufficient supplies
of new products can be delivered in a timely manner to meet customer demand.
We face intense and growing competition from leading technology companies as well as from emerging
companies. Our inability to compete effectively with any or all of these competitors could impact
our ability to achieve our anticipated market penetration and achieve or sustain profitability.
The data warehouse market is highly competitive and we expect competition to intensify in the
future. This competition may make it more difficult for us to sell our products, and may result in
increased pricing pressure, reduced profit margins, increased sales and marketing expenses and
failure to increase, or the loss of, market share, any of which would likely seriously harm our
business, operating results and financial condition.
Currently, our most significant competition includes companies which typically sell several if
not all elements of a data warehouse environment as individual products, including database
software, servers, storage and professional services. These competitors are often leaders in many
of these segments including EMC, Hewlett-Packard, IBM, Oracle, Sun Microsystems, Sybase and
Teradata. In addition, a large number of fast growing companies have recently entered the market,
many of them selling integrated appliance offerings similar to our products. Additionally, as the
benefits of an appliance solution have become evident in the marketplace, many of our larger
competitors have also begun to bundle their products into appliance-like offerings that more
directly compete with our products. We also expect additional competition in the future from new
and existing companies with whom we do not currently compete directly. As our industry evolves, our
current and potential competitors may establish cooperative relationships among themselves or with
third parties, including software and hardware companies with whom we have partnerships and whose
products interoperate with our own, that could acquire significant market share, which could
adversely affect our business. We also face competition from internally-developed systems. Any
of these competitive threats, alone or in combination with others, could seriously harm our
business, operating results and financial condition.
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Many of our competitors have greater market presence, longer operating histories, stronger
name recognition, larger customer bases and significantly greater financial, technical, sales and
marketing, manufacturing, distribution and other resources than we have. In addition, many of our
competitors have broader product and service offerings than we do. These companies may attempt to
use their greater resources to better position themselves in the data warehouse market including by
pricing their products at a discount or bundling them with other products and services in an
attempt to rapidly gain market share. Moreover, many of our competitors have more extensive
customer and partner relationships than we do, and may therefore be in a better position to
identify and respond to market developments or changes in customer demands. Potential customers may
also prefer to purchase from their existing suppliers rather than a new supplier regardless of
product performance or features. We cannot assure you that we will be able to compete successfully
against existing or new competitors.
Our success depends on the continued recognition of the need for business intelligence in the
marketplace and on the adoption by our customers of data warehouse appliances, often as
replacements for existing systems, to enable business intelligence. If we fail to improve our
products to further drive this market migration as well as to successfully compete with alternative
approaches and products, our business would suffer.
Due to the innovative nature of our products and the new approaches to business intelligence
that our products enable, purchases of our products often involve the adoption of new methods of
database access and utilization on the part of our customers. This may entail the acknowledgement
of the benefits conferred by business intelligence and the customer-wide adoption of business
intelligence analysis that makes the benefits of our system particularly relevant. Business
intelligence solutions are still in their early stages of growth and their continued adoption and
growth in the marketplace remain uncertain. Additionally, our appliance approach requires our
customers to run their data warehouses in new and innovative ways and often requires our customers
to replace their existing equipment and supplier relationships, which they may be unwilling to do,
especially in light of the often critical nature of the components and systems involved and the
significant capital and other resources they may have previously invested. Furthermore, purchases
of our products involve material changes to established purchasing patterns and policies. Even if
prospective customers recognize the need for our products, they may not select our NPS solution
because they choose to wait for the introduction of products and technologies that serve as a
replacement or substitute for, or represent an improvement over, our NPS solutions. Therefore, our
future success also depends on our ability to maintain our leadership position in the data
warehouse market and to proactively address the needs of the market and our customers to further
drive the adoption of business intelligence and to sustain our competitive advantage versus
competing approaches to business intelligence and alternate product offerings.
Claims that we infringe or otherwise misuse the intellectual property of others could subject us to
significant liability and disrupt our business, which could have a material adverse effect on our
business and operating results.
Our competitors protect their intellectual property rights by means such as trade secrets,
patents, copyrights and trademarks. We have not conducted an independent review of patents issued
to third parties. Although we have not been involved in any litigation related to intellectual
property rights of others, from time to time we receive letters from other parties alleging, or
inquiring about, breaches of their intellectual property rights. We may in the future be sued for
violations of other parties intellectual property rights, and the risk of such a lawsuit will
likely increase as our size and the number and scope of our products increase, as our geographic
presence and market share expand and as the number of competitors in our market increases. Any such
claims or litigation could:
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be time-consuming and expensive to defend, whether meritorious or not; |
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cause shipment delays; |
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divert the attention of our technical and managerial resources; |
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require us to enter into royalty or licensing agreements with third parties, which may not be
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terms that we deem acceptable, if at all; |
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prevent us from operating all or a portion of our business or force us to redesign our products,
which could be difficult and expensive and may degrade the performance of our products; |
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subject us to significant liability for damages or result in significant settlement payments; and/or |
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require us to indemnify our customers, distribution partners or suppliers. |
Any of the foregoing could disrupt our business and have a material adverse effect on our
operating results and financial condition.
Our products must interoperate with our customers information technology infrastructure, including
customers software applications, networks, servers and data-access protocols, and if our products
do not do so successfully, we may experience a weakening demand for our products.
To be competitive in the market, our products must interoperate with our customers
information technology infrastructure, including software applications, network infrastructure and
servers supplied by a variety of other vendors, many of whom are competitors of ours. Our products
currently interoperate with a number of business intelligence and data-integration applications
provided by vendors including IBM and Oracle, among others. When new or updated versions of these
software applications are introduced, we must sometimes develop updated versions of our software
that may require assistance from these vendors to ensure that our products effectively interoperate
with these applications. If these vendors do not provide us with assistance on a timely basis, or
decide not to work with us for competitive or other reasons, including due to consolidation with
our competitors, we may be unable to ensure such interoperability. Additionally, our products
interoperate with servers, network infrastructure and software applications predominantly through
the use of data-access protocols. While many of these protocols are created and maintained by
independent standards organizations, some of these protocols that exist today or that may be
created in the future are, or could be, proprietary technology and therefore require licensing the
proprietary protocols specifications from a third party or implementing the protocol without
specifications. Our development efforts to provide interoperability with our customers information
technology infrastructures require substantial capital investment and the devotion of substantial
employee resources. We may not accomplish these development efforts quickly, cost-effectively or at
all. If we fail for any reason to maintain interoperability, we may experience a weakening in
demand for our products, which would adversely affect our business, operating results and financial
condition.
If we fail to enhance our brand, our ability to expand our customer base will be impaired and our
operating results may suffer.
We believe that developing and maintaining awareness of the Netezza brand is critical to
achieving widespread acceptance of our products and is an important element in attracting new
customers and shortening our sales cycle. We expect the importance of brand recognition to increase
as competition further develops in our market. Successful promotion of our brand will depend
largely on the effectiveness of our marketing efforts and our ability to provide customers with
reliable and technically sophisticated products at competitive prices. If customers do not perceive
our products and services to be of high value, our brand and reputation could be harmed, which
could adversely impact our financial results. Despite our best efforts, our brand promotion efforts
may not yield increased revenue sufficient to offset the additional expenses incurred in our
brand-building efforts.
We may not receive significant revenues from our current research and development efforts for
several years, if at all.
Investment in product development often involves a long payback cycle. We have made and expect
to continue making significant investments in research and development and related product
opportunities. Accelerated product introductions and short product life cycles require high levels
of expenditures for research and development that could adversely affect our operating results if
not offset by revenue increases. We believe that we must continue
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to dedicate a significant amount of resources to our research and development efforts to
maintain our competitive position. However, we do not expect to receive significant revenues from
these investments for several years, if at all.
Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and
expense, which contribute to the unpredictability and variability of our financial performance and
may adversely affect our profitability.
The timing of our revenue is difficult to predict as we experience extended sales cycles, due
in part to our need to educate our customers about our products and participate in extended product
evaluations and the high purchase price of our products. In addition, product purchases are often
subject to a variety of customer considerations that may extend the length of our sales cycle,
including customers acceptance of our approach to data warehouse management and their willingness
to replace their existing solutions and supplier relationships, timing of their budget cycles and
approval processes, budget constraints, extended negotiations, and administrative, processing and
other delays, including those due to general economic factors. As a result, our sales cycle extends
to more than nine months in most cases, and it is difficult to predict when or if a sale to a
potential customer will occur. All of these factors can contribute to fluctuations in our quarterly
financial performance and increase the likelihood that our operating results in a particular
quarter will fall below investor expectations. In addition, the provision of evaluation units to
customers may require significant investment in inventory in advance of sales of these units, which
sales may not ultimately transpire. If we are unsuccessful in closing sales after expending
significant resources, or if we experience delays for any of the reasons discussed above, our
future revenues and operating expenses may be materially adversely affected.
Our company is growing rapidly and we may be unable to manage our growth effectively.
Between January 31, 2005 and July 31, 2008, the number of our employees increased from 140 to
361 and our installed base of customers grew from 15 to 209. In addition, during that time period
our number of office locations has increased from 3 to 19. We anticipate that further expansion of
our organization and operations will be required to achieve our growth targets. Our rapid growth
has placed, and is expected to continue to place, a significant strain on our management and
operational infrastructure. Our failure to continue to enhance our management personnel and
policies and our operational and financial systems and controls in response to our growth could
result in operating inefficiencies that could impair our competitive position and would increase
our costs more than we had planned. If we are unable to manage our growth effectively, our
business, our reputation and our operating results and financial condition will be adversely
affected.
Our ability to sell to U.S. federal government agencies is subject to evolving laws and policies
that could have a material adverse effect on our growth prospects and operating results, and our
contracts with the U.S. federal government may impose requirements that are unfavorable to us.
In the six months ended July 31, 2008, and the fiscal years ended January 31, 2008 and 2007,
we derived approximately 3%, 3% and 5%, respectively, of our revenue from U.S. federal government
agencies. The demand for data warehouse products and services by federal government agencies may be
affected by laws and policies that might restrict agencies collection, processing, and sharing of
certain categories of information. Our ability to profitably sell products to government agencies
is also subject to changes in agency funding priorities and contracting procedures and our ability
to comply with applicable government regulations and other requirements.
The restrictions on federal government data management include, for example, the Privacy Act,
which requires agencies to publicize their collection and use of personal data and implement
procedures to provide individuals with access to that information; the Federal Information Security
Management Act, which requires agencies to develop comprehensive data privacy and security measures
that may increase the cost of maintaining certain data; and the E-government Act, which requires
agencies to conduct privacy assessments before acquiring certain information technology products or
services and before initiating the collection of personal information or the aggregation of
existing databases of personal information. These restrictions, any future restrictions, and public
or political pressure to constrain the governments collection and processing of personal
information may adversely
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affect the governments demand for our products and services and could have a material adverse
effect on our growth prospects and operating results.
Federal agency funding for information technology programs is subject to annual appropriations
established by Congress and spending plans adopted by individual agencies. Accordingly, government
purchasing commitments normally last no longer than one year. The amounts of available funding in
any year may be reduced to reflect budgetary constraints, economic conditions, or competing
priorities for federal funding. Constraints on federal funding for information technology could
harm our ability to sell products to government agencies, causing fluctuations in our revenues from
this segment from period to period and resulting in a weakening of our growth prospects, operating
results and financial condition.
Our contracts with government agencies may subject us to certain risks and give the government
rights and remedies not typically found in commercial contracts, including rights that allow the
government to, for example:
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terminate contracts for convenience at any time without cause; |
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obtain detailed cost or pricing information; |
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receive most favored customer pricing; |
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perform routine audits; |
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impose equal employment and hiring standards; |
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require products to be manufactured in specified countries; |
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restrict non-U.S. ownership or investment in our company; and |
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pursue administrative, civil or criminal remedies for contractual violations. |
Moreover, some of our contracts allow the government to use, or permit others to use, patented
inventions that we developed under those contracts, and to place conditions on our right to retain
title to such inventions. Likewise, some of our government contracts allow the government to use or
disclose software or technical data that we develop or deliver under the contract without
constraining subsequent uses of those data. Third parties authorized by the government to use our
patents, software and technical data may emerge as alternative sources for the products and
services we offer to the government and may enable the government to negotiate lower prices for our
products and services. If we fail to assert available protections for our patents, software, and
technical data, our ability to control the use of our intellectual property may be compromised,
which may benefit our competitors, reduce the prices we can obtain for our products and services,
and harm our financial condition.
Our international operations are subject to additional risks that we do not face in the United
States, which could have an adverse effect on our operating results.
In the six months ended July 31, 2008, and the fiscal years ended January 31, 2008 and 2007,
we derived approximately 30%, 20% and 24%, respectively, of our revenue from customers based
outside the United States, and we currently have sales personnel in nine different foreign
countries. We expect our revenue and operations outside the United States will expand in the
future. Our international operations are subject to a variety of risks that we do not face in the
United States, including:
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difficulties in staffing and managing our foreign offices and the increased
travel, infrastructure and legal and compliance costs associated with multiple
international locations; |
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general economic conditions in the countries in which we operate, including
seasonal reductions in business activity in the summer months in Europe,
during Lunar New Year in parts of Asia and in other periods in various
individual countries; |
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longer payment cycles for sales in foreign countries and difficulties in
enforcing contracts and collecting accounts receivable; |
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additional withholding taxes or other taxes on our foreign income, and tariffs
or other restrictions on foreign trade or investment; |
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imposition of, or unexpected adverse changes in, foreign laws or regulatory
requirements, many of which differ from those in the United States; |
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increased length of time for shipping and acceptance of our products; |
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difficulties in repatriating overseas earnings; |
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increased exposure to foreign currency exchange rate risk; |
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reduced protection for intellectual property rights in some countries; |
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costs and delays associated with developing products in multiple languages; and |
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political unrest, war, incidents of terrorism, or responses to such events. |
Our overall success in international markets depends, in part, on our ability to succeed in
differing legal, regulatory, economic, social and political conditions. We may not be successful in
developing and implementing policies and strategies that will be effective in managing these risks
in each country where we do business. Our failure to manage these risks successfully could harm our
international operations, reduce our international sales and increase our costs, thus adversely
affecting our business, operating results and financial condition.
Our future revenue growth will depend in part on our ability to further develop our indirect sales
channel, and our inability to effectively do so will impair our ability to grow our revenues as we
anticipate.
Our future revenue growth will depend in part on the continued development of our indirect
sales channel to complement our direct sales force. Our indirect sales channel includes resellers,
systems integration firms and analytic service providers. In the six months ended July 31, 2008,
and the fiscal years ended January 31, 2008 and 2007, we derived approximately 21%, 14% and 17%,
respectively, of our revenue from our indirect sales channel. We plan to continue to invest in our
indirect sales channel by expanding upon and developing new relationships with resellers, systems
integration firms and analytic service providers. While the development of our indirect sales
channel is a priority for us, we cannot predict the extent to which we will be able to attract and
retain financially stable, motivated indirect channel partners. Additionally, due in part to the
complexity and innovative nature of our products, our channel partners may not be successful in
marketing and selling our products. Our indirect sales channel may be adversely affected by
disruptions in relationships between our channel partners and their customers, as well as by
competition between our channel partners or between our channel partners and our direct sales
force. In addition our reputation could suffer as a result of the conduct and manner of marketing
and sales by our channel partners. Our agreements with our channel partners are generally not
exclusive and may be terminated without cause. If we fail to effectively develop and manage our
indirect channel for any of these reasons, we may have difficulty attaining our growth targets.
Our ability to sell our products and retain customers is highly dependent on the quality of our
maintenance and support services offerings, and our failure to offer high-quality maintenance and
support could have a material adverse effect on our operating results.
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Most of our customers purchase maintenance and support services from us, which represents a
significant portion of our revenue (approximately 20% of our revenue for the six months ended July
31, 2008, and 19% of our
revenue in both the fiscal years ended January 31, 2008 and 2007). Customer satisfaction with
our maintenance and support services is critical for the successful marketing and sale of our
products and the success of our business. In addition to our support staff and installation and
technical account management teams, we have developed service relationships with third parties to
provide on-site hardware service to our customers. Although we believe these third parties and any
other third-party service provider we utilize in the future will offer a high level of service
consistent with our internal customer support services, we cannot assure you that they will
continue to devote the resources necessary to provide our customers with effective technical
support. In addition, if we are unable to renew our service agreements with these third parties we
utilize in the future or such agreements are terminated, we may be unable to establish alternative
relationships on a timely basis or on terms acceptable to us, if at all. If we or our service
partners are unable to provide effective maintenance and support services, it could adversely
affect our ability to sell our products and harm our reputation with current and potential
customers.
Our products are highly technical and may contain undetected software or hardware defects, which
could cause data unavailability, loss or corruption that might result in liability to our customers
and harm to our reputation and business.
Our products are highly technical and complex and are often used to store and manage data
critical to our customers business operations. Our products may contain undetected errors, defects
or security vulnerabilities that could result in data unavailability, loss or corruption or other
harm to our customers. Some errors in our products may only be discovered after the products have
been installed and used by customers. Any errors, defects or security vulnerabilities discovered in
our products after commercial release or that are caused by another vendors products with which we
interoperate but are nevertheless attributed to us by our customers, as well as any computer virus
or human error on the part of our customer support or other personnel, that result in a customers
data being misappropriated, unavailable, lost or corrupted could have significant adverse
consequences, including:
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loss of customers; |
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negative publicity and damage to our reputation; |
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diversion of our engineering, customer service and other resources; |
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increased service and warranty costs; and |
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loss or delay in revenue or market acceptance of our products. |
Any of these events could adversely affect our business, operating results and financial
condition. In addition, there is a possibility that we could face claims for product liability,
tort or breach of warranty, including claims from both our customers and our distribution partners.
The cost of defending such a lawsuit, regardless of its merit, could be substantial and could
divert managements attention from ongoing operations of the company. In addition, if our business
liability insurance coverage proves inadequate with respect to a claim or future coverage is
unavailable on acceptable terms or at all we may be liable for payment of substantial damages. Any
or all of these potential consequences could have an adverse impact on our operating results and
financial condition.
It is difficult to predict our future capital needs and we may be unable to obtain additional
financing that we may need, which could have a material adverse effect on our business, operating
results and financial condition.
We believe that our current balance of cash, cash equivalents and investments, together with
cash expected to be generated from operations, will be sufficient to fund our projected operating
requirements, including anticipated capital expenditures, for the foreseeable future. However, we
may need to raise additional funds if we are presented with unforeseen circumstances or
opportunities in order to, among other things:
45
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develop or enhance our products; |
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support additional capital expenditures; |
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respond to competitive pressures; |
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fund operating losses in future periods; or |
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take advantage of acquisition or expansion opportunities. |
Any required additional financing may not be available on terms acceptable to us, or at all.
If we raise additional funds by issuing equity securities, you may experience significant dilution
of your ownership interest, and the newly issued securities may have rights senior to those of the
holders of our common stock. If we raise additional funds by obtaining loans from third parties,
the terms of those financing arrangements may include negative covenants or other restrictions on
our business that could impair our operational flexibility and would also require us to fund
additional interest expense, which would harm our profitability. Holders of debt would also have
rights, preferences or privileges senior to those of holders of our common stock.
A substantial portion of our long-term marketable securities is invested in highly rated auction
rate securities and failures in these auctions may affect our liquidity.
A substantial percentage of our marketable securities portfolio is invested in highly rated auction
rate securities collateralized by student loans with approximately 95% of such collateral in the
aggregate being guaranteed by the United States government. Auction rate securities are securities
that are structured to allow for short-term interest rate resets but with contractual maturities
that can be well in excess of ten years. At the end of each reset period, which typically occurs
every 7 to 35 days, investors can sell or continue to hold the securities at par. Since February
2008, due to current market conditions, the auction process for certain of our auction rate
securities have failed. Such failures resulted in the interest rates on these investments resetting
to predetermined rates in accordance with their underlying loan agreements. These interest rates
were in some instances, lower than the current market rate of interest. In the event we need to
liquidate our investments in these types of securities, we will not be able to do so until a future
auction on these investments is successful, the issuer redeems the outstanding securities, a buyer
is found outside the auction process, the securities mature, or there is a default requiring
immediate repayment from the issuer. In the future, should the auction rate securities we hold be
subject to additional auction failures and/or we determine that the decline in value of auction
rate securities are other than temporary, we would recognize a loss in our consolidated statement
of operations, which could be material. In addition, any future failed auctions may adversely
impact the liquidity of our investments. Furthermore, if one or more issuers of the auction rate
securities held in our portfolio are unable to successfully close future auctions and their credit
ratings deteriorate, we may be required to adjust the carrying value of these investments through
an impairment charge, which could be material. At July 31, 2008, we have taken a temporary
impairment of $2.9 million on our consolidated balance sheet. In the future, should the auction
rate securities we hold be subject to additional auction failures and/or we determine that the
decline in value of ARSs is other than temporary, we would recognize a loss in our consolidated
statement of operations, which could be material.
If we are unable to protect our intellectual property rights, our competitive position could be
harmed or we could be required to incur significant expenses to enforce our rights.
Our success is dependent in part on obtaining, maintaining and enforcing our intellectual
property and other proprietary rights. We rely on a combination of trade secret, patent, copyright
and trademark laws and contractual provisions with employees and third parties, all of which offer
only limited protection. Despite our efforts to protect our intellectual property and proprietary
information, we may not be successful in doing so, for several reasons. We cannot be certain that
our pending patent applications will result in the issuance of patents or whether the examination
process will require us to narrow our claims. Even if patents are issued to us, they may be
contested, or our competitors may be able to develop similar or superior technologies without
infringing our patents.
46
Although we enter into confidentiality, assignments of proprietary rights and license
agreements, as appropriate, with our employees and third parties, including our contract
engineering firm, and generally control access to and distribution of our technologies,
documentation and other proprietary information, we cannot be certain that the steps we take to
prevent unauthorized use of our intellectual property rights are sufficient to prevent their
misappropriation, particularly in foreign countries where laws or law enforcement practices may not
protect our intellectual property rights as fully as in the United States.
Even in those instances where we have determined that another party is breaching our
intellectual property and other proprietary rights, enforcing our legal rights with respect to such
breach may be expensive and difficult. We may need to engage in litigation to enforce or defend our
intellectual property and other proprietary rights, which could result in substantial costs and
diversion of management resources. Further, many of our current and potential competitors are
substantially larger than we are and have the ability to dedicate substantially greater resources
to defending any claims by us that they have breached our intellectual property rights.
Our products may be subject to open source licenses, which may restrict how we use or distribute
our solutions or require that we release the source code of certain technologies subject to those
licenses.
Some of our proprietary technologies incorporate open source software. For example, the open
source database drivers that we use may be subject to an open source license. The GNU General
Public License and other open source licenses typically require that source code subject to the
license be released or made available to the public. Such open source licenses typically mandate
that proprietary software, when combined in specific ways with open source software, become subject
to the open source license. We take steps to ensure that our proprietary software is not combined
with, or does not incorporate, open source software in ways that would require our proprietary
software to be subject to an open source license. However, few courts have interpreted the open
source licenses, and the manner in which these licenses may be interpreted and enforced is
therefore subject to uncertainty. If these licenses were to be interpreted in a manner different
than we interpret them, we may find ourselves in violation of such licenses. While our customer
contracts prohibit the use of our technology in any way that would cause it to violate an open
source license, our customers could, in violation of our agreement, use our technology in a manner
prohibited by an open source license.
In addition, we rely on multiple software engineers to design our proprietary products and
technologies. Although we take steps to ensure that our engineers do not include open source
software in the products and technologies they design, we may not exercise complete control over
the development efforts of our engineers and we cannot be certain that they have not incorporated
open source software into our proprietary technologies. In the event that portions of our
proprietary technology are determined to be subject to an open source license, we might be required
to publicly release the affected portions of our source code, which could reduce or eliminate our
ability to commercialize our products.
As part of our business strategy, we engage in acquisitions, which could disrupt our business,
cause dilution to our stockholders, reduce our financial resources and result in increased
expenses.
We acquired a company, NuTech Solutions, Inc., in May 2008 (see Note 7 to our accompanying
financial statements). In the future, we may acquire additional companies, assets or technologies
in an effort to complement our existing offerings or enhance our market position. Any future
acquisitions we make could subject us to a number of risks, including:
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the purchase price we pay could significantly deplete our cash
reserves, impair our future operating flexibility or result in
dilution to our existing stockholders; |
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we may find that the acquired company, assets or technology do not
further improve our financial and strategic position as planned; |
47
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we may find that we overpaid for the company, asset or technology, or that the economic conditions
underlying our acquisition have changed; |
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we may have difficulty integrating the operations and personnel of the acquired company; |
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we may have difficulty retaining the employees with the technical skills needed to enhance and provide
services with respect to the acquired assets or technologies; |
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the acquisition may be viewed negatively by customers, financial markets or investors; |
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we may have difficulty incorporating the acquired technologies or products with our existing product
lines; |
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we may encounter difficulty entering and competing in new product or geographic markets; |
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we may encounter a competitive response, including price competition or intellectual property litigation; |
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we may have product liability, customer liability or intellectual property liability associated with the
sale of the acquired companys products; |
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we may be subject to litigation by terminated employees or third parties; |
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we may incur debt, one-time write-offs, such as acquired in-process research and development costs, and
restructuring charges; |
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we may acquire goodwill and other intangible assets that are subject to impairment tests, which could
result in future impairment charges; |
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our ongoing business and managements attention may be disrupted or diverted by transition or
integration issues and the complexity of managing geographically or culturally diverse enterprises; and |
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our due diligence process may fail to identify significant existing issues with the target companys
product quality, product architecture, financial disclosures, accounting practices, internal controls,
legal contingencies, intellectual property and other matters. |
These factors could have a material adverse effect on our business, operating results and
financial condition.
From time to time, we may enter into negotiations for acquisitions or investments that are not
ultimately consummated. Such negotiations could result in significant diversion of management time,
as well as substantial out-of-pocket costs, any of which could have a material adverse effect on
our business, operating results and financial condition.
We currently rely on a single contract manufacturer to assemble our products, and our failure to
manage our relationship with our contract manufacturer successfully could negatively impact our
ability to sell our products.
We currently rely on a single contract manufacturer, Sanmina-SCI Corporation or Sanmina, to
assemble our products, manage our supply chain and participate in negotiations regarding component
costs. While we believe that our use of Sanmina provides benefits to our business, our reliance on
Sanmina reduces our control over the assembly process, exposing us to risks, including reduced
control over quality assurance, production costs and product supply. These risks could become more
acute if we are successful in our efforts to increase revenue. If we fail to manage our
relationship with Sanmina effectively, or if Sanmina experiences delays, disruptions, capacity
constraints or quality control problems in its operations, our ability to ship products to our
customers could be impaired and our competitive position and reputation could be harmed. In
addition, we are required to provide forecasts to Sanmina regarding product demand and production
levels. If we inaccurately forecast demand for our products, we may have
48
excess or inadequate
inventory or incur cancellation charges or penalties, which could adversely impact our operating
results and financial condition.
Additionally, Sanmina can terminate our agreement for any reason upon 90 days notice or for
cause upon 30 days notice. If we are required to change contract manufacturers or assume internal
manufacturing operations due to any termination of the agreement with Sanmina, we may lose revenue,
experience manufacturing delays, incur increased costs or otherwise damage our customer
relationships. We cannot assure you that we will be able to establish an alternative manufacturing
relationship on acceptable terms or at all.
We depend on a continued supply of components for our products from third-party suppliers, and if
shortages of these components arise, we may not be able to secure enough components to build new
products to meet customer demand or we may be forced to pay higher prices for these components.
We rely on a limited number of suppliers for several key components utilized in the assembly
of our products, including disk drives and microprocessors. Although in many cases we use standard
components for our products, some of these components may only be purchased or may only be
available from a single supplier. In addition, we maintain relatively low inventory and acquire
components only as needed, and neither we nor our contract manufacturer enter into long-term supply
contracts for these components and none of our third-party suppliers is obligated to supply
products to us for any specific period or in any specific quantities, except as may be provided in
a particular purchase order. Our industry has experienced component shortages and delivery delays
in the past, and we may experience shortages or delays of critical components in the future as a
result of strong demand in the industry or other factors. If shortages or delays arise, we may be
unable to ship our products to our customers on time, or at all, and increased costs for these
components that we could not pass on to our customers would negatively impact our operating
margins. For example, new generations of disk drives are often in short supply, which may limit our
ability to procure these disk drives. In addition, disk drives represent a significant portion of
our cost of revenue, and the price of various kinds of disk drives is subject to substantial
volatility in the market. Many of the other components required to build our systems are also
occasionally in short supply. Therefore, we may not be able to secure enough components at
reasonable prices or of acceptable quality to build new products, resulting in an inability to meet
customer demand or our own operating goals, which could adversely affect our customer
relationships, business, operating results and financial condition.
We currently rely on a contract engineering firm for quality assurance and product integration
engineering.
In addition to our internal research and development staff, we have contracted with Persistent
Systems Pvt. Ltd. located in Pune, India, to employ a dedicated team of over 60 engineers focused
on quality assurance and product integration engineering. Persistent Systems can terminate our
agreement for any reason upon 15 days notice. If we were required to change our contract
engineering firm, including due to a termination of the agreement with Persistent Systems, we may
experience delays, incur increased costs or otherwise damage our customer relationships. We cannot
assure you that we will be able to establish an alternative contract engineering firm relationship
on acceptable terms or at all.
Future interpretations of existing accounting standards could adversely affect our operating
results.
Generally Accepted Accounting Principles in the United States, or GAAP, are subject to
interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of
Certified Public Accountants, or AICPA, the SEC and various other bodies formed to promulgate and
interpret appropriate accounting principles. A change in these principles or interpretations could
have a significant effect on our reported operating results, and they could affect the reporting of
transactions completed before the announcement of a change. For example, we recognize our product
revenue in accordance with AICPA Statement of Position, or SOP 97-2, Software Revenue Recognition,
and related amendments and interpretations contained in SOP 98-9, Software Revenue Recognition with
Respect to Certain Transactions. The AICPA and its Software Revenue Recognition Task Force continue
to issue interpretations and guidance for applying the relevant accounting standards to a wide
range of sales contract terms and business arrangements that are prevalent in software licensing
arrangements and arrangements for the sale of hardware products that contain more than an
insignificant amount of software. Future interpretations of existing
49
accounting standards,
including SOP 97-2 and SOP 98-9, or changes in our business practices could result in delays in our
recognition of revenue that may have a material adverse effect on our operating results. For
example, we may in the future have to defer recognition of revenue for a transaction that involves:
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undelivered elements for which we do not have vendor-specific objective evidence of fair value; |
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requirements that we deliver services for significant enhancements and modifications to customize our software for a particular customer; or |
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material acceptance criteria. |
Because of these factors and other specific requirements under GAAP for recognition of
software revenue, we must include specific terms in customer contracts in order to recognize
revenue when we initially deliver products or perform services. Negotiation of such terms could
extend our sales cycle, and, under some circumstances, we may accept terms and conditions that do
not permit revenue recognition at the time of delivery.
If we fail to maintain an effective system of internal controls, we might not be able to report our
financial results accurately or prevent fraud; in that case, our stockholders could lose confidence
in our financial reporting, which could negatively impact the price of our stock.
Effective internal controls are necessary for us to provide reliable financial reports and
prevent fraud. In addition, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to
evaluate and report on our internal control over financial reporting and have our independent
registered public accounting firm audit our internal control over financial reporting beginning
with our Annual Report on Form 10-K for the year ending January 31, 2009. We are in the process of
preparing and implementing an internal plan of action for compliance with Section 404 and
strengthening and testing our system of internal controls to provide the basis for our report. The
process of implementing our internal controls and complying with Section 404 will be expensive and
time consuming, and will require significant attention of management. We cannot be certain that
these measures will ensure that we implement and maintain adequate controls over our financial
processes and reporting in the future. Even if we conclude, and our independent registered public
accounting firm concurs, that our internal control over financial reporting provides reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles,
because of its inherent limitations, internal control over financial reporting may not prevent or
detect fraud or misstatements. Failure to implement required new or improved controls, or
difficulties encountered in their implementation, could harm our operating results or cause us to
fail to meet our reporting obligations. If we or our independent registered public accounting firm
discover a material weakness in our internal control, the disclosure of that fact, even if quickly
remedied, could reduce the markets confidence in our financial statements and harm our stock
price. In addition, a delay in compliance with Section 404 could subject us to a variety of
administrative sanctions, including ineligibility for short form registration, action by the SEC,
the suspension or delisting of our common stock from NYSE Arca and the inability of registered
broker-dealers to make a market in our common stock, which would further reduce our stock price and
could harm our business.
We are subject to governmental export controls that could impair our ability to compete in
international markets.
Our products are subject to U.S. export controls and may be exported outside the United States
only with the required level of export license or through an export license exception. Changes in
our products or changes in export regulations 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
certain countries altogether. Any change in export regulations or related legislation, shift in
approach to the enforcement or scope of existing regulations or change in the countries, persons or
technologies targeted by these regulations could result in decreased use of our products by, or in
our decreased ability to export or sell our products to, existing or potential customers with
international operations.
50
Adverse changes in economic conditions and reduced information technology spending may negatively
impact our business.
Our business depends on the overall demand for information technology and on the economic
health of our current and prospective customers and the geographic regions in which we operate. In
addition, the purchase of our products is often discretionary and may involve a significant
commitment of capital and other resources. As a result, weak economic conditions or a reduction in
information technology spending could adversely impact demand for our products and therefore our
business, operating results and financial condition.
Risks Related to our Common Stock
The trading price of our common stock is likely to be volatile.
The trading price of our common stock will be susceptible to fluctuations in the market due to
numerous factors, many of which may be beyond our control, including:
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changes in operating performance and stock market valuations of other technology companies
generally or those that sell data warehouse solutions in particular; |
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actual or anticipated fluctuations in our operating results; |
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the financial guidance that we may provide to the public, any changes in such guidance, or
our failure to meet such guidance; |
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changes in financial estimates by securities analysts, our failure to meet such estimates,
or failure of analysts to initiate or maintain coverage of our stock; |
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the publics response to our press releases or other public announcements by us, including
our filings with the SEC; |
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announcements by us or our competitors of significant technical innovations, customer wins
or losses, acquisitions, strategic partnerships, joint ventures or capital commitments; |
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introduction of technologies or product enhancements that reduce the need for our products; |
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the loss of key personnel; |
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the development and sustainability of an active trading market for our common stock; |
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lawsuits threatened or filed against us; |
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future sales of our common stock by our officers or directors; and |
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other events or factors affecting the economy generally, including those resulting from
political unrest, war, incidents of terrorism or responses to such events. |
The trading price of our common stock might also decline in reaction to events that affect
other companies in our industry even if these events do not directly affect us.
Some companies that have had volatile market prices for their securities have had securities
class actions filed against them. If a suit were filed against us, regardless of its merits or
outcome, it would likely result in substantial costs and divert managements attention and
resources. This could have a material adverse effect on our business, operating results and
financial condition.
51
Future sales of shares by existing stockholders could cause our stock price to decline.
Since the expiration of contractual lock-up agreements with most of our stockholders in
January 2008, most of our stockholders have an opportunity to sell their common stock for the first
time. Sales by our existing stockholders
of a substantial number of shares of common stock in the public market, or the threat that
substantial sales might occur, could cause the market price of the common stock to decrease
significantly. These factors could also make it difficult for us to raise additional capital by
selling our common stock.
If securities or industry analysts do not publish research or publish unfavorable research about
our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on any research reports that
securities or industry analysts publish about us or our business. In the event securities or
industry analysts cover our company and one or more of these analysts downgrade our stock or
publish unfavorable reports about our business, our stock price would likely decline. In addition,
if any securities or industry analysts cease coverage of our company or fail to publish reports on
us regularly, demand for our stock could decrease, which could cause our stock price and trading
volume to decline.
Provisions in our certificate of incorporation and by-laws and Delaware law might discourage, delay
or prevent a change in control of our company or changes in our management and, therefore, may
negatively impact the trading price of our common stock.
Provisions of our certificate of incorporation and our by-laws may discourage, delay or
prevent a merger, acquisition or other change in control that stockholders may consider favorable,
including transactions in which you might otherwise receive a premium for your shares of our common
stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or
remove our management. These provisions:
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establish a classified board of directors so that not all members of our board are elected at one time; |
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provide that directors may only be removed for cause; |
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authorize the issuance of blank check preferred stock that our board of directors could issue to
increase the number of outstanding shares and to discourage a takeover attempt; |
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eliminate the ability of our stockholders to call special meetings of stockholders; |
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prohibit stockholder action by written consent, which has the effect of requiring all stockholder
actions to be taken at a meeting of stockholders; |
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provide that the board of directors is expressly authorized to make, alter or repeal our by-laws; and |
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establish advance notice requirements for nominations for election to our board of directors or for
proposing matters that can be acted upon by stockholders at stockholder meetings. |
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or
prevent a change in control of our company by prohibiting stockholders owning in excess of 15% of
our outstanding voting stock from merging or combining with us during a specified period unless
certain approvals are obtained.
Insiders own a significant portion of our outstanding common stock and will therefore have
substantial control over us and will be able to influence corporate matters.
Our executive officers, directors and their affiliates beneficially own, in the aggregate,
approximately 20% of our outstanding common stock. As a result, our executive officers, directors
and their affiliates are able to exercise significant influence over all matters requiring
stockholder approval, including the election of directors and approval
52
of significant corporate
transactions, such as a merger or other sale of our company or its assets. This concentration of
ownership could limit your ability to influence corporate matters and may have the effect of
delaying or preventing another party from acquiring control over us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities
None.
(b) Use of Proceeds from Public Offering of Common Stock
In July 2007, we completed an initial public offering of common stock pursuant to a
Registration Statement on Form S-1 (Registration No. 333-141522), which was declared effective by
the SEC on July 18, 2007, selling 10,350,000 shares of common stock at an offering price of $12.00
per share, raising proceeds of approximately $113.0 million, net of underwriting discounts and
expenses. As of April 30, 2008 we had used a total of $90.6 million of the net proceeds to repay
our outstanding debt and interest and to fund our cost of goods sold and operating expenses. During
the quarter ended July 31, 2008, we used the remaining $22.4 million of the net proceeds to fund
our cost of goods sold and operating expenses.
Item 4. Submission of Matters to a Vote of Security Holders
Our 2008 Annual Meeting of Stockholders was held on June 6, 2008 at the offices of WilmerHale LLP,
60 State Street, Boston, Massachusetts. Of the 57,990,285 shares of our common stock issued and
outstanding on April 22, 2008, the record date of the annual meeting, 52,920,855 shares (91.3%)
were present or represented by proxy at the meeting. The results of the votes on each of the
proposals considered at the annual meeting were as follows:
1. |
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Election of three class I directors, each to serve a three-year term beginning at the annual
meeting and ending at our 2011 Annual Meeting of Stockholders. |
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Shares |
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Broker |
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Shares For |
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Withheld |
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Abstentions |
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Non-Votes |
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James Baum |
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52,792,920 |
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127,935 |
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0 |
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0 |
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Peter Gyenes |
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52,765,741 |
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155,114 |
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0 |
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0 |
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Charles F. Kane |
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52,749,163 |
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171,692 |
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0 |
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0 |
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2. |
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Amendment of our 2007 Stock Incentive Plan to establish a maximum number of shares that may
be authorized under the plan. |
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Shares For |
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40,241,935 |
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Shares Against |
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5,258,288 |
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Abstentions |
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26,250 |
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Broker Non-Votes |
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7,394,382 |
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3. |
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Ratification of the selection of PricewaterhouseCoopers LLP as our independent registered
public accounting firm for the fiscal year ending January 31, 2009 |
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Shares For |
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52,742,942 |
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Shares Against |
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136,991 |
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53
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Abstentions |
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40,922 |
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Broker Non-Votes |
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0 |
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Item 6. Exhibits
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Exhibit No. |
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Description |
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10.1 |
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2007 Stock Incentive Plan, as amended, as filed with the Companys
definitive proxy statement on Schedule 14A, filed with the SEC on May
5, 2008 and incorporated herein by reference. |
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10.2 |
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First
Amendment dated as of July 8, 2008, to the Lease, dated January 2, 2008, by
and between the Company and NE Williams II, LLC. |
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31.1 |
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Certification of Chief Executive Officer, pursuant to Securities
Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of Chief Financial Officer, pursuant to Securities
Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Securities Exchange Act Rules 13a-14(b) and 15d-14(b), as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
54
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Netezza Corporation
(Registrant)
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Date: September 9, 2008
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By: |
/s/ Patrick J. Scannell, Jr.
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Patrick J. Scannell, Jr. |
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Senior Vice President and Chief Financial Officer (Principal Financial and Accounting
Officer) |
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55