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| BCSI > SEC Filings for BCSI > Form 10-K on 22-Jun-2009 | All Recent SEC Filings |
22-Jun-2009
Annual Report
This Annual Report on Form 10-K, and other materials accompanying this Annual
Report on Form 10-K contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements relate to our future plans, objectives,
expectations, intentions and financial performance and the assumptions that
underlie these statements. These forward-looking statements include, but are not
limited to, statements concerning the following: expectations with respect to
future market growth opportunities; changes in and expectations with respect to
revenues and gross margins; future operating expense levels and operating
margins; the impact of quarterly fluctuations of revenue and operating results;
our ability to achieve expected levels of revenues and profit contributions from
acquired businesses; the impact of macroeconomic conditions on our business; the
adequacy of our capital resources to fund operations and growth; investments or
potential investments in acquired businesses and technologies (including our
acquisition of Packeteer, Inc.), as well as internally developed technologies;
the expansion and effectiveness of our direct sales force, distribution channel,
and marketing activities, including the realignment of our sales force and
changes in our global fulfillment model; the impact of recent changes in
accounting standards and assumptions underlying any of the foregoing. In some
cases, forward-looking statements are identified by the use of terminology such
as "anticipate," "expect," "intend," "plan," "predict," "believe," "estimate,"
"may," "will," "should," "would," "could," "potential," "continue," "ongoing,"
or negatives or derivatives of the foregoing, or other comparable terminology.
The forward-looking statements in this Annual Report on Form 10-K involve known and unknown risks, uncertainties and other factors that may cause industry and market trends, or our actual results, level of activity, performance or achievements, to be materially different from any future trends, results, level of activity, performance or achievements expressed or implied by these statements. For a detailed discussion of these risks, uncertainties and other factors, see the "Risk Factors" section in Item 1A of this Annual Report on Form 10-K. We undertake no obligation to revise or update forward-looking statements to reflect new information or events or circumstances occurring after the date of this Annual Report on Form 10-K, except as required by applicable law.
Overview
We sell a family of proxy appliances and related software and services. Proxy appliances are computer hardware devices that, together with internal software, optimize and secure the delivery of business applications and other information over a WAN or across an enterprise's Internet gateway, where its local computer network links to the public Internet.
On June 6, 2008, we acquired Packeteer, a pioneer in delivering sophisticated WAN traffic prioritization, for a purchase price of approximately $278.6 million. Packeteer developed and sold application classification and performance management products. Much of our focus during fiscal 2009 was on integrating the business of Packeteer into our existing business and creating a single organization (including an integrated sales force) designed to take advantage of cost, management, technology, sales and market synergies. As well, we sought to make the Packeteer products, in particular the PacketShaper® product, a key part of our product offering and business strategy.
In fiscal 2009, we developed, articulated and commenced implementation of our business strategy to be the leader in the market for products and services that comprise an Application Delivery Network ("ADN") infrastructure. We look at an ADN infrastructure as a set of products and services that provides visibility into the business applications operating on a network, as well as securing and optimizing the delivery of those applications. While much of our focus during the past two fiscal years has been in the area of WAN optimization, we believe that our ability to differentiate WAN optimization with our traditional secure web gateway products and technologies and with the application performance monitoring products and technologies we acquired from Packeteer is fundamental to our current and continued success.
We continue to monitor the current unfavorable and uncertain global macroeconomic conditions, and their actual and anticipated impact on IT spending. While we believe that our ADN products offer an attractive return on investment and that sales of our products have been less affected by current conditions than many IT products, the current economy has affected our ability to close sales transactions. We believe that many customers are postponing spending, which means that sales can take longer to close. Despite the challenging economic environment, we continued to hire sales personnel during fiscal 2009 to address and grow our current and anticipated market.
We have recently revised our sales and logistics operations in significant respects to better and more efficiently serve our customers and end users. While historically we have assigned territory-based sales teams to provide sales coverage, we have tiered our sales model to provide sales managers focused on the level of sales opportunity, which we classify as strategic, large enterprise and mid-tier. We also have allocated and aligned our sales support personnel, such as sales engineers, based on their skill sets, rather than assigning them to a single sales team. These changes are intended to increase product revenue and to decrease our selling costs as a percentage of revenue, as well as to provide more focused service to our customers.
In fiscal 2009, we developed a plan to revise our global logistics practices to ship directly to our end user customers and value-added resellers worldwide. We will be implementing these revised practices in fiscal 2010. This will not materially impact our distribution practices in North America, Latin America and Asia Pacific, where most of our distributors do not stock inventory. However, it will constitute a significant change in our Europe, Middle East and Africa region, where the stocking of our products is common. While we will continue using a two tier distribution scheme where distributors provide added value, such as professional services and training, pre-sales support, post-sales support and marketing activities, the added value will no longer include stocking and shipping our products. We believe that this model will prove more efficient and cost-effective, and will result in a higher level of customer satisfaction.
We track many financial metrics as key measures of our business performance, including net revenue, operating margin, deferred revenue, cash flow from operations, and cash position.
Net Revenue
Net revenue, which includes product and service revenue, increased to $444.7 million in fiscal 2009 from $305.4 million in fiscal 2008. Net product revenue in fiscal 2009 was $305.6 million, a $71.7 million increase compared to fiscal 2008. The increase in product revenue was primarily due to revenue attributable to Packeteer products and increased sales of existing products. Net product revenue primarily includes sales of our Proxy and PacketShaper® appliances and licenses to our Blue Coat WebFilter product. Included in product revenue is $57.7 million in sales attributable to Packeteer products. We recognized $139.1 million in service revenue in fiscal 2009, a $67.6 million increase compared to fiscal 2008. Included in service revenue is $31.4 million attributable to Packeteer services. The balance of the increase was driven primarily by the continued growth in our installed base, resulting in an increase in sales of service contracts and renewal service contracts.
Operating Margin
In fiscal 2009, our operating income decreased to $2.6 million from operating income of $25.1 million in fiscal 2008, a decrease of $22.5 million. The decrease was attributable to a reduction in our gross profit margin from 76.6% in fiscal 2008 to 70.5% in fiscal 2009, as well as increased operating expenses of $102.2 million which were 69.9% of revenue for fiscal year 2009 compared to 68.4% for fiscal year 2008. Our fiscal 2009 gross profit margin was negatively impacted by $16.2 million as a consequence of the sale of acquired Packeteer inventory that had been written up to its estimated fair value at the time of acquisition and additionally, by the loss of $11.9 million of service revenue due to the write-down of Packeteer's deferred service revenue to fair value, in each case, as required by purchase accounting rules. At April 30, 2009, $2.8 million of the fair value write-up on the acquired Packeteer inventory and $3.7 million of the fair value write-down on Packeteer's
deferred service revenue remained to be recognized. Operating expenses primarily consist of sales and marketing, research and development, general and administrative expenses and amortization of intangible assets. Personnel-related costs, including stock-based compensation, are the primary driver of each of these expense categories and the increase in operating expenses in fiscal 2009. Additionally, in fiscal 2009, we incurred restructuring, integration and transition costs of $10.9 million. As of April 30, 2009 we had 1,434 employees, an increase of 38.8% from the 1,033 employees at April 30, 2008. The majority of the headcount increases in fiscal 2009 were in sales, research and development and customer support.
Deferred Revenue
Net deferred revenue was $130.6 million at April 30, 2009 compared to $89.6 million at April 30, 2008. The increase was primarily attributable to an increase in new service contracts sold with our appliances, as well as the renewal of service contracts, offset by a reduction in inventory held by our distributors attributable to distributor inventory management in anticipation of our change to a new fulfillment model during fiscal 2010 to direct shipment of our products to end user customers and value-added resellers. Once this transition is complete, our distributors will no longer hold inventory and, consequently, distributor inventory stocking orders will no longer be included in our deferred revenue at sales value, but will be included in our inventory at cost.
Cash Flow from Operations and Cash Position
During fiscal 2009, we generated cash flow from operations of $57.7 million, compared to $56.9 million generated during fiscal 2008. The increase in operating cash flow was primarily due to higher cash collections, offset by certain payments made related to our Packeteer acquisition, including transaction costs, severance payments and other liabilities assumed as a result of the Packeteer acquisition, and lower net income of $41.1 million. Our cash, restricted cash and short-term investments were $115.0 million at April 30, 2009, compared to $163.0 million at April 30, 2008. The overall decrease in our cash and equivalents balance was primarily due to the cash used for our Packeteer acquisition, partially offset by the proceeds received from our convertible debt issuance on June 2, 2008.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to Revenue Recognition, Allowance for Doubtful Accounts, Stock-Based Compensation, Supply Chain Liabilities and Valuation of Inventories, Acquisitions, Goodwill and Identifiable Intangible Assets, Income Taxes, and Legal and Other Contingencies. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and such differences could be material.
We have discussed the development and selection of critical accounting policies and estimates with the audit committee of our board of directors. We believe the accounting policies described below are those that most frequently require us to make estimates and judgments that materially affect our financial statements and are critical to the understanding of our financial condition and results of operations:
• Revenue Recognition
• Allowance for Doubtful Accounts
• Stock-Based Compensation
• Acquisitions, Goodwill and Identifiable Intangible Assets
• Income Taxes
• Legal and Other Contingencies
Revenue Recognition
Our products include stand-alone software and software that is essential to the functionality of our appliances. Additionally, we provide unspecified software upgrades through maintenance contracts for most of our products. Accordingly, we account for revenue in accordance with Statement of Position No. 97-2, Software Revenue Recognition, ("SOP 97-2") and all related interpretations. We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery or performance has occurred; the sales price is fixed or determinable; and collection is probable.
We define each of the four criteria above as follows:
Persuasive evidence of an arrangement exists. Evidence of an arrangement generally consists of customer purchase orders and, in certain instances, sales contracts or agreements.
Delivery or performance has occurred. We use shipping and related documents, or written evidence of customer acceptance, when applicable, to verify delivery or performance. Through fiscal 2009, most of our sales were made through distributors under agreements that, in most cases, allow for stock rotation rights. Net revenue and the related cost of net revenue resulting from shipments of products to distributors are deferred until the distributors report that our products have been sold to a customer. Product revenue in China is deferred until the customer registers its purchase of the proxy appliance.
For direct sales to end-users and value-added resellers, we recognize product revenue upon transfer of title and risk of loss, which generally is upon shipment. We do not accept orders from value-added resellers when we are aware that the value-added reseller does not have an order from an end user customer. We generally do not have significant obligations for future performance, such as rights of return or pricing credits, associated with sales to end users and value-added resellers.
The sales price is fixed or determinable. We assess whether the sales price is fixed or determinable based on payment terms and whether the sales price is subject to refund or adjustment.
Collection is probable. We assess probability of collection on a customer-by-customer basis. We subject our customers to a credit review process that evaluates their financial condition and ability to pay for our products and services. If we conclude that collection is not probable based upon our initial review, we do not recognize revenue until cash is received.
For products in an arrangement that includes multiple elements, such as appliances, maintenance or software, we use the residual method to recognize revenue for the delivered elements. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangement consideration less the aggregate fair value of any undelivered elements, provided that vendor specific objective evidence ("VSOE") of fair value exists for all undelivered elements. VSOE of fair value is based on the price charged when the element is sold separately. We analyze our stand alone maintenance renewals by sales channel and service offering (strata). We determine the VSOE of fair value for maintenance by analyzing our stand alone maintenance renewals and noting that a substantial majority of transactions fall within a narrow range for each stratum. In limited cases, VSOE of fair value has been based on management determined prices. If evidence of the fair value of one or more undelivered elements does not exist, all revenue is generally deferred and recognized at the earlier of delivery of those elements or establishment of fair value for the remaining undelivered elements. When VSOE of fair value cannot be determined for any undelivered maintenance, subscription or service elements, revenue for the entire arrangement is recognized ratably over the maintenance, subscription or service period.
Maintenance and subscription revenue is initially deferred and recognized ratably over the life of the contract, with the related expenses recognized as incurred. Maintenance and subscription contracts usually have a term of one to three years. Unearned maintenance and subscription revenue is included in deferred revenue.
Allowance for Doubtful Accounts
We perform ongoing credit evaluations of our customers' financial condition and maintain an allowance for doubtful accounts. We analyze accounts receivable and historical bad debts, customer geographic concentrations, customer solvency, current economic and geographic trends, and changes in customer payment terms and practices when evaluating the adequacy of such allowance, and record any required changes in the allowance account to general and administrative expense. We write off accounts receivable when they are deemed to be uncollectible.
Stock-Based Compensation
Effective May 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123(R), Share-Based Payment, ("SFAS No. 123 (R)") using the modified prospective transition method. Under that transition method, compensation expenses recognized beginning on that date include: (a) compensation expense for all unvested share-based payments granted prior to May 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123; and (b) compensation expense for all share-based payments granted on or after May 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). We use the Black-Scholes option valuation model to calculate this compensation expense.
The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the expected term of options, the expected price volatility of the stock underlying such options, the risk-free interest rate, and the expected forfeiture rate.
For options granted before May 1, 2006, we amortize the fair value on a graded basis over the vesting period, which results in greater expense recorded in earlier years than the straight-line method. For options granted on or after May 1, 2006, we amortize the fair value of stock-based compensation on a straight-line basis for options expected to vest. The fair value of all options is amortized over the requisite service periods of the awards, which are generally the vesting periods. We may use different assumptions under the Black-Scholes option valuation model in the future, which could materially affect our total and per-share net income or loss.
We estimate the expected term of options granted based on our historical experience of grants, exercises and post-vesting cancellations. Beginning with our adoption of SFAS No. 123(R) on May 1, 2006 until April 30, 2008, the expected option term was 4.63 years. Effective May 1, 2008 and continuing through April 30, 2009, we estimated the expected option term at 4.0 years based on our updated experience of grants, exercises and post-vesting cancellations.
We estimate the volatility of our stock options at the date of grant using a combination of historical and implied volatilities, consistent with SFAS No. 123(R) and SAB No. 107. We base the risk-free rate that we use in the Black-Scholes option valuation model on the implied yield in effect at the time of option grant based on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of our option grants.
Stock-based compensation expense under SFAS No. 123(R) is based on awards ultimately expected to vest, which requires that forfeitures be estimated at the time of grant and revised, if necessary, if actual forfeitures differ from those estimates. Effective May 1, 2008 and continuing through April 30, 2009, we estimated our forfeiture rate at 14.0% based on an analysis of historical pre-vesting forfeitures, and have reduced stock-based compensation expense accordingly. From May 1, 2006 until April 30, 2008, we used a forfeiture rate of 10.0%.
Supply Chain Liabilities and Valuation of Inventories
We outsource most of our manufacturing, product fulfillment, repair, and supply chain management operations to contract manufacturers, and a significant portion of our cost of revenues is a result of this activity. Our contract manufacturers procure components and manufacture our products based on demand forecasts that we prepare. These forecasts are based on estimates of future product demand and are adjusted for overall market conditions. If the actual product demand is significantly lower than forecasted, it could have an adverse impact on our gross margins and profitability.
Inventories consist of raw materials and finished goods. Inventories are recorded at the lower of cost (using the first-in, first-out method) or market, after we give appropriate consideration to obsolescence and inventory in excess of anticipated future demand. In assessing the ultimate recoverability of inventories, we are required to make estimates regarding future customer demand, the timing of new product introductions, economic trends and market conditions.
Acquisitions, Goodwill and Identifiable Intangible Assets
We account for acquired businesses using the purchase method of accounting in accordance with SFAS No. 141, Business Combinations ("SFAS 141"), which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of net assets acquired is recorded as goodwill. The fair value of intangible assets, including acquired technology and customer relationships, is based on significant judgments made by management. We typically engage third party valuation appraisal firms to assist us in determining the fair values and useful lives of the assets acquired. Such valuations and useful life determinations require us to make significant estimates and assumptions. These estimates are based on historical experience and information obtained from the management of the acquired companies. Critical estimates in determining the fair value and useful lives of the assets include, but are not limited to, future expected cash flows earned from the product related technology and discount rates applied in determining the present value of those cash flows. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. Acquisition-related identified intangible assets are amortized on a straight-line basis over their estimated economic lives, which are three to seven years for developed technology and patents, five years for core technology, five to seven years for customer relationships and two years for trade name.
We perform annual goodwill impairment tests in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, during our fourth fiscal quarter, or whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. The first step of the test identifies whether potential impairment may have occurred, and the second step of the test measures the amount of the impairment, if any. An impairment of goodwill is recognized when the carrying amount of the assets exceeds their fair value. The process of evaluating the potential impairment of goodwill is highly subjective and requires the application of significant judgment. For purposes of the annual impairment test, we consider our market capitalization compared to the carrying amount of our assets on the date of the test, since we have only one reporting unit. We performed our annual review of goodwill in the fourth quarter of fiscal 2009 and concluded that no impairment existed at April 30, 2009.
We periodically evaluate potential impairments of our long-lived assets, including identifiable intangible assets, in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We evaluate long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events or changes in circumstances that could result in an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, and significant negative industry or economic trends. Impairment is recognized when the carrying amount of an asset exceeds its fair value as calculated on a discounted cash flow basis.
Income Taxes
We use the liability method to account for income taxes as required by SFAS No. 109, Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves determining our income tax expense and calculating the deferred income tax expense related to temporary difference resulting from the differing treatment of items for tax and accounting purposes, such as deferred revenue or deductibility of the amortization of certain intangible assets. These temporary differences result in deferred tax assets or liabilities, which are included within the consolidated balance sheets.
We record a valuation allowance to reduce certain deferred tax assets to an amount that we estimate is more likely than not to be realized. We consider estimated future taxable income and prudent tax planning strategies in determining the need for a valuation allowance. When we determine that it is more likely than not that some or all of our deferred tax assets will be realizable by either refundable income taxes or future taxable income, the valuation allowance will be reduced and the related tax impact will be recorded as a reduction to the tax provision in that quarter. Likewise, should we determine that we are not likely to realize all or part of our deferred tax assets in the future, an increase to the valuation allowance would be recorded . . .
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