Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
FIRE > SEC Filings for FIRE > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for SOURCEFIRE INC

Form 10-Q for SOURCEFIRE INC


2-Aug-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions, or the negative of such words or phrases, are intended to identify "forward-looking statements." We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include those below and elsewhere in this Quarterly Report on Form 10-Q, particularly in "Risk Factors," and our other filings with the Securities and Exchange Commission. Statements made herein are as of the date of the filing of this Form 10-Q with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
Introduction
Management's discussion and analysis of financial condition, changes in financial condition and results of operations is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of Sourcefire, Inc.'s financial condition and results of operations. This item is organized as follows:
• Overview. This section provides a general description of our business, the key financial metrics that we use in assessing our performance, and anticipated trends that we expect to affect our financial condition and results of operations.

• Results of Operations. This section provides an analysis of our results of operations for the three and six months ended June 30, 2013 and 2012, respectively.

• Non-GAAP Financial Measures and Supplemental Operating Data. This section discusses non-GAAP financial results that we use in evaluating the operating performance of our business. These measures should be considered in addition to results prepared in accordance with United States generally accepted accounting principles, or GAAP, but should not be considered a substitute for, or superior to, GAAP results. The non-GAAP measures discussed have been reconciled to the nearest GAAP measure in a table included in this section. This section also includes supplemental operating data.

• Liquidity and Capital Resources. This section provides an analysis of our cash flows for the three and six months ended June 30, 2013 and 2012, respectively and a discussion of our capital requirements and the resources available to us to meet those requirements.

• Critical Accounting Policies and Estimates. This section discusses accounting policies that are considered important to our financial condition and results of operations, require significant judgment or require estimates on our part in applying them. Our significant accounting policies, including those considered to be critical accounting policies, are summarized in Note 2 to the accompanying consolidated financial statements.

Overview
Sourcefire delivers intelligent cybersecurity technologies. Our comprehensive portfolio of solutions enables commercial enterprises and government agencies worldwide to manage and minimize cybersecurity risks. From our industry-leading next-generation network security platform to our advanced malware protection, Sourcefire provides customers with Agile Security® that addresses the need for more informed, adaptive, and automated security solutions to protect today's dynamic information technology environments from constantly changing threats. We sell our solutions to a diverse customer base that includes Global 2000 companies, global enterprises, U.S. and international government agencies and small and mid-size businesses. We also manage the security industry's leading open source initiative, Snort®, as well as the ClamAV® and Razorback™ open source initiatives.


Pending Merger with Cisco
On July 22, 2013, Sourcefire, Inc. (the "Company") entered into an Agreement and Plan of Merger (the "Merger Agreement") with Cisco Systems, Inc., a California corporation ("Cisco"), and Shasta Acquisition Corp., a Delaware corporation and an indirect wholly-owned subsidiary of Cisco ("Merger Sub"), pursuant to which Merger Sub will be merged with and into the Company (the "Merger"), and the Company will become an indirect wholly-owned subsidiary of Cisco at the effective time of the Merger. Under the terms of the Merger Agreement, Cisco has agreed to acquire all of our outstanding common stock for $76.00 per share in cash, which represented a premium of approximately 29% to our closing price on July 22, 2013. The transaction has been approved by the boards of directors of both companies and is subject to customary closing conditions, including a regulatory review and approval by Sourcefire's stockholders. For additional information regarding the business risks associated with pursuing the Merger, see Item 1A., "Risk Factors," in this Quarterly Report on Form 10-Q. Key Financial Metrics and Trends
Revenue from U.S. commercial customers accounted for 49% and 51% of our total revenue for the three and six months ended June 30, 2013, respectively, and 55% and 50% of our total revenue for the three and six months ended June 30, 2012, respectively. Our revenues from U.S. commercial customers increased by 16% and 27%, respectively, for the three and six months ended June 30, 2013 as compared to the prior-year periods.
Revenue from international customers accounted for 31% and 33% of our total revenue for the three and six months ended June 30, 2013, respectively, and 29% and 31% of our total revenue for the three and six months ended June 30, 2012, respectively. Our revenues from international customers increased by 35% and 34%, respectively, for three and six months ended June 30, 2013 as compared to the prior-year periods.
Revenue from U.S. federal and state government agencies collectively accounted for 20% and 16% of our total revenue for the three and six months ended June 30, 2013, respectively, and 16% and 19% for the of our total revenue for the three and six months ended June 30, 2012, respectively. Our revenues from U.S. federal and state government agencies increased by 57% and 6%, respectively, for the three and six months ended June 30, 2013, as compared to the prior-year periods. We believe that our revenue from sales of products for the three and six months ended June 30, 2013 was positively affected by a number of factors, including
(i) increased customer acceptance of enhanced versions of our products, (ii) expansion of our indirect sales channel in the U.S. and internationally and
(iii) investments in our international operations and the resulting increase in workforce. In addition, our revenue from sales of services for the three and six months ended June 30, 2013 was positively affected by an increase in our installed customer base. We expect these factors to continue to positively affect our product and services revenue for the remainder of 2013. We also believe that our revenue from sales of products and services for the three months ended June 30, 2013 was positively affected by a shift in timing of sales to the U.S. federal government, from the first quarter to the second quarter, due to uncertainty in the federal procurement process created by the federal budget sequestration implemented during the first quarter and the failure of the federal government to enact a budget for its fiscal year ending September 30, 2013, and the resolution of this uncertainty with the March 26, 2013 enactment of a continuing budget resolution that funds the federal government for the remainder of its fiscal year. However, we believe that our revenue from sales of products and services for the six months ended June 30, 2013 was negatively affected by a reduction in U.S. federal spending levels due to automatic budget cuts associated with the sequestration and reduced spending levels under the continuing budget resolution. For the remainder of 2013, we expect these factors may continue to negatively affect our sales to the federal government. We evaluate our performance on the basis of several key financial metrics, including revenue, cost of revenue, gross profit, and operating expenses. We compare these key performance indicators, on a quarterly basis, to both target amounts established by management and to our performance for prior periods. We also evaluate performance on the basis of adjusted net income, adjusted net income per share, adjusted income from operations, adjusted income from operations as a percentage of revenue and free cash flow, which are non-GAAP financial measures. Information regarding our non-GAAP financial measures and a reconciliation of each to the nearest GAAP measure is provided under "Non-GAAP Financial Measures" below. Revenue
We currently derive revenue from product sales and services. Product revenue is principally derived from the sale of our network security solutions. These solutions include a perpetual software license bundled with a third-party hardware platform. Services revenue is principally derived from technical support and professional services and training. We typically sell technical support to complement our network security product solutions.

Technical support entitles a customer to product updates and new rule releases on a when and if available basis and both telephone and web-based assistance for using our products. Our professional services include optional installation, configuration and tuning, which we refer to collectively as network security deployment services. These services typically


occur on-site after delivery has occurred. Our training includes instructor-led and custom classes delivered at various locations around the world, onsite at customer premises, and online.
Product sales are typically recognized as revenue upon shipment of the product to the customer. For sales through resellers and distributors, we recognize revenue upon the shipment of the product only if those resellers and distributors provide us, at the time of placing their order, with the identity of the end-user customer to whom the product has been sold. We recognize revenue from services when the services are performed. For technical support services, we recognize revenue ratably over the term of the support arrangement, which is primarily 12 months. Our support agreements generally provide for payment in advance.
We sell our network security solutions globally. Revenue generated by sales to U.S.-based customers was 69% and 67%, respectively, of total revenue for the three and six months ended June 30, 2013 and 71% and 69%, respectively, of total revenue for the three and six months ended June 30, 2012. We believe that our revenue from customers based outside of the United States will increase in absolute dollars and as a percentage of revenue as we strengthen our international presence.
We continue to generate a majority of our product revenue through sales to existing customers, both for new locations and for additional technology to protect existing networks and locations. Product sales to existing customers accounted for 72% and 69% of total product revenue for the three months ended June 30, 2013 and 2012, respectively. Product sales to existing customers accounted for 71% and 66% of total product revenue for the six months ended June 30, 2013 and 2012, respectively. We expect product sales to existing customers to continue to account for a significant portion of our product revenue in 2013. Historically, our product revenue has been seasonal, with a significant portion of our total product revenue in recent fiscal years generated in the third and fourth quarters. Revenue from our government customers has been influenced by the September 30th fiscal year-end of the U.S. federal government, which has historically resulted in our revenue from government customers being highest in the second half of the year. While we expect these historical trends to continue, they could be affected by a number of factors, including another decline in general economic conditions, changes in the timing or amounts of U.S. government spending and our planned international expansion. Notwithstanding these general seasonal patterns, our revenue within a particular quarter is often affected significantly by the unpredictable procurement patterns of our customers. Our prospective customers usually spend a long time evaluating and making purchase decisions for network security solutions. Historically, many of our customers have not finalized their purchasing decisions until the final weeks or days of a quarter. We expect these purchasing patterns to continue in the future. Therefore, a delay in even one large order beyond the end of the quarter could materially reduce our anticipated revenue for a quarter. In addition, because we typically recognize revenue upon shipment, the timing of our quarter-end and year-end shipments could materially affect our reported product revenue for a given quarter or year. Delayed orders could negatively impact our results of operations and cash flows for a particular period and could therefore cause us to fail to meet the financial performance expectations of financial and industry research analysts or investors. Cost of Revenue
Cost of product revenue includes the cost of the hardware platform, third-party manufacturing costs, royalties for third-party software, personnel costs associated with logistics and quality control, stock-based compensation expense, amortization of acquired intangible assets, supplies, warranty, shipping and handling costs, expense for excess and obsolete inventory and depreciation in the instances where we lease our network security solutions to our customers. In addition, in the first quarter of 2012, we began to incur cost of revenue expenses to support and run the infrastructure of our advanced malware protection products. We allocate overhead costs, including facilities, supplies, communication and information systems and employee benefits, to the cost of product revenue. Overhead costs are reflected in each cost of revenue and operating expense category. As our product volume increases, we anticipate incurring an increased amount of both direct and overhead expenses to supply and manage the increased volume. In addition, hardware unit costs or other costs of manufacturing could increase in the future.

Cost of services revenue includes the direct labor costs of our employees and outside consultants engaged to furnish those services, as well as their travel and associated direct material costs and stock-based compensation expense. Additionally, we include in cost of services revenue an allocation of overhead costs, as well as the cost of time and materials to service or repair the hardware component of our products covered under a renewed support arrangement beyond the manufacturer's warranty, the amortization of a long-term contract for a third-party to provide maintenance and support services for certain product offerings and the expense for advance replacement unit inventory excess and obsolescence. As our customer base continues to grow, we anticipate incurring an increasing amount of these service and repair costs, as well as costs for additional personnel to provide support and service to our customers.


Gross Profit
Our gross profit is affected by a variety of factors, including the mix and average selling prices of our products, our pricing policy, new product introductions, the cost of hardware platforms, expense for excess and obsolete inventory, warranty expense, the cost of labor and materials and the mix of distribution channels through which our products are sold. Our gross profit would be adversely affected by price declines or pricing discounts if we are unable to reduce costs on existing products and fail to introduce new products with higher margins. Currently, product sales typically have a lower gross profit as a percentage of revenue than our services due to the cost of the hardware platform. Our gross profit for any particular quarter could be adversely affected if we do not complete a sufficient level of sales of higher-margin products by the end of the quarter. As discussed above, many of our customers do not finalize purchasing decisions until the final weeks or days of a quarter, so a delay in even one large order of a high-margin product could significantly reduce our gross margin for that quarter.
We completed the transition of our product line to our next generation platform in 2012. Generally, the gross margins of our new products are lower as compared to the previous generation of products they are replacing. In addition, in the first quarter of 2012, we began to incur cost of revenue expenses to support and run the infrastructure of our advanced malware protection products. These items had a negative impact on our gross margin for the three and six months ended June 30, 2013 and we expect this impact to continue in 2013. In addition, as we expand our international operations, our gross margin may be negatively impacted due to the additional costs associated with operating in certain non-U.S. jurisdictions.
Operating Expenses
Research and Development. Research and development expenses consist primarily of salaries, incentive compensation and allocated overhead costs for our engineers; stock-based compensation expense; retention obligations related to our hiring of former Immunet employees; costs for professional services to design, test and certify our products; and costs associated with data used by us in our product development.
We have expanded our research and development capabilities and expect to continue to expand these capabilities in the future. We are committed to increasing the level of innovative design and development of new products as we strive to enhance our ability to serve our existing commercial and federal government markets as well as new markets for security solutions. To meet the changing requirements of our customers, we will need to fund investments in several development projects in parallel. Accordingly, we anticipate that our research and development expenses will continue to increase in absolute dollars for the year ending December 31, 2013 and, as a percentage of revenue, will be consistent with 2012.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries, incentive compensation and allocated overhead costs for sales and marketing personnel; stock-based compensation expense; trade show, advertising, marketing and other brand-building costs; marketing consultants and other professional services; training, seminars and conferences; and travel and related costs. As we continue to focus on increasing our market penetration, expanding internationally, increasing our indirect sales channel and building brand awareness, we anticipate that selling and marketing expenses will continue to increase in absolute dollars for the year ending December 31, 2013 and, as a percentage of revenue, will be consistent with 2012.
General and Administrative. General and administrative expenses consist primarily of salaries, incentive compensation and allocated overhead costs for executive, legal, finance, information technology, human resources and administrative personnel; stock-based compensation expense; corporate development expenses and professional fees related to legal, audit, tax and regulatory compliance; travel and related costs; and corporate insurance. We anticipate that general and administrative expenses will increase in absolute dollars for the year ending December 31, 2013.
Stock-Based Compensation. Stock-based compensation expense is based on the grant date fair value of stock awards. We use the Black-Scholes option pricing model, except for certain option awards that contain market conditions relating to our stock price achieving specified levels, in which case we use a Monte Carlo simulation model, for estimating the fair value of stock options granted and for employee stock purchases under our Employee Stock Purchase Plan, or ESPP. The use of option valuation models requires the input of highly subjective assumptions, including the expected term and the expected stock price volatility. Additionally, the recognition of expense requires the estimation of the number of stock-based awards that will ultimately vest and the number that will ultimately be forfeited. Based on the estimated grant date fair value of stock-based awards, we recognized aggregate stock-based compensation expense of $7.2 million and $4.9 million for the three months ended June 30, 2013 and 2012, respectively, and $13.5 million and $9.0 million for the six months ended June 30, 2013 and 2012 .


Results of Operations
Revenue. The following table shows products and technical support and
professional services revenue (dollars in thousands):

                        Three Months Ended June 30,             Variance            Six Months Ended June 30,            Variance
                          2013               2012             $           %            2013             2012           $           %
Products            $      38,088       $      29,794     $  8,294        28 %   $      68,880       $  55,487     $ 13,393        24 %
Percentage of
total revenue                  59 %                59 %                                     57 %            57 %
Technical support
and professional
services                   26,964              20,804        6,160        30 %          52,336          41,413       10,923        26 %
Percentage of
total revenue                  41 %                41 %                                     43 %            43 %
Total revenue       $      65,052       $      50,598     $ 14,454        29 %   $     121,216       $  96,900     $ 24,316        25 %

The increase in our product revenue for the three months ended June 30, 2013, as compared to the prior-year period, was primarily due to increased unit sales of our appliances, with $5.4 million of the $8.3 million increase related to sales of our more powerful, higher priced appliances. The increase in our product revenue for the six months ended June 30, 2013, as compared to the prior-year period, was primarily due to increased unit sales of our appliances, with $11.6 million of the $13.4 million increase related to sales of our more powerful, higher priced appliances.
The increase in our services revenue for the three and six months ended June 30, 2013, as compared to the prior-year periods, resulted from an increase in our installed customer base due to new product sales in which associated support was purchased, as well as technical support renewals by our existing customers. Cost of revenue. The following table shows products and technical support and professional services cost of revenue (dollars in thousands):

                            Three Months Ended June 30,            Variance            Six Months Ended June 30,            Variance
                              2013               2012             $         %           2013               2012            $         %
Products                $      10,891       $       8,682     $ 2,209       25 %   $     20,917       $     17,171     $ 3,746       22 %
Percentage of total
revenue                            17 %                17 %                                  17 %               18 %
Technical support and
professional services           3,578               2,837         741       26 %          6,776              5,270       1,506       29 %
Percentage of total
revenue                             6 %                 6 %                                   6 %                5 %
Total cost of revenue   $      14,469       $      11,519     $ 2,950       26 %   $     27,693       $     22,441     $ 5,252       23 %
Percentage of total
revenue                            22 %                23 %                                  23 %               23 %

The increase in our product cost of revenue for the three and six months ended June 30, 2013, as compared to the prior-year periods, was primarily due to an increase in unit volume and the associated increase in product costs and increased infrastructure costs to support and run our advanced malware protection products.
The increase in our services cost of revenue for the three and six months ended June 30, 2013, as compared to the prior-year periods, was primarily due to our hiring of additional personnel to service our larger installed customer base, provide training to our resellers and customers, provide professional services to our customers, and increased hardware service expense to maintain our install base.


Gross profit. The following table shows products and technical support and professional services gross profit (dollars in thousands):

                           Three Months Ended June 30,            Variance            Six Months Ended June 30,             Variance
                             2013               2012             $          %          2013               2012            $           %
Products               $      27,197       $      21,112     $  6,085      29 %   $     47,963       $     38,316     $  9,647        25 %
Product gross margin              71 %                71 %                                  70 %               69 %
Technical support
and professional
services                      23,386              17,967        5,419      30 %         45,560             36,143        9,417        26 %
Technical support
and professional
services gross
margin                            87 %                86 %                                  87 %               87 %
Total gross profit     $      50,583       $      39,079     $ 11,504      29 %   $     93,523       $     74,459     $ 19,064        26 %
Total gross margin                78 %                77 %                                  77 %               77 %

Product gross margin for the three and six months ended June 30, 2013 remained relatively flat over the prior-year periods.
Technical support and professional services gross margin for the three and six months ended June 30, 2013 remained relatively flat over the prior-year periods. Operating expenses. The following table shows our operating expenses (dollars in thousands):

                           Three Months Ended June 30,            Variance             Six Months Ended June 30,            Variance
                             2013               2012             $          %           2013               2012            $          %
Research and
development            $      12,255       $      10,661     $  1,594       15 %   $     23,450       $     20,089     $  3,361       17 %
Percentage of total
. . .
  Add FIRE to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for FIRE - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.