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XXIA > SEC Filings for XXIA > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for IXIA


9-Aug-2013

Quarterly Report


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

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2013, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Form 10-Q and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012 (the "2012 Form 10-K"), including the "Risk Factors" section and the consolidated financial statements and notes included therein.

Restatement of Previously Issued Financial Statements. As discussed further in Note 14 to the condensed consolidated financial statements" contained in this Form 10-Q, in the 2012 Form 10-K, we restated our consolidated financial statements for, among other prior periods, the quarter ended June 30, 2012. Specifically, we have restated our consolidated financial statements for such quarter and other periods as the result of certain errors that existed in our previously filed financial statements related to the manner in which we had historically recorded revenues related to our warranty and software maintenance contracts, including a previous implied warranty and software maintenance arrangement with a certain customer. During the first quarter of 2013, we corrected the manner in which we record revenue for our warranty and software maintenance contracts and arrangements, and we are also continuing to enhance our documentation related to our revenue recognition policies and practices. See our 2012 Form 10-K for additional information regarding the restatement of our unaudited consolidated financial statements for the quarter ended June 30, 2012, and for information regarding the restatement in the 2012 Form 10-K of our audited consolidated financial statements for the years ended December 31, 2011 and 2010 and of our unaudited consolidated financial statements for each of the quarters in the year ended December 31, 2011 and for the quarters ended March 31, 2012 and September 30, 2012.

The impact of the correction of these errors on the applicable line items in the condensed consolidated financial statements for the three and six months ended June 30, 2012 resulting from the restatement is set forth in Note 14 to the condensed consolidated financial statements, included in this Form 10-Q.

BUSINESS OVERVIEW

We are a leading provider of converged Internet Protocol (IP) network validation and network visibility solutions. Equipment manufacturers, service providers, enterprises, and government agencies use our solutions to design, verify, and monitor a broad range of Ethernet, Wi-Fi, and 3G/LTE equipment and networks. Our product solutions consist of our hardware platforms, such as our chassis, interface cards and appliances, software application tools, and services, including our warranty and maintenance offerings and professional services.

During the 2013 second quarter, our cash, cash equivalents and investments in the aggregate increased by $25.8 million to $234.1 million from the $208.3 million reported three months earlier at March 31, 2013, and by $56.6 million from the $177.5 million reported six months earlier at December 31, 2012. Total revenues increased 27.8% to $115.9 million during the 2013 second quarter from $90.7 million during the 2012 second quarter due to the completion of two significant acquisitions in June and August of 2012. However, during the second quarter of 2013, our revenues came in below our expectations due, in part, to delays in spending at certain customers. We remain confident in our competitive position and our opportunities for long-term growth as our customers continue to transition to mobile networks, virtual data centers and hybrid cloud environments to deliver next generation applications. However, we believe that there continues to be some concerns that are creating uncertainty in the market, such as the Federal sequestration in the United States and the capital spending plans of large service providers and equipment manufacturers. This uncertainty may adversely impact our sales, results of operations and financial position over the near term.

Acquisition of BreakingPoint Systems, Inc. On August 24, 2012, we completed our acquisition of all of the outstanding shares of common stock of BreakingPoint Systems, Inc. ("BreakingPoint"). The aggregate cash consideration paid totaled $163.7 million, or $150.3 million net of BreakingPoint's existing cash and investment balances at the time of the acquisition. The acquisition was funded from our existing cash and investments. BreakingPoint is a leader in security testing, and its solutions provide global visibility into emerging threats and applications, along with advance insight into the resiliency of an organization's information technology infrastructure under operationally relevant conditions and malicious attacks. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base. In addition, we expect to leverage BreakingPoint's existing sales channels and assembled workforce, including its experienced product development and sales teams. The results of operations of BreakingPoint have been included in our consolidated statements of operations and cash flows since the date of the acquisition. See Note 3 to the condensed consolidated financial statements included in this Form 10-Q for additional information regarding the BreakingPoint acquisition.


Acquisition of Anue Systems, Inc. On June 1, 2012, we completed our acquisition of all of the outstanding shares of common stock of Anue Systems, Inc. ("Anue"). The aggregate consideration paid totaled $152.4 million, or $148.7 million net of Anue's existing cash and investment balances at the time of the acquisition. The acquisition was funded from our existing cash and investments. Anue provides solutions to monitor and test complicated networks, including Anue's Net Tool Optimizer solution that efficiently aggregates and filters network traffic to help optimize network monitoring tool usage. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base. In addition, we expect to leverage Anue's existing sales channels and assembled workforce, including its experienced product development team. The results of operations of Anue have been included in our condensed consolidated statements of operations and cash flows since the date of the acquisition. See Note 3 to the condensed consolidated financial statements included in this Form 10-Q for additional information regarding the Anue acquisition.

Revenues. Our revenues are principally derived from the sale and support of our test and visibility solutions.

Sales of our network test hardware products primarily consist of traffic generation and analysis hardware platforms containing multi-slot chassis and interface cards. Our primary network test hardware platform is enabled by our operating system software that is essential to the functionality of the hardware platform. Sales of our network visibility hardware products typically include an integrated, purpose-built hardware appliance with essential, proprietary software. Our software products consist of a comprehensive suite of technology-specific applications for certain of our network test hardware platforms. Our software products are typically installed on and work with these hardware products to further enhance the core functionality of the overall network test system, although some of our software products can be operated independently from our network test platforms.

Our service revenues primarily consist of technical support, warranty and software maintenance services revenues related to our network test and visibility hardware and software products. Most of our products include up to one year of these services with the initial product purchase, and our customers may separately purchase extended services for annual or multi-year periods. Our technical support, warranty and software maintenance services include assistance with the set-up, configuration and operation of our products, repair or replacement of defective products, bug fixes, and unspecified when and if available software upgrades. For certain network test products, our technical support and software maintenance service revenues also include our Application and Threat Intelligence (ATI) service, which provides a comprehensive suite of application protocols, software updates and technical support. The ATI service provides full access to the latest security attacks and application updates for use in real-world test and assessment scenarios. Our customers may purchase the ATI service for annual or multi-year periods. Service revenues also include training and other professional services revenues.

Sales to AT&T were approximately $17.5 million, or 15.1%, and $40.4 million, or 16.9%, of our total revenues for the three and six months ended June 30, 2013, respectively, and $1.7 million, or 1.9%, and $2.9 million, or 1.7%, of our total revenues for the three and six months ended June 30, 2012, respectively. Sales to Cisco Systems were approximately $12.3 million, or 10.6%, and $26.4 million, or 11.0%, of our total revenues for the three and six months ended June 30, 2013, respectively, and $13.5 million, or 14.9%, and $28.4 million, or 16.0%, of our total revenues for the three and six months ended June 30, 2012, respectively. To date, we have generated the majority of our revenues from sales to network equipment manufacturers, but this percentage has been declining over the past several years. While we expect that we will continue to have some customer concentration with network equipment manufacturers for the foreseeable future, we expect to continue to see some declines in revenues from such customers as a percentage of total revenues as we continue to sell our products to a wider variety and increasing number of service provider, enterprise and government customers. To the extent that we develop a broader and more diverse customer base, our reliance on any one customer or customer type should diminish. We also expect that our 2012 acquisitions of Anue and BreakingPoint (the "2012 Acquisitions") and the growth of their businesses will continue to further diversify our customer base.


From a geographic perspective, we generated revenues from shipments to international locations of $39.3 million, or 33.9%, and $85.8 million, or 36.0%, of our total revenues for the three and six months ended June 30, 2013, respectively, and $40.3 million, or 44.5%, and $82.9 million, or 46.7%, of our total revenues for the three and six months ended June 30, 2012, respectively. The decline in the percentage of our revenue from shipments to international locations was primarily due to our 2012 Acquisitions, which have a higher concentration of revenue from customers in the United States. Over the next 12 months, we expect to leverage and expand our international sales force to sell our Anue and BreakingPoint products to a larger global customer base, and as a result, we expect to increase our percentage of revenues from shipments to international locations.

Stock-Based Compensation. For the three and six months ended June 30, 2013, stock-based compensation expense was $5.7 million and $12.6 million, respectively. For the three and six months ended June 30, 2012, stock-based compensation expense was $3.8 million and $7.9 million, respectively. The increase in stock-based compensation expense in the three and six months ended June 30, 2013 as compared to the same periods in 2012 was primarily due to (i) the incremental impact of the share-based awards granted to the Anue and BreakingPoint employees related to our 2012 Acquisitions and (ii) an increase in the number of participants in our employee stock purchase plan. The aggregate amount of gross unrecognized stock-based compensation to be expensed in the years 2013 through 2017 related to unvested share-based awards as of June 30, 2013 was approximately $31.4 million. To the extent that we grant additional share-based awards, future expense may increase by the additional unearned compensation resulting from those grants. We anticipate that we will continue to grant additional share-based awards in the future as part of our long-term incentive compensation programs. The impact of future grants cannot be estimated at this time because it will depend on a number of factors, including the amount of share-based awards granted and the then current fair values of such awards for accounting purposes.

Cost of Revenues. Our cost of revenues related to the sale of our hardware and software products includes materials, payments to third-party contract manufacturers, royalties, and salaries and other expenses related to our manufacturing and supply operations, technical support and professional service personnel. We outsource the majority of our manufacturing operations, and we conduct supply chain management, quality assurance, documentation control, shipping and some final assembly and testing at our facilities in Calabasas, California, Austin, Texas and Penang, Malaysia. Accordingly, a significant portion of our cost of revenues related to our products consists of payments to our contract manufacturers. Cost of revenues related to the provision of services includes salaries and other expenses associated with technical support services, professional services and the warranty cost of hardware that is replaced or repaired during the warranty coverage period. Cost of revenues does not include the amortization of purchased technology related to our acquisitions of certain businesses, product lines and technologies of $6.4 million and $12.9 million for the three and six months ended June 30, 2013, respectively, and $3.6 million and $6.3 million for the three and six months ended June 30, 2012, respectively, which are included within our Amortization of Intangible Assets line item on our condensed consolidated statements of operations included in this Form 10-Q.

Our cost of revenues as a percentage of total revenues is primarily affected by the following factors:

? our pricing policies and those of our competitors;

? the pricing we are able to obtain from our component suppliers and contract manufacturers;

? the mix of customers and sales channels through which our products are sold;

? the mix of our products sold, such as the mix of software versus hardware product sales;

? new product introductions by us and by our competitors;

? demand for and quality of our products; and

? shipment volume.

In the near term, although we anticipate that our cost of revenues as a percentage of total revenues will remain relatively flat, we expect to continue to experience pricing pressure on larger transactions and from larger customers as a result of competition.


Operating Expenses. Our operating expenses are generally recognized when incurred and consist of research and development, sales and marketing, general and administrative, amortization of intangible assets, acquisition and other related costs and restructuring expenses. In dollar terms, we expect total operating expenses, excluding stock-based compensation expense discussed above and amortization of intangible assets, acquisition and other related costs and restructuring expenses discussed below, to increase modestly for the remainder of 2013 due primarily the expansion of our sales force and investments in certain product initiatives.

? Research and development expenses consist primarily of salaries and other personnel costs related to the design, development, testing and enhancement of our products. We expense our research and development costs as they are incurred. We also capitalize and depreciate over a five-year period costs of our products used for internal purposes.

? Sales and marketing expenses consist primarily of compensation and related costs for personnel engaged in direct sales, sales support and marketing functions, as well as promotional and advertising expenditures. We also capitalize and depreciate over a two-year period costs of our products used for sales and marketing activities, including product demonstrations for potential customers.

? General and administrative expenses consist primarily of salaries and related expenses for certain executive, finance, legal, human resources, information technology and administrative personnel, as well as professional fees (e.g., legal and accounting), facility costs related to our corporate headquarters, insurance costs and other general corporate expenses.

? Amortization of intangible assets consists of the recognition of the purchase price of various intangible assets over their estimated useful lives. We evaluate our identifiable definite-lived intangible assets and other long-lived assets for impairment when events or changes in circumstances indicate that a potential impairment may exist. An impairment charge would be recorded to the extent that the carrying value of the intangible asset exceeds its undiscounted cash flows and its estimated fair value in the period that the impairment circumstances occurred. We also evaluate the recoverability of our goodwill on an annual basis or if events or changes in circumstances indicate that an impairment in the value of goodwill recorded on our balance sheet may exist. Impairment losses are recorded to the extent that the carrying value of the goodwill exceeds its estimated fair value. The future amortization expense of acquired intangible assets depends on a number of factors, including the extent to which we acquire additional businesses, technologies or product lines or are required to record impairment charges related to our acquired intangible assets.

? Acquisition and other related costs are expensed as incurred and consist primarily of transaction and integration related costs such as success-based banking fees, professional fees for legal, accounting, tax, due diligence, valuation and other related services, change in control payments, amortization of deferred consideration, consulting fees, required regulatory costs, certain employee, facility and infrastructure transition costs, and other related expenses. We expect our acquisition and other related expenses to fluctuate over time based on the timing of our acquisitions and related integration activities.

? Restructuring expenses consist primarily of employee severance costs and other related charges, as well as facility-related charges to exit certain locations. See Note 4 to the condensed consolidated financial statements included in this Form 10-Q.

Interest Income and Other, Net represents interest on cash and a variety of securities, including money market funds, U.S. government and government agency debt securities, corporate debt securities and auction rate securities, realized gains/losses on the sale of investment securities, certain foreign currency gains and losses, and other non-operating items.

Interest Expense consists of interest due to the holders of our 3.00% convertible senior notes issued in December 2010 and interest expense and fees pertaining to our credit facility established in December 2012, as well as the amortization of the associated debt issuance costs. See Note 5 to the condensed consolidated financial statements included in this Form 10-Q.


Income tax is determined based on the amount of earnings and enacted federal, state and foreign tax rates, adjusted for allowable credits and deductions, and for other effects of equity compensation plans. Our income tax provision may be significantly affected by changes to our estimates for tax in jurisdictions in which we operate and other estimates utilized in determining the global effective tax rate. Actual results may also differ from our estimates based on changes in economic conditions. Such changes could have a substantial impact on the income tax provision. Our income tax provision could also be significantly impacted by estimates surrounding our uncertain tax positions and changes to valuation allowance set against certain deferred tax assets. We reevaluate the judgments surrounding our estimates and make adjustments as appropriate each reporting period.

Our effective tax rate differs from the federal statutory rate of 35% due to benefits associated with the differential in tax rates for certain foreign operations, state taxes and significant permanent differences. Significant permanent differences arise primarily due to research and development credits and certain stock-based compensation expenses that are not expected to generate a tax deduction, such as stock-based compensation expense on grants to foreign employees, offset by tax benefits from disqualifying dispositions. Federal research credits were not available to be recorded in our 2012 financial statements. During the 2013 first quarter, the federal research credit was retroactively renewed for 2012, and such benefits were recorded at that time.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements included in this Form 10-Q which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, write-downs for obsolete inventory, income taxes, acquisition purchase price allocation, impairments of long-lived assets and marketable securities, stock-based compensation, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. None of these accounting policies and estimates have significantly changed since our Annual Report on Form 10-K for the year ended December 31, 2012. Critical accounting policies and estimates are more fully described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2012 Form 10-K. Actual results may differ from these estimates under different assumptions or conditions.


RESULTS OF OPERATIONS

The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated and reflects the impact of the restatement of the prior period consolidated financial statements as described in "Restatement of Previously Issued Financial Statements" above and Note 14 to the condensed consolidated financial statements included in this Form 10-Q:

                                                 Three months ended               Six months ended
                                                      June 30,                        June 30,
                                               2013             2012            2013            2012
                                                             (Restated)                      (Restated)
Revenues:
Products                                          75.8 %            80.8 %         77.3 %           80.6 %
Services                                          24.2              19.2           22.7             19.4
Total revenues                                   100.0             100.0          100.0            100.0

Costs and operating expenses:(1)
Cost of revenues - products(2)                    18.2              15.7           17.8             16.4
Cost of revenues - services                        2.9               3.0            2.7              2.7
Research and development                          25.5              24.9           24.8             24.5
Sales and marketing                               28.6              27.1           28.6             27.7
General and administrative                        10.4              12.2           10.1             12.7
Amortization of intangible assets                  8.7               5.9            8.5              5.3
Acquisition and other related                      0.9               4.1            0.9              2.3
Restructuring                                        -                 -            0.0                -
Total costs and operating expenses                95.2              92.9           93.4             91.7

Income from operations                             4.8               7.1            6.6              8.3
Interest income and other, net                     3.0               0.7            1.5              0.4
Interest expense                                  (1.7 )            (2.0 )         (1.6 )           (2.0 )
Income before income taxes                         6.1               5.8            6.5              6.7
Income tax (benefit) expense                       2.9             (22.5 )          1.5            (10.7 )
Net income                                         3.2 %            28.3 %          5.0 %           17.4 %


(1) Stock-based compensation included in:
Cost of revenues - products                        0.1 %             0.1 %          0.1 %            0.1 %
Cost of revenues - services                        0.0               0.0            0.0              0.0
Research and development                           1.8               1.0            1.9              1.3
Sales and marketing                                1.6               1.0            1.6              1.1
General and administrative                         1.4               2.0            1.6              2.0

(2)Cost of revenues - products excludes amortization of intangibles, which is shown separately.

Comparison of Three and Six Months Ended June 30, 2013 and 2012

As a result of our acquisitions of Anue on June 1, 2012 and BreakingPoint on August 24, 2012 (the "2012 Acquisitions"), our 2013 consolidated results of operations include the financial results of these acquisitions from their respective acquisition dates. To assist the readers of our financial statements in reviewing our year-over-year consolidated operating results, we have estimated the impacts of these acquisitions for the applicable periods in the related statement of operations sections below. Results for the three and six months ended June 30, 2012 do not include any results of BreakingPoint, which was not acquired until the third quarter of 2012.

Revenues. In the second quarter of 2013, total revenues increased 27.8% to $115.9 million from the $90.7 million recorded in the second quarter of 2012. The year over year increase was primarily due to the impact of our 2012 Acquisitions. The second quarters of 2013 and 2012 included revenues of $33.2 million and $3.9 million, respectively, related to the 2012 Acquisitions. Excluding the revenues from our 2012 Acquisitions, revenues decreased by $4.1 million, or 4.7%, to $82.7 million in the second quarter of 2013 as compared to the same period in 2012.


In the first six months of 2013, total revenues increased 34.6% to $238.7 million from $177.3 million recorded in the same period of 2012. The year over year increase was primarily due to the impact of our 2012 Acquisitions. The first six months of 2013 and 2012 included revenues of $71.5 million and $3.9 . . .

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