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GIMO > SEC Filings for GIMO > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for GIGAMON INC.

Form 10-Q for GIGAMON INC.


7-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission on October 23, 2013 ("Prospectus"). In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect" and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Unless expressly indicated or the context requires otherwise, the terms "Gigamon," "company," "we," "us" and "our" in this document refer to Gigamon Inc., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries. The term "Gigamon" may also refer to our products, regardless of the manner in which they are accessed.

Overview

We have developed an innovative solution that delivers pervasive and dynamic intelligent visibility of traffic across networks. Our solution, which we refer to as our Traffic Visibility Fabric, consists of distributed network appliances that enable an advanced level of visibility, modification and control of network traffic. Our Fabric enables IT organizations to forward traffic from network and server infrastructure to management, analysis, compliance and security tools in a manner that is optimized for specific uses or functions.

We generate product revenue primarily from sales of perpetual software licenses installed on physical appliances for our Traffic Visibility Fabric solutions to channel partners, including distributors and resellers, as well as directly to end-user customers. We market and sell our products through a hybrid sales model, which combines a high-touch sales organization and an overlay channel sales team that actively assists our extensive network of channel partners throughout the sales process. We also provide our channel partners with marketing assistance, technical training and support.

We generate services revenue primarily from the sale of maintenance and support services for our products. A one-year contract for our maintenance and support services is bundled with the initial contract to purchase our products. Following expiration of this one-year contract, our end-user customers typically purchase maintenance and support contracts that generally have one-year terms.


Our revenue increased from $25.7 million in the three months ended September 30, 2012 to $39.0 million in the three months ended September 28, 2013, representing 52% growth. In the nine months ended September 28, 2013, our revenue increased to $97.2 million from $64.9 million in the nine months ended September 30, 2012, representing 50% growth. Net income attributable to common stockholders was $1.4 million in the three months ended September 28, 2013, compared to $1.1 million in the three months ended September 30, 2012, primarily due to an increase in revenue and the discontinuation of redeemable convertible preferred stock related accretion and earnings allocation subsequent to the conversion of our outstanding redeemable convertible preferred stock into common stock in connection with our initial public offering (the "IPO"), partially offset by higher operating expenses and an increase in income tax provision. Net loss attributable to common stockholders was $7.7 million in the nine months ended September 28, 2013 primarily due to the $20.4 million in expenses related to the settlement of performance units ("PUPs") under our 2009 Performance Unit Plan (the "2009 Plan") and $16.7 million in stock-based compensation expense recorded in the second quarter of 2013. In addition, we recorded an income tax benefit of $23.8 million in the nine months ended September 28, 2013 primarily due to our conversion from a Delaware limited liability company to a Delaware corporation and upon establishing a deferred tax asset resulting from our net loss incurred in 2013. Net income attributable to common stockholders was $1.5 million in the nine months ended September 30, 2012. We generated positive net operating cash flows of $1.0 million and $25.9 million in the nine months ended September 28, 2013 and September 30, 2012, respectively.

Key Performance Indicators of Our Business

We monitor a variety of key performance indicators to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. These key performance indicators include the following (dollars in thousands):

                                                      Three Months Ended                                    Nine Months Ended
                                           September 28,
                                               2013               September 30, 2012         September 28, 2013          September 30, 2012
Key Performance Indicators:
Revenue                                   $        38,986        $             25,694        $            97,208        $             64,863
Gross margin                                           80 %                        80 %                       77 %                        79 %
Income (loss) from operations             $         2,110        $              2,121        $           (31,554 )      $              4,003
Deferred revenue                          $        40,945        $             26,855        $            40,945        $             26,855

Revenue. We monitor our revenue to assess the acceptance of our products by our end-user customers and growth in the markets we serve.

Gross margin. We monitor our gross margin to assess the impact on our current and forecasted financial results from any changes to the pricing and mix of products we are selling to our end-user customers.

Income (loss) from operations. We monitor our income (loss) from operations to assess how effectively we are conducting our operations as well as controlling our operating expenses, which are primarily driven by headcount.

Deferred revenue. Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue. The majority of our deferred revenue balance consists of the unamortized portion of services revenue from maintenance and support contracts. We also defer revenue, and the related costs of product revenue, on sales of products to a distributor who stocks inventory until that distributor reports to us that it has sold the product to an end-user customer. We monitor our deferred revenue balance because it represents a significant portion of the revenue that we will recognize in future periods. We assess the change in our deferred revenue balance which, taken together with revenue, is an indication of sales activity in a given period.

Initial Public Offering

On June 17, 2013, we completed our IPO, in which we issued and sold 5,512,500 shares of common stock, inclusive of the 1,012,500 shares of common stock sold in connection with the full exercise of the overallotment option of shares granted to the underwriters, at a public offering price of $19.00 per share. In addition, our selling stockholders sold 2,250,000 shares of common stock at a public offering price of $19.00 per share. We did not receive any proceeds from the sale of shares by the selling stockholders. The net proceeds to us from the IPO were $93.4 million, net of underwriting discounts, commissions and offering costs payable by us.


Follow-On Public Offering

On October 28, 2013, we completed our follow-on public offering, in which 5,100,000 shares of our common stock were sold at a public offering price of $38.50 per share. We sold 300,000 shares of common stock for net proceeds of $10.2 million, net of underwriting discounts, commissions and offering expenses payable by us. In addition, our selling stockholders sold 4,800,000 shares of common stock, which included 293,718 shares of common stock issued upon the exercise of options by certain selling stockholders, with an aggregate exercise price of $1.3 million, in order to sell those shares in the follow-on public offering, at a public offering price of $38.50 per share. We did not receive any proceeds from the sale of shares by the selling stockholders.

Financial Overview

Revenue

We generate revenue from the sale of products and related services, including maintenance and support. We present revenue net of discounts, rebates, and sales taxes. Our revenue is comprised of the following:

Product revenue. We generate product revenue primarily from sales of perpetual software licenses installed on physical appliances for our Traffic Visibility Fabric solutions. We generally recognize product revenue at the time of product delivery, provided all other revenue recognition criteria have been met. As a percentage of revenue, we expect our product revenue to vary from quarter-to-quarter based on, among other things, the timing of orders and delivery of products and seasonal and cyclical factors discussed under the section titled "-Results of Operations." We expect our product revenue to increase in absolute dollars as we continue to add new end-user customers, expand the volume of shipments to our current end-user customers and introduce new products.

We have experienced seasonality in the sale of our products. The first quarter of each year is usually our lowest revenue quarter during the year and product revenue typically declines sequentially from the prior fourth quarter. We generally expect an increase in sales in the second half of the year, primarily due to the buying habits of many of our end-user customers as budgets for annual capital purchases are being fully utilized.

Services revenue. We generate service revenue from sales of maintenance and support contracts, which are bundled with sales of products, and from subsequent renewals of those contracts. We offer tiered maintenance and support services under our renewable, fee-based maintenance and support contracts, which includes technical support, hardware repair and replacement parts, bug fixes, patches and unspecified upgrades on a when-and-if-available basis. We recognize services revenue ratably over the duration of the contract, which is typically one year and can be up to five years; as a result, the impact on services revenue will lag any shift in product revenue because product revenue is recognized when a product is sold and revenue criteria are satisfied, whereas services revenue is recognized ratably over the contract term. We expect our services revenue to increase in absolute dollars as we increase our installed base by selling more products and adding more end-user customers.

Cost of revenue

Our cost of revenue is comprised of the following:

Cost of product revenue. Cost of product revenue is comprised primarily of the costs associated with manufacturing our products, including third-party hardware manufacturing costs, as well as personnel costs for salary, benefits, bonuses and stock-based compensation expense, shipping costs, allocated costs of facilities and information technology, and warranty costs and other related expenses. We expect cost of product revenue to increase in absolute dollars in connection with the anticipated increase in product revenue.

Cost of services revenue. Cost of services revenue is comprised primarily of personnel costs for salary, benefits, bonuses and stock-based compensation expense related to our customer support organization, as well as allocated costs of facilities and information technology. We expect cost of services revenue to increase in absolute dollars in connection with the anticipated increase in services revenue.


Gross profit and gross margin

Gross profit has been and will continue to be affected by a variety of factors including shipment volumes, changes in the mix of products and services sold, new product introductions and upgrades to existing products, changes in customer mix, changes in pricing, the extent of customer rebates and incentive programs and changes in our product costs including any excess inventory write-offs. We expect our gross margin to fluctuate over time depending on a variety of factors, including those described above, and may decrease over the longer-term in the event that we experience additional competitive pricing pressure.

Operating expenses

Operating expenses consist of research and development, sales and marketing and general and administrative expenses. Personnel costs comprise a significant component of our operating expenses, and consist of salary, benefits, bonuses and stock-based compensation expense; and with respect to our sales organization, personnel costs also include sales commissions. From December 31, 2012 through September 28, 2013, we increased headcount attributable to our operating expenses from 224 to 315. We expect to continue to hire new employees, although at a slower rate, to support our anticipated growth, particularly with respect to an anticipated increase in research and development headcount for the remainder of 2013. We expect operating expenses to increase in absolute dollars as we continue to grow, and that our operating margin may decline in the near term as we continue to invest for future growth.

Research and development. Our research and development efforts are focused on new product development and on developing additional functionality for our existing products. Research and development expenses consist primarily of personnel costs, and to a lesser extent, prototype materials, allocated costs of facilities and information technology and product certification. We expense research and development costs as incurred. We expect our research and development expenses to increase in absolute dollars as we continue to develop new products and enhance our existing products.

Sales and marketing. Sales and marketing expenses are the largest component of our operating expenses and consist primarily of personnel costs, as well as travel expenses, trade shows, marketing and promotional activities, and allocated costs of facilities and information technology. We sell our products through our global sales organization, which is divided into three geographic regions: North America, Europe and Asia Pacific. We expect our sales and marketing expenses to increase in absolute dollars as we expand our sales and marketing efforts domestically and internationally to help drive increased revenue.

General and administrative. General and administrative expenses consist of personnel costs and allocated costs of facilities and information technology related to our executive, finance, human resources and legal functions, as well as professional services costs. Professional services costs consist primarily of outside legal and accounting services. We have incurred and expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange and costs related to compliance and reporting obligations.

Interest income and other expense, net

Interest income consists primarily of income earned on our invested cash, cash equivalents and investments . We expect interest income to increase modestly depending on our average invested balances during the period and market interest rates.

Other expense, net consists primarily of foreign currency exchange losses related to transactions denominated in currencies other than the U.S. dollar, which have not been material to date.

Provision for income taxes

We converted from a Delaware limited liability company (a pass through entity for tax purposes) to a Delaware corporation on May 31, 2013. Accordingly, we have elected to be treated as a corporation under Subchapter C of Chapter 1 of the United States Internal Revenue Code and, therefore, have become subject to both federal and state income taxes. As a result of this tax election, we recorded a one-time non-cash tax benefit of $14.8 million, in the second quarter of 2013, for the deferred tax asset amount recorded upon our change in entity status from a Delaware limited liability company to a Delaware corporation.

We are also subject to state taxes in certain states that may assess capital taxes or taxes based on gross receipts. We also have a subsidiary in a foreign jurisdiction, which is subject to foreign income taxes.


Stock-based compensation expense and other compensation charges

Beginning in April 2012, we have granted stock options and beginning in August 2012, we have granted restricted stock units ("RSUs").In connection with our IPO, we recorded stock-based compensation expense of $5.5 million, net of estimated forfeitures, in the second quarter of 2013 for stock options and RSUs that were subject to the completion of an IPO (the "IPO Awards"). Upon the completion of our IPO in June 2013, we began offering eligible employees the opportunity to purchase shares under our 2013 Employee Stock Purchase Plan (the "ESPP"). Total stock-based compensation expense, net of estimated forfeitures, in the three and nine months ended September 28, 2013, was $7.1 million and $25.4 million, respectively, compared to $1.7 million and $2.3 million in the three and nine months ended September 30, 2012, respectively. As of September 28, 2013, unrecognized compensation expense, net of estimated forfeitures, was $30.6 million.

In addition, upon the completion of our IPO, we recorded cash-based compensation expenses and related payroll taxes of $20.4 million for our PUPs, based on our IPO price of $19.00 per share, which is reflected in cost of revenue and operating expenses in the second quarter of 2013.

Change in Reporting Calendar

Effective January 1, 2013, we changed our reporting period from a calendar year ending on December 31 of each year to a 52- or 53-week fiscal year that ends on the last Saturday in December. Fiscal year 2013 will be a 52-week fiscal year ending on December 28, 2013, and each quarter will be a 13-week quarter. The first, second and third quarters of fiscal 2013 ended on March 30, 2013, June 29, 2013 and September 28, 2013, respectively.


Results of Operations

The following tables set forth our results of operations in dollars and as a
percentage of revenue (in thousands, except percentages):



                                                   Three Months Ended                           Nine Months Ended
                                           September 28,         September 30,         September 28,         September 30,
                                               2013                  2012                  2013                  2012
Consolidated Statement of Operations
Data:
Revenue:
Product                                   $        29,146       $        18,700       $        70,019       $        45,806
Services                                            9,840                 6,994                27,189                19,057
Total revenue                                      38,986                25,694                97,208                64,863
Cost of revenue:
Product                                             6,744                 4,524                18,566                11,975
Services                                              993                   557                 3,557                 1,502
Total cost of revenue                               7,737                 5,081                22,123                13,477
Gross profit                                       31,249                20,613                75,085                51,386
Operating expenses:
Research and development                            8,958                 4,809                31,726                12,324
Sales and marketing                                15,485                 9,963                54,020                27,298
General and administrative                          4,696                 3,720                20,893                 7,761
Total operating expenses                           29,139                18,492               106,639                47,383
Income (loss) from operations                       2,110                 2,121               (31,554 )               4,003
Interest income                                        32                    55                    35                    61
Other expense, net                                    (52 )                 (17 )                 (77 )                 (50 )
Income (loss) before income tax
(provision) benefit                                 2,090                 2,159               (31,596 )               4,014
Income tax (provision) benefit                       (704 )                 (37 )              23,838                  (128 )
Net income (loss)                         $         1,386       $         2,122       $        (7,758 )     $         3,886

Net income (loss) includes stock-based
compensation expense and PUP expenses
allocated as follows:
Stock-based compensation expense:
Cost of revenue                           $           340       $           132       $         3,049       $           134
Research and development                            2,468                   328                 8,846                   360
Sales and marketing                                 2,735                   473                 8,427                   559
General and administrative                          1,524                   760                 5,035                 1,276
Total stock-based compensation expense    $         7,067       $         1,693       $        25,357       $         2,329
PUP expenses:
Cost of revenue                           $            -        $            -        $           353       $            -
Research and development                               -                     -                  5,188                    -
Sales and marketing                                    -                     -                  7,991                    -
General and administrative                             -                     -                  6,839                    -
Total PUP expenses                        $            -        $            -        $        20,371       $            -


                                                    Three Months Ended                            Nine Months Ended
                                           September 28,           September 30,         September 28,          September 30,
                                               2013                    2012                  2013                   2012
Percentage of Revenue:
Revenue:
Product                                                75 %                    73 %                  72 %                   71 %
Services                                               25                      27                    28                     29
Total revenue                                         100                     100                   100                    100
Cost of revenue                                        20                      20                    23                     21
Gross margin                                           80                      80                    77                     79
Operating expenses:
Research and development                               23                      19                    33                     19
Sales and marketing                                    40                      39                    55                     42
General and administrative                             12                      14                    21                     12
Total operating expenses                               75                      72                   109                     73
Income (loss) from operations                           5                       8                   (32 )                    6
Interest income                                        -                       -                     -                      -
Other expense, net                                     -                       -                     -                      -
Income (loss) before income tax
(provision) benefit                                     5                       8                   (32 )                    6
Income tax (provision) benefit                         (1 )                    -                     24                     -
Net income (loss)                                       4 %                     8 %                  (8 )%                   6 %

Comparison of the three and nine months ended September 28, 2013 and September 30, 2012

Revenue





                                    Three Months Ended                                                                    Nine Months Ended
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