Item 1. Financial Statements
BARRACUDA NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
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As of May 31, 2017
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As of February 28, 2017
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Assets
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|
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Current assets:
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|
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Cash and cash equivalents
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$
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126,676
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|
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$
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120,194
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Marketable securities
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80,660
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79,915
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Accounts receivable, net of allowance for doubtful accounts of $2,984 and $2,857 as of May 31, 2017 and February 28, 2017, respectively
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39,654
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40,560
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Inventories, net
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6,443
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|
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5,847
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Prepaid income taxes
|
1,436
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|
11,050
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Deferred costs
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33,403
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32,598
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Other current assets
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7,938
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|
|
5,245
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Total current assets
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296,210
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295,409
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Property and equipment, net
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32,060
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29,979
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Deferred costs, non-current
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28,780
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27,285
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Deferred income taxes, non-current
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1,275
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1,554
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Other non-current assets
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10,166
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8,607
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Intangible assets, net
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30,418
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32,145
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Goodwill
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70,199
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69,795
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Total assets
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$
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469,108
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$
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464,774
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Liabilities and stockholders’ equity
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Current liabilities:
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Accounts payable
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$
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12,524
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$
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11,439
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Accrued payroll and related benefits
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12,943
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13,593
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Other accrued liabilities
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12,314
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12,942
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Deferred revenue
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241,464
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239,796
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Note payable
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4,044
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4,115
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Total current liabilities
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283,289
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281,885
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Long-term liabilities:
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Deferred revenue, non-current
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166,060
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167,286
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Deferred income taxes, non-current
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2,938
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2,803
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Other long-term liabilities
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6,425
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6,377
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Commitments and contingencies (Note 8)
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Stockholders’ equity:
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Preferred stock, $0.001 par value; 20,000,000 shares authorized; zero shares issued and outstanding as of May 31, 2017 and February 28, 2017, respectively
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—
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—
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Common stock, $0.001 par value; 1,000,000,000 shares authorized; 52,811,301 and 52,897,128 shares issued and outstanding as of May 31, 2017 and February 28, 2017, respectively
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53
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53
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Additional paid-in capital
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375,679
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370,745
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Accumulated other comprehensive loss
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(4,239
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)
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(5,226
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)
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Accumulated deficit
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(361,097
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)
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(359,149
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)
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Total stockholders’ equity
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10,396
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6,423
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Total liabilities and stockholders’ equity
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$
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469,108
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$
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464,774
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See accompanying notes.
BARRACUDA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
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Three Months Ended May 31,
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2017
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2016
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Revenue:
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Appliance
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$
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20,265
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$
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21,333
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Subscription
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73,914
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65,321
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Total revenue
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94,179
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86,654
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Cost of revenue
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23,648
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20,241
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Gross profit
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70,531
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66,413
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Operating expenses:
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Research and development
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19,356
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19,207
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Sales and marketing
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36,220
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31,330
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General and administrative
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10,944
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10,772
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Total operating expenses
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66,520
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61,309
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Income from operations
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4,011
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5,104
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Other income, net
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1,184
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|
990
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Income before income taxes
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5,195
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6,094
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Provision for income taxes
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(2,523
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)
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(3,310
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)
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Net income (Note 9)
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$
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2,672
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$
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2,784
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Net income per share:
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Basic
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$
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0.05
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$
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0.05
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Diluted
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$
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0.05
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$
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0.05
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Weighted-average shares used to compute net income per share:
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Basic
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52,875
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52,285
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Diluted
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54,329
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52,854
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See accompanying notes.
BARRACUDA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
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Three Months Ended May 31,
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2017
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2016
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Net income
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$
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2,672
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$
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2,784
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Other comprehensive income, net of tax:
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Change in net foreign currency translation adjustment
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901
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334
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Available-for-sale investments:
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Change in net unrealized gains (losses) (net of tax effect of $0 and $0)
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81
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610
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Less: reclassification adjustment for net gains (losses) included in net income (net of tax effect of $(2) and $147)
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5
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(273
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)
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Net change
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86
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337
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Other comprehensive income
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987
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|
671
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Comprehensive income
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$
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3,659
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$
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3,455
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See accompanying notes.
BARRACUDA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Three Months Ended May 31,
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2017
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2016
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Operating activities
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Net income
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$
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2,672
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$
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2,784
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation, amortization and impairment expense
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4,216
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4,281
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Stock-based compensation expense
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7,383
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7,937
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Excess tax benefits from equity compensation plans
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—
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(141
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)
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Deferred income taxes
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652
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261
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Other
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(511
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)
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(225
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)
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Changes in operating assets and liabilities:
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Accounts receivable, net
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872
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1,015
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Inventories, net
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(666
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)
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(363
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)
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Income taxes, net
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9,356
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1,452
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Deferred costs
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(1,424
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)
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(26
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)
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Other assets
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(4,211
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)
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(1,646
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)
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Accounts payable
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1,320
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(3,283
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)
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Accrued payroll and related benefits
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(1,262
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)
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69
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Other liabilities
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351
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(255
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)
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Deferred revenue
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1,461
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277
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Net cash provided by operating activities
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20,209
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12,137
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Investing activities
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Purchases of marketable securities
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(10,809
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)
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(11,572
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)
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Proceeds from the sale of marketable securities
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4,784
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5,351
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Proceeds from the maturity of marketable securities
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5,257
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3,831
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Purchases of non-marketable investments
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—
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(636
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)
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Purchases of property and equipment
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(4,737
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)
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(1,949
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)
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Business combinations, net of cash acquired
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(506
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)
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(183
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)
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Payments for the sale of net liabilities
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(250
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)
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—
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Net cash used in investing activities
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(6,261
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)
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(5,158
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)
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Financing activities
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Proceeds from issuance of common stock
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1,313
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3,031
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Taxes paid related to net share settlement of equity awards
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(1,866
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)
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(1,554
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)
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Excess tax benefits from equity compensation plans
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—
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|
|
141
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Employee loans extended, net of repayment
|
30
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(34
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)
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Repayment of note payable
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(71
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)
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(67
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)
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Repurchases of common stock
|
(6,546
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)
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(280
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)
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Payments of acquisition-related liabilities
|
(742
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)
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—
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Net cash provided by (used in) financing activities
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(7,882
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)
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1,237
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Effect of exchange rate changes
|
428
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135
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Net increase in cash, cash equivalents and restricted cash
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6,494
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8,351
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Cash, cash equivalents and restricted cash at beginning of period
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120,837
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119,333
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Cash, cash equivalents and restricted cash at end of period
|
$
|
127,331
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$
|
127,684
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See accompanying notes.
BARRACUDA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Overview and Basis of Presentation
Nature of Operations
Barracuda Networks, Inc., also referred to in this report as "we," "our," "us," "Barracuda" or "the Company," is headquartered in Campbell, California, and designs and delivers powerful yet easy-to-use security and data protection solutions. We offer cloud-enabled solutions that help our customers address security threats, improve network performance and protect and store their data. Our solutions are designed to simplify IT operations for our customers, allowing them to enhance their return on technology investments.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We evaluate our estimates on an ongoing basis, including those related to the fair values of stock-based awards, taxes and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates and such differences could be material to our condensed consolidated financial position and results of operations.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP, and follow the requirements of the U.S. Securities and Exchange Commission (the "SEC") for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP are condensed or omitted. In management’s opinion, the unaudited condensed financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of our financial information. The results for the
three
months ended
May 31, 2017
are not necessarily indicative of the results expected for the full fiscal year. The condensed consolidated balance sheet as of
February 28, 2017
has been derived from audited financial statements at that date but does not include all of the information required by GAAP.
The accompanying unaudited condensed consolidated financial statements include the accounts of Barracuda Networks, Inc. and our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and related footnotes included in our most recent Annual Report on Form 10-K. There have been no material changes in our significant accounting policies from those that were disclosed in our Annual Report on Form 10-K for the fiscal year ended
February 28, 2017
.
Foreign Currency
For those subsidiaries whose functional currency is not the U.S. dollar, assets and liabilities are translated into U.S. dollar equivalents at the exchange rate in effect on the balance sheet date and revenues and expenses are translated into U.S. dollars using the average exchange rate over the period. Resulting currency translation adjustments are recorded in accumulated other comprehensive loss in our condensed consolidated balance sheets. We recorded net gains resulting from foreign exchange transactions of
$1.0 million
and
$0.5 million
for the
three
months ended
May 31, 2017
and
2016
, respectively, which were reflected as a component of other income, net in our condensed consolidated statements of income.
We have foreign subsidiaries that operate and sell our products in various markets around the world. As a result, we are exposed to foreign exchange risks. We utilize foreign exchange forward contracts to manage foreign currency risk associated with foreign currency denominated monetary assets and liabilities, primarily trade receivables, and to reduce the volatility of earnings and cash flows related to foreign currency transactions. The fair values of our contracts as of
May 31, 2017
and
February 28, 2017
were not significant. The change in the fair value of these foreign currency forward contracts is recorded as gains (losses) in other income, net in our condensed consolidated statements of income.
Recently Adopted Accounting Pronouncements
On March 1, 2017, we adopted Accounting Standards Update No. 2016-09 ("ASU 2016-09"), which simplifies several aspects of employee share-based payment accounting. The impact of the adoption on our condensed consolidated financial statements was as follows:
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•
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Forfeitures: Under the new standard, we can make an accounting policy election to either estimate the number of share-based awards that are expected to vest or account for forfeitures when they occur. We elected to account for forfeitures when they occur and adopted this change on a modified retrospective basis. As a result, we recorded the cumulative effect of the change as a
$0.4 million
increase to the March 1, 2017 opening accumulated deficit balance on our condensed consolidated balance sheets.
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|
|
•
|
Income tax accounting: The standard eliminates additional paid-in-capital ("APIC") pools and requires excess tax benefits and tax deficiencies on share-based awards to be recognized in the statement of income prospectively when share-based awards vest or are settled. The standard also requires excess tax benefits to be recognized regardless of whether the benefit reduces taxes payable. We adopted the guidance related to the timing of previously unrecognized excess tax benefits, which resulted in
no
impact to the March 1, 2017 opening accumulated deficit balance on our condensed consolidated balance sheets.
|
|
|
•
|
Net income per share: Because excess tax benefits are no longer recognized in APIC, the assumed proceeds from applying the treasury stock method when calculating dilutive shares was amended to exclude the amount of excess tax benefits that would be recognized upon exercise or vesting of such awards. As a result, this reduces the assumed shares to be repurchased under the treasury stock method, thereby increasing the amount of dilutive shares used to compute earnings per share. We adopted the guidance related to the exclusion of excess tax benefits in calculating net income per share on a prospective basis.
|
|
|
•
|
Cash flow presentation of excess tax benefits: Prior to the new standard, we were required to present excess tax benefits on share-based awards as a cash inflow from financing activities with a corresponding cash outflow from operating activities. The new standard required that these excess tax benefits be classified as an operating activity. We elected to adopt the guidance related to the presentation of excess tax benefits in our condensed consolidated statements of cash flows on a prospective basis, while the prior period presented has not been adjusted.
|
In January 2017, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2017-04 ("ASU 2017-04"), which eliminates Step 2 from the goodwill impairment test. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We early adopted ASU 2017-04 for impairment tests to be performed on testing dates after January 1, 2017, which did not impact our condensed consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18 ("ASU 2016-18"), which requires the statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017. We early adopted ASU 2016-18 retrospectively, effective March 1, 2017. Net cash flows for the
three
months ended
May 31, 2016
did not significantly change as a result of including restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on our condensed consolidated statements of cash flows.
Recent Accounting Pronouncements
In May 2017, the FASB issued Accounting Standards Update No. 2017-09 ("ASU 2017-09"), which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption is permitted, including in an interim period. ASU 2017-09 is to be applied on a prospective basis to an award modified on or after the adoption date. We do not intend to early adopt ASU 2017-09 and do not expect the adoption of ASU 2017-09 to have a material impact on our condensed consolidated financial statements.
In March 2017, the FASB issued Accounting Standards Update No. 2017-08 ("ASU 2017-08"), which shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. ASU 2017-08 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, and early adoption is permitted, including in an interim period. If early adopted in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. ASU 2017-08 is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently evaluating the timing of adoption and do not expect the adoption of ASU 2017-08 to have a material impact on our condensed consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01 ("ASU 2017-01"), which clarifies the definition of a business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption is permitted for transactions which occur before the issuance or effective date of the amendments, only when the transaction has not been reported in the financial statements that have been issued or made available for issuance. ASU 2017-01 is to be applied on a prospective basis. We do not intend to early adopt ASU 2017-01 and do not expect the adoption of ASU 2017-01 to have a material impact on our condensed consolidated financial statements.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15 ("ASU 2016-15") which addresses eight cash flow classification issues. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption is permitted, including in an interim period. If early adopted in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. Early adoption requires the adoption of all the amendments in the same period. ASU 2016-15 is to be applied through a retrospective transition method to each period presented. If it is impracticable to apply retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. We do not intend to early adopt ASU 2016-15 and do not expect the adoption of ASU 2016-15 to have a material impact on our condensed consolidated statements of cash flows.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 ("ASU 2016-13") which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-13 is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We are currently evaluating the timing and the impact of adopting ASU 2016-13 on our condensed consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 ("Topic 842") to amend lease accounting requirements and requires entities to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. Topic 842 will require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. Topic 842 is effective for fiscal years beginning after December 15, 2018 and interim periods within those years, and early adoption is permitted. Topic 842 is to be applied using a modified retrospective approach and includes a number of optional practical expedients that entities may elect to apply. We are currently evaluating the timing and the impact of adopting Topic 842 on our condensed consolidated financial statements and expect that most of our operating lease commitments will be subject to Topic 842 and recognized as operating lease liabilities and right-of-use assets upon the adoption.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01 ("ASU 2016-01") to enhance the reporting model for financial instruments by amending certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early application to financial statements of fiscal years or interim periods that have not yet been issued is permitted by presenting separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if we elected to measure the liability at fair value in accordance with the fair value option for financial instruments, otherwise, early adoption is not permitted. ASU 2016-01 is to be applied with a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. We are currently evaluating the impact of adopting ASU 2016-01 on our condensed consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 ("Topic 606") which completed the joint effort by the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and improving financial reporting. Topic 606 also provides guidance on the recognition of costs related to obtaining and fulfilling customer contracts. The FASB issued subsequent amendments to the initial guidance collectively under Topic 606. Topic 606 supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Topic 606 defines a five-step process to achieve this core principle, and more judgment and estimates may be required under the Topic 606 revenue recognition process than are required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation, among others.
Topic 606 is required to be effective for us on March 1, 2018. Topic 606 allows for full retrospective adoption applied to all periods presented or retrospective adoption with the cumulative effect of initially applying Topic 606 recognized at the date of initial application. We are currently considering adopting using the full retrospective approach; however, our final decision will depend on a number of factors such as the significance of the impact of the new standard on our financial results, system readiness and our ability to accumulate and analyze the information necessary to assess the impact on prior period financial statements, as necessary.
Currently, we are in the process of reviewing our historical contracts and evaluating the impact of Topic 606 on our accounting policies, processes and system requirements, and have assigned internal resources and engaged third-party service providers to assist in our evaluation. Furthermore, we will continue to make investments in systems to enable timely and accurate reporting under the new standard. While we continue to assess all potential impacts under the new standard, there is the potential for significant changes to the pattern of revenue recognition for our arrangements resulting from, for example, the identification of performance obligations, inclusion of variable consideration in the transaction price, allocation of the transaction price based on relative standalone selling prices, timing of recognition, accounting for contract acquisition costs, among other areas, as well as the related financial statement disclosures. With respect to contract acquisition costs, we preliminarily believe that we will capitalize additional costs of obtaining the contract, including additional sales commissions, as the new cost guidance, as interpreted by the FASB Transition Resource Group for Revenue Recognition, requires the capitalization of all incremental costs that we incur to obtain a contract with a customer that we would not have incurred if the contract had not been obtained, provided we expect to recover the costs. Under our current accounting policy, we would only capitalize such costs if they are both incremental and directly related to acquiring the customer.
As we are in the initial stages of our evaluation of the impact of the new standard and the impact on our accounting policies across our multiple solutions, we do not know or cannot reasonably estimate quantitative information related to the impact of Topic 606 on our condensed consolidated financial statements, including the effect on our operating results and our accounting for deferred commission balances, at this time.
2. Balance Sheet Information
Cash, Cash Equivalents and Restricted Cash
The following table summarizes our cash, cash equivalents and restricted cash by category (in thousands):
|
|
|
|
|
|
|
|
|
|
As of May 31, 2017
|
|
As of February 28, 2017
|
Cash and cash equivalents:
|
|
|
|
Cash
|
$
|
110,520
|
|
|
$
|
103,726
|
|
Money market funds
|
16,156
|
|
|
16,468
|
|
Other non-current assets:
|
|
|
|
Restricted cash
|
655
|
|
|
643
|
|
|
$
|
127,331
|
|
|
$
|
120,837
|
|
Restricted cash is primarily related to customs obligations and letters of credit associated with our leases.
Marketable Securities
The following tables summarize our marketable securities by category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2017
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Asset-backed securities
|
$
|
9,888
|
|
|
$
|
9
|
|
|
$
|
(17
|
)
|
|
$
|
9,880
|
|
Corporate debt securities
|
42,864
|
|
|
16
|
|
|
(131
|
)
|
|
42,749
|
|
Foreign government bonds
|
650
|
|
|
2
|
|
|
—
|
|
|
652
|
|
Mortgage-backed securities
|
3,647
|
|
|
1
|
|
|
(11
|
)
|
|
3,637
|
|
U.S. government agency securities
|
13,822
|
|
|
8
|
|
|
(47
|
)
|
|
13,783
|
|
U.S. government notes
|
9,980
|
|
|
3
|
|
|
(24
|
)
|
|
9,959
|
|
|
$
|
80,851
|
|
|
$
|
39
|
|
|
$
|
(230
|
)
|
|
$
|
80,660
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2017
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Asset-backed securities
|
$
|
9,597
|
|
|
$
|
6
|
|
|
$
|
(28
|
)
|
|
$
|
9,575
|
|
Corporate debt securities
|
41,822
|
|
|
11
|
|
|
(140
|
)
|
|
41,693
|
|
Foreign government bonds
|
650
|
|
|
—
|
|
|
(1
|
)
|
|
649
|
|
Mortgage-backed securities
|
3,324
|
|
|
—
|
|
|
(22
|
)
|
|
3,302
|
|
U.S. government agency securities
|
12,707
|
|
|
1
|
|
|
(77
|
)
|
|
12,631
|
|
U.S. government notes
|
12,092
|
|
|
2
|
|
|
(29
|
)
|
|
12,065
|
|
|
$
|
80,192
|
|
|
$
|
20
|
|
|
$
|
(297
|
)
|
|
$
|
79,915
|
|
We use the specific-identification method to determine any realized gains or losses from the sale of our marketable securities classified as available-for-sale. For the
three
months ended
May 31, 2017
, realized gross gains and losses were
insignificant
. For the
three
months ended
May 31, 2016
, we realized gross gains of
$0.4 million
and an insignificant amount of gross losses. We reflect these gains and losses as a component of other income, net in our condensed consolidated statements of income.
The following tables present gross unrealized losses and fair values for those marketable securities that were in an unrealized loss position aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2017
|
|
Less Than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
Asset-backed securities
|
$
|
5,742
|
|
|
$
|
(17
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,742
|
|
|
$
|
(17
|
)
|
Corporate debt securities
|
36,102
|
|
|
(131
|
)
|
|
—
|
|
|
—
|
|
|
36,102
|
|
|
(131
|
)
|
Mortgage-backed securities
|
2,932
|
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
2,932
|
|
|
(11
|
)
|
U.S. government agency securities
|
10,246
|
|
|
(39
|
)
|
|
1,734
|
|
|
(8
|
)
|
|
11,980
|
|
|
(47
|
)
|
U.S. government notes
|
6,115
|
|
|
(24
|
)
|
|
—
|
|
|
—
|
|
|
6,115
|
|
|
(24
|
)
|
|
$
|
61,137
|
|
|
$
|
(222
|
)
|
|
$
|
1,734
|
|
|
$
|
(8
|
)
|
|
$
|
62,871
|
|
|
$
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2017
|
|
Less Than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
Asset-backed securities
|
$
|
6,086
|
|
|
$
|
(28
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,086
|
|
|
$
|
(28
|
)
|
Corporate debt securities
|
35,095
|
|
|
(140
|
)
|
|
—
|
|
|
—
|
|
|
35,095
|
|
|
(140
|
)
|
Foreign government bonds
|
650
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
650
|
|
|
(1
|
)
|
Mortgage-backed securities
|
3,204
|
|
|
(22
|
)
|
|
—
|
|
|
—
|
|
|
3,204
|
|
|
(22
|
)
|
U.S. government agency securities
|
11,306
|
|
|
(65
|
)
|
|
731
|
|
|
(12
|
)
|
|
12,037
|
|
|
(77
|
)
|
U.S. government notes
|
7,265
|
|
|
(29
|
)
|
|
—
|
|
|
—
|
|
|
7,265
|
|
|
(29
|
)
|
|
$
|
63,606
|
|
|
$
|
(285
|
)
|
|
$
|
731
|
|
|
$
|
(12
|
)
|
|
$
|
64,337
|
|
|
$
|
(297
|
)
|
We periodically review our marketable securities for other-than-temporary impairment. We consider factors such as the duration, severity and the reason for the decline in value, the potential recovery period and whether we intend to sell. For marketable debt securities, we also consider whether (i) it is more likely than not that we will be required to sell the debt securities before recovery of their amortized cost basis and (ii) the amortized cost basis cannot be recovered as a result of credit losses. Unrealized losses related to these investments are due to interest rate fluctuations as opposed to changes in credit quality. We do not intend to sell and it is not more likely than not that we would be required to sell these investments before recovery of their amortized cost basis, which may be at maturity.
As of May 31, 2017
, we have recognized
no
other-than-temporary impairment loss.
The following table summarizes the estimated fair value of our investments in marketable debt securities by contractual maturities (in thousands):
|
|
|
|
|
|
As of May 31, 2017
|
Due in 1 year
|
$
|
22,494
|
|
Due in 1 year through 5 years
|
50,336
|
|
Due in 5 years through 10 years
|
3,455
|
|
Due after 10 years
|
4,375
|
|
|
$
|
80,660
|
|
Fair Value Measurements
We determine fair value based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value assumes that the transaction to sell the asset or transfer the liability occurs in the principal or most advantageous market for the asset or liability and establishes that the fair value of an asset or liability shall be determined based on the assumptions that market participants would use in pricing the asset or liability. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:
|
|
Level 1:
|
Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2:
|
Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
|
|
|
Level 3:
|
Inputs are unobservable inputs based on our assumptions.
|
Cash equivalents and marketable equity securities are classified within Level 1 because they are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Marketable debt securities and derivative assets are classified within Level 2 if the investments are valued using model driven valuations which use observable inputs such as quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Our marketable securities are held by custodians who obtain investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models.
We estimated the fair value of our Level 3 contingent consideration liabilities based on a weighted probability assessment of achieving the milestones related to certain of our acquisitions. Significant increases (decreases) in the probability assumptions in isolation would result in a significantly higher (lower) fair value measurement. In developing these estimates, we considered unobservable inputs that are supported by little or no market activity and reflect our own assumptions.
Financial assets measured at fair value on a recurring basis are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
16,156
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,156
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Asset-backed securities
|
$
|
—
|
|
|
$
|
9,880
|
|
|
$
|
—
|
|
|
$
|
9,880
|
|
Corporate debt securities
|
$
|
—
|
|
|
$
|
42,749
|
|
|
$
|
—
|
|
|
$
|
42,749
|
|
Foreign government bonds
|
$
|
—
|
|
|
$
|
652
|
|
|
$
|
—
|
|
|
$
|
652
|
|
Mortgage-backed securities
|
$
|
—
|
|
|
$
|
3,637
|
|
|
$
|
—
|
|
|
$
|
3,637
|
|
U.S. government agency securities
|
$
|
—
|
|
|
$
|
13,783
|
|
|
$
|
—
|
|
|
$
|
13,783
|
|
U.S. government notes
|
$
|
—
|
|
|
$
|
9,959
|
|
|
$
|
—
|
|
|
$
|
9,959
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
16,468
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,468
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Asset-backed securities
|
$
|
—
|
|
|
$
|
9,575
|
|
|
$
|
—
|
|
|
$
|
9,575
|
|
Corporate debt securities
|
$
|
—
|
|
|
$
|
41,693
|
|
|
$
|
—
|
|
|
$
|
41,693
|
|
Foreign government bonds
|
$
|
—
|
|
|
$
|
649
|
|
|
$
|
—
|
|
|
$
|
649
|
|
Mortgage-backed securities
|
$
|
—
|
|
|
$
|
3,302
|
|
|
$
|
—
|
|
|
$
|
3,302
|
|
U.S. government agency securities
|
$
|
—
|
|
|
$
|
12,631
|
|
|
$
|
—
|
|
|
$
|
12,631
|
|
U.S. government notes
|
$
|
—
|
|
|
$
|
12,065
|
|
|
$
|
—
|
|
|
$
|
12,065
|
|
Other accrued liabilities (current):
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
902
|
|
|
$
|
902
|
|
The following table summarizes the change in fair value of our Level 3 contingent consideration amounts (in thousands):
|
|
|
|
|
Balance as of February 28, 2017
|
$
|
902
|
|
Total remeasurement recognized in earnings
|
(160
|
)
|
Settlements
|
(742
|
)
|
Balance as of May 31, 2017
|
$
|
—
|
|
For the
three
months ended
May 31, 2017
, the contingent consideration remeasurement was recognized within research and development expense in our condensed consolidated statements of income.
Inventories, Net
Inventories, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of May 31, 2017
|
|
As of February 28, 2017
|
Raw materials
|
$
|
4,229
|
|
|
$
|
3,479
|
|
Finished goods
|
2,681
|
|
|
2,878
|
|
Reserves
|
(467
|
)
|
|
(510
|
)
|
|
$
|
6,443
|
|
|
$
|
5,847
|
|
Deferred Costs
Deferred costs consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of May 31, 2017
|
|
As of February 28, 2017
|
Appliance
|
$
|
39,856
|
|
|
$
|
39,474
|
|
Commissions
|
22,327
|
|
|
20,409
|
|
|
$
|
62,183
|
|
|
$
|
59,883
|
|
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of May 31, 2017
|
|
As of February 28, 2017
|
Land
|
$
|
9,849
|
|
|
$
|
9,849
|
|
Building
|
6,549
|
|
|
6,549
|
|
Computer hardware and software
|
37,396
|
|
|
32,850
|
|
Vehicles, machinery and equipment
|
4,756
|
|
|
4,797
|
|
Leasehold improvements
|
4,432
|
|
|
4,379
|
|
|
62,982
|
|
|
58,424
|
|
Accumulated depreciation and amortization
|
(30,922
|
)
|
|
(28,445
|
)
|
|
$
|
32,060
|
|
|
$
|
29,979
|
|
Depreciation and amortization expense related to property and equipment was
$2.5 million
and
$2.4 million
for the
three
months ended
May 31, 2017
and
2016
, respectively.
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) ("AOCI"), net of tax, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
Unrealized
Gains
(Losses) on
Available-for-
Sale Investments
|
|
Total
|
Balance as of February 28, 2017
|
$
|
(4,954
|
)
|
|
$
|
(272
|
)
|
|
$
|
(5,226
|
)
|
Other comprehensive income before reclassifications
|
901
|
|
|
81
|
|
|
982
|
|
Amounts reclassified from AOCI
|
—
|
|
|
5
|
|
|
5
|
|
Other comprehensive income
|
901
|
|
|
86
|
|
|
987
|
|
Balance as of May 31, 2017
|
$
|
(4,053
|
)
|
|
$
|
(186
|
)
|
|
$
|
(4,239
|
)
|
3. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill are summarized as follows (in thousands):
|
|
|
|
|
Balance as of February 28, 2017
|
$
|
69,795
|
|
Effect of foreign exchange rates
|
404
|
|
Balance as of May 31, 2017
|
$
|
70,199
|
|
Intangible assets subject to amortization are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2017
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
Acquired developed technology
|
$
|
50,146
|
|
|
$
|
(31,357
|
)
|
|
$
|
18,789
|
|
Customer relationships
|
19,876
|
|
|
(9,962
|
)
|
|
9,914
|
|
Patents
|
2,999
|
|
|
(1,886
|
)
|
|
1,113
|
|
Trade name
|
812
|
|
|
(404
|
)
|
|
408
|
|
|
$
|
73,833
|
|
|
$
|
(43,609
|
)
|
|
$
|
30,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2017
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
Acquired developed technology
|
$
|
50,013
|
|
|
$
|
(30,105
|
)
|
|
$
|
19,908
|
|
Customer relationships
|
19,736
|
|
|
(9,348
|
)
|
|
10,388
|
|
Patents
|
2,999
|
|
|
(1,781
|
)
|
|
1,218
|
|
Trade name
|
812
|
|
|
(375
|
)
|
|
437
|
|
|
$
|
73,560
|
|
|
$
|
(41,609
|
)
|
|
$
|
31,951
|
|
Certain intangible assets were removed as they were fully amortized as of the periods presented above. In addition to the above, we maintained other intangible assets not subject to amortization of
$0.2 million
as of
May 31, 2017
and
February 28, 2017
.
Amortization expense, including impairment charges, was
$1.7 million
and
$1.9 million
for the
three
months ended
May 31, 2017
and
2016
, respectively.
As of
May 31, 2017
, amortization expense for intangible assets in future periods was as follows:
$5.2 million
for the remainder of fiscal
2018
,
$6.0 million
for fiscal
2019
,
$5.8 million
for fiscal
2020
,
$5.3 million
for fiscal
2021
,
$4.9 million
for fiscal
2022
and
$3.0 million
thereafter.
4. Stockholders’ Equity
Stock-Based Compensation
Total stock-based compensation expense has been classified as follows in our condensed consolidated statements of income (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
2017
|
|
2016
|
Cost of revenue
|
$
|
426
|
|
|
$
|
298
|
|
Research and development
|
2,687
|
|
|
2,464
|
|
Sales and marketing
|
2,134
|
|
|
1,848
|
|
General and administrative
|
2,136
|
|
|
3,327
|
|
|
$
|
7,383
|
|
|
$
|
7,937
|
|
As of May 31, 2017
, there was
$8.2 million
of unrecognized compensation cost related to outstanding stock options, expected to be recognized over a weighted-average period of
1.72 years
, and
$65.4 million
of unrecognized compensation cost related to unvested restricted stock units ("RSUs"), expected to be recognized over a weighted-average period of
2.86 years
.
Our 2015 Employee Stock Purchase Plan (the "ESPP") allows eligible employee participants to purchase shares of our common stock at a discount through payroll deductions. The ESPP consists of offering periods that are
six
months in length and employees may purchase shares in each period at
85%
of the lower of the Company’s fair market value on the first trading day
of each offering period or on the purchase date. The ESPP will continue until the earlier to occur of (i) the termination of the ESPP by our board of directors, or (ii)
June 15, 2035
.
As of May 31, 2017
, we had reserved
750,000
shares of our common stock for issuance under the ESPP and
634,746
shares remain available for future issuance.
Stock Repurchase Program
In September 2015, our board of directors authorized a stock repurchase program to repurchase shares of our common stock for an aggregate purchase price not to exceed
$50.0 million
through September 30, 2017.
The following table summarizes our common stock repurchases for the periods presented (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
2017
|
|
2016
|
Total number of shares repurchased
|
331
|
|
|
18
|
|
Dollar amount of shares repurchased
|
$
|
6,546
|
|
|
$
|
280
|
|
Average price paid per share
|
$
|
19.75
|
|
|
$
|
15.91
|
|
Remaining amount authorized as of the period end
|
$
|
16,642
|
|
|
$
|
30,504
|
|
5. Income Taxes
For the
three
months ended
May 31, 2017
and
2016
, we recorded an income tax provision of
$2.5 million
and
$3.3 million
, respectively.
We maintain a valuation allowance against a significant portion of our deferred tax assets, including U.S. federal and state deferred tax assets and certain foreign deferred tax assets, because realization of these tax benefits through future taxable income did not meet the more-likely-than-not threshold. We intend to maintain the valuation allowance until sufficient positive evidence exists to support its reversal.
The difference between the income tax provision that would be derived by applying the statutory rate to our before tax income for the
three
months ended
May 31, 2017
and the income tax provision actually recorded is primarily due to the temporary differences we do not expect to benefit from due to our valuation allowance, as well as non-deductible stock-based compensation expense and other currently non-deductible items.
6. Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our chief executive officer. Our chief executive officer reviews financial information presented on a consolidated basis, accompanied by information about sales by geographic region, for purposes of allocating resources and evaluating financial performance. We have one business activity and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated level. Accordingly, we have determined that we have a single reportable segment and operating segment structure.
Revenue by geographic region is based on our customers' billing addresses and is presented as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
2017
|
|
2016
|
North America
|
$
|
70,187
|
|
|
$
|
65,097
|
|
United States
|
66,262
|
|
|
61,593
|
|
Other
|
3,925
|
|
|
3,504
|
|
Latin America
|
1,317
|
|
|
1,125
|
|
Asia-Pacific
|
5,922
|
|
|
5,049
|
|
EMEA
|
16,753
|
|
|
15,383
|
|
|
$
|
94,179
|
|
|
$
|
86,654
|
|
7. Borrowings
Credit Facility
We have a
$25.0 million
credit facility with Silicon Valley Bank ("SVB"), which was amended in fiscal 2017 to extend the expiration date to November 2017. The credit facility includes an option to request an increase of the available funds to
$50.0 million
and is secured by a security interest on substantially all of our assets and contains restrictive covenants. Upon drawing the credit facility, the financial covenants will require us to maintain a minimum adjusted EBITDA, as defined in the credit facility, and a minimum adjusted quick ratio. The credit facility also sets forth specified events of default.
No
amounts had been drawn under the credit facility through
May 31, 2017
.
8. Commitments and Contingencies
Legal Matters
On February 27, 2017, Realtime Data LLC ("Realtime Data") filed a lawsuit against us in the United States District Court for the Eastern District of Texas, Tyler Division, alleging that certain of our products infringe U.S. patent numbers 9,054,728, 7,415,530, 9,116,908 and 8,717,204. On June 2, 2017, we filed a motion to dismiss for improper venue, and on July 5, 2017, Realtime Data filed a second lawsuit related to the same patents and products in the United States District Court for the District of Delaware. Given the early stage of the matter, we are unable to estimate a possible loss or range of possible loss, if any.
We may, from time to time, be party to litigation and subject to claims that arise in the ordinary course of business. In addition, third parties may, from time to time, assert claims against us in the form of letters and other communications. We currently believe that these ordinary course matters will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows; however, the results of litigation and claims are inherently unpredictable. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
9. Net Income Per Share
The following table presents the calculation of basic and diluted net income per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
2017
|
|
2016
|
Net income
|
$
|
2,672
|
|
|
$
|
2,784
|
|
Weighted-average shares used to compute net income per share, basic
|
52,875
|
|
|
52,285
|
|
Dilutive shares from stock options and RSUs
|
1,454
|
|
|
569
|
|
Weighted-average shares used to compute net income per share, diluted
|
54,329
|
|
|
52,854
|
|
Net income per share, basic
|
$
|
0.05
|
|
|
$
|
0.05
|
|
Net income per share, diluted
|
$
|
0.05
|
|
|
$
|
0.05
|
|
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 together with our condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended
February 28, 2017
. The last day of our fiscal year is February 28/29. Our fiscal quarters end on May 31, August 31, November 30 and February 28/29. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended
February 28, 2017
.
Overview
Barracuda designs and delivers powerful yet easy-to-use security and data protection solutions. We offer cloud-enabled solutions that empower customers to address security threats, improve network performance and protect and store their data. Our security platform helps customers simplify their IT operations and address their most pressing security needs even as they adopt new deployment models and move applications, data and workloads to the cloud. Our business model is built on the core values of speed and agility, which we apply to all aspects of our approach, including our technology innovations, the delivery and deployment of our solutions and responses to customer inquiries.
We derive revenue from sales of appliances and subscriptions. Revenue from the sale of our appliances includes hardware and a perpetual license. Subscription revenue is generated primarily from our subscription services such as our Barracuda Energize Updates and our cloud solutions. Subscription revenue also includes revenue from fixed term licenses of our managed service provider solutions, virtual appliance software, support and maintenance. Our subscriptions include monthly and annual terms ranging from one to five years, the substantial majority of which are for one-year periods. Subscriptions are billed in advance of the purchased subscription period. Renewal rates from subscriptions, on a dollars basis, were
90%
and
93%
for the
three
months ended
May 31, 2017
and
2016
, respectively. Subscription annual recurring revenue, which represent the annualized dollar amount of recurring subscription revenue in the final month of the fiscal quarter, were
$293.5 million
and
$263.2 million
for the three months ended
May 31, 2017
and
2016
, respectively.
The growth of our business and our future success depend on many factors, including our ability to continue to expand our customer base, pursue cross-sale opportunities and grow revenues from our existing customer base, expand our distribution channels, particularly internationally, continue to develop new solutions to promptly respond to our customers’ needs and successfully integrate acquisitions into our business. In aligning our investments, product portfolio and routes to market to address our customers' growing adoption of public cloud, software-as-a-service ("SaaS") and managed service IT deployment models, we provide a security platform that spans email, management, network and application security as well as data protection, all of which can be deployed and centrally managed across diverse and distributed architectures. As our existing customers’ IT buying needs evolve, or as our customers realize the benefits of the solutions that they previously purchased, our platform provides us an opportunity to cross-sell additional solutions. To support our cross-sell efforts, we intend to continue adding higher touch sales and marketing field resources to liaise with our channel partners as we continue to grow our sales both domestically and internationally. We expect that our continued investment in resources to expand our cross-sell efforts to existing customers will result in longer-term revenue growth opportunities.
In addition to our cross-sell efforts, our sales and marketing initiatives are primarily focused on higher-growth segments within the security and data protection markets. Our future success will depend in part on our ability to continue to timely identify these higher-growth segments and expand our sales within them. While these areas represent significant opportunities for us, they also pose risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results.
Furthermore, our business depends on the overall demand for security and data protection solutions. Weak global economic conditions, particularly market and financial uncertainty and instability in the United States and Europe, or a reduction in security and data protection solution spending even if general economic conditions are unaffected, could adversely impact our business, financial condition and operating results in a number of ways. Additionally, we face significant competition across all of our market segments, and must continue to execute across all functions and add qualified personnel to succeed.
Our Business Model
We generally invoice at the time of sale for the total price of the solutions we deliver, and we typically collect cash in 30 to 60 days. We refer to the total amount of invoices we issue in a period as gross billings. All of the gross billings we record are
recognized as revenue ratably under U.S. generally accepted accounting principles ("GAAP"), once all revenue recognition criteria have been met. Gross billings are initially recorded as deferred revenue, less reserves. The hardware appliance component of our gross billings is recognized ratably as revenue over the estimated customer relationship period, which is typically three years, commencing upon the activation of the unit by the end customer. The subscription component of our gross billings is recognized ratably as revenue over the contractual period of the subscription. Because we typically bill in advance for the entire term, substantially all of our new and renewal gross billings increase our deferred revenue balance, which contributes significantly to our cash flow.
Components of Results of Operations
Revenue
We generate revenue from the sales of our appliances and subscriptions.
|
|
•
|
Appliance Revenue
. Revenue from the sale of our appliances includes hardware and a perpetual software license. We recognize hardware appliance revenue over the estimated customer relationship period of three years, commencing with the end-user’s activation of the appliance and related subscription, provided all other criteria for the recognition of appliance revenue are met.
|
|
|
•
|
Subscription Revenue
. Subscription revenue is generated primarily from our subscription services such as our Barracuda Energize Updates. Subscription revenue also includes revenue from fixed term licenses of our virtual appliance software, support and maintenance. Our subscription terms include monthly and annual terms ranging from one year to five years, the substantial majority of which are for one year periods. We recognize revenue from subscriptions, support and maintenance over the contractual service period.
|
Cost of Revenue
Cost of revenue consists of costs related to our appliance and subscription revenue. Such costs include hardware, manufacturing, shipping and logistics, customer support, royalty, warranty, personnel costs, service delivery and data center costs and amortization of intangible assets related to acquired technology. We expect our cost of revenue to increase in absolute dollars, although it may fluctuate as a percentage of total revenue from period to period, as we continue to grow.
Gross Profit
Gross profit as a percentage of total revenue, or gross margin, has been and will continue to be affected by a variety of factors, including manufacturing costs, cost of technical support and the mix of our solutions sold. We expect our gross profit to fluctuate over time depending on the factors described above.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation expense and travel-related expenses. Operating expenses also include allocated overhead costs for facilities, IT and depreciation. We expect operating expenses to increase in absolute dollars, although they may fluctuate as a percentage of total revenue from period to period, as we continue to grow. In particular, we expect our stock-based compensation expense to increase in absolute dollars as a result of our existing stock-based compensation expense to be recognized as options and restricted stock units ("RSUs") vest and as we issue additional stock-based awards to attract and retain employees.
|
|
•
|
Research and development
. Research and development expenses consist primarily of salaries, benefits and stock-based compensation for employees and executives on our engineering and technical teams who are responsible for increasing the functionality and enhancing the ease-of-use of our appliance and subscription services, as well as the development of new products. We expense our research and development costs as they are incurred. We expect research and development expenses to increase in absolute dollars as we continue to invest in our future solutions, although our research and development expenses may fluctuate as a percentage of total revenue.
|
|
|
•
|
Sales and marketing.
Our sales and marketing expenses consist primarily of advertising, as well as salaries, commissions, benefits and stock-based compensation for our employees and executives engaged in sales, sales support, marketing, business development and customer service functions. Our advertising expenses include the costs of cooperative marketing programs developed with our channel partners and other marketing programs such as online lead generation, promotional events and web seminars. We market and sell our subscription services worldwide
|
through our sales organization and distribution channels, such as strategic resellers and distributors. We capitalize and amortize the direct and incremental portion of our sales commissions over the period the related revenue is recognized. We expect sales and marketing expenses to increase in absolute dollars as we continue to introduce marketing campaigns and invest in sales resources in key focus areas, although our sales and marketing expenses may fluctuate as a percentage of total revenue.
|
|
•
|
General and administrative.
Our general and administrative expenses consist primarily of salaries, benefits and stock-based compensation for our finance, legal, regulatory and compliance, human resources and other administrative employees and executives. In addition, general and administrative expenses include outside consulting, legal and accounting services and facilities and other supporting overhead costs. We expect general and administrative expenses to increase in absolute dollars due to professional services fees primarily related to outside legal, audit, investor relations and consulting services to support the business, although our general and administrative expenses may fluctuate as a percentage of total revenue.
|
Other Income, Net
Other income, net consists primarily of foreign exchange gains and losses, interest expense on our outstanding debt and interest income earned on our cash, cash equivalents and marketable securities, as well as realized gains and losses from our marketable securities portfolio. We expect interest income will vary each reporting period depending on our average investment balances during the period, types and mix of investments and market interest rates.
Provision for Income Taxes
Our provision for income taxes consists primarily of federal and state income taxes in the United States and income taxes in foreign jurisdictions in which we conduct business. We estimate income taxes in each of the jurisdictions in which we operate. This process involves determining income tax expense together with calculating the deferred income tax expense related to temporary differences resulting from the differing treatment of items for tax and accounting purposes. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. These temporary differences result in deferred tax assets and liabilities, which are included within our condensed consolidated balance sheets. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss and credits carryforwards, if it is more likely than not that the tax benefits will be realized.
Results of Operations
Comparison of the Three Months Ended
May 31, 2017
and
2016
The following table summarizes our condensed consolidated results of operations for the periods presented and as a percentage of our total revenue for those periods (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
2017
|
|
% of
Total
Revenue
|
|
2016
|
|
% of
Total
Revenue
|
|
Change
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Appliance
|
$
|
20,265
|
|
|
22
|
%
|
|
$
|
21,333
|
|
|
25
|
%
|
|
$
|
(1,068
|
)
|
Subscription
|
73,914
|
|
|
78
|
|
|
65,321
|
|
|
75
|
|
|
8,593
|
|
Total revenue
|
94,179
|
|
|
100
|
|
|
86,654
|
|
|
100
|
|
|
7,525
|
|
Cost of revenue
|
23,648
|
|
|
25
|
|
|
20,241
|
|
|
23
|
|
|
3,407
|
|
Gross profit
|
70,531
|
|
|
75
|
|
|
66,413
|
|
|
77
|
|
|
4,118
|
|
Operating expenses:
|
|
|
|
Research and development
|
19,356
|
|
|
21
|
|
|
19,207
|
|
|
22
|
|
|
149
|
|
Sales and marketing
|
36,220
|
|
|
38
|
|
|
31,330
|
|
|
36
|
|
|
4,890
|
|
General and administrative
|
10,944
|
|
|
12
|
|
|
10,772
|
|
|
13
|
|
|
172
|
|
Total operating expenses
|
66,520
|
|
|
71
|
|
|
61,309
|
|
|
71
|
|
|
5,211
|
|
Income from operations
|
4,011
|
|
|
4
|
|
|
5,104
|
|
|
6
|
|
|
(1,093
|
)
|
Other income, net
|
1,184
|
|
|
2
|
|
|
990
|
|
|
1
|
|
|
194
|
|
Income before income taxes
|
5,195
|
|
|
6
|
|
|
6,094
|
|
|
7
|
|
|
(899
|
)
|
Provision for income taxes
|
(2,523
|
)
|
|
(3
|
)
|
|
(3,310
|
)
|
|
(4
|
)
|
|
787
|
|
Net income
|
$
|
2,672
|
|
|
3
|
%
|
|
$
|
2,784
|
|
|
3
|
%
|
|
$
|
(112
|
)
|
Revenue
Total revenue increased
$7.5 million
, or
9%
, for the three months ended
May 31, 2017
compared to the three months ended
May 31, 2016
. Subscription revenue increased by
$8.6 million
, or
13%
, for the three months ended
May 31, 2017
compared to the three months ended
May 31, 2016
, primarily driven by an increase in active subscribers during the period of
48,722
, or
17%
, from
286,602
active subscribers as of
May 31, 2016
to
335,324
active subscribers as of
May 31, 2017
. The increase in active subscribers was primarily driven by our high level of customer retention and an increase in the number of customers purchasing subscriptions from us. Total appliance revenue decreased by
$1.1 million
, or
5%
, primarily due to the continuing shift by our customers from traditional and solely on-premises deployments to include the cloud, which includes hybrid network architectures, public and/or private clouds, SaaS applications and managed service solutions.
Cost of Revenue and Gross Margin
Cost of revenue increased
$3.4 million
, or
17%
, for the three months ended
May 31, 2017
compared to the three months ended
May 31, 2016
commensurate with the increase in total revenue for the comparable period. Gross margin decreased from
77%
for the three months ended
May 31, 2016
to
75%
for the three months ended
May 31, 2017
, primarily due to product mix shifts and increases of $1.7 million in warranty costs, $0.6 million in service delivery costs, $0.6 million in royalty costs and $0.5 million in compensation and personnel costs. Additionally, our gross margin is generally impacted by the timing of investments in our data center infrastructure and our technical support.
Operating Expenses
Research and development expenses on a dollar basis remained relatively consistent for the three months ended
May 31, 2017
compared to the three months ended
May 31, 2016
.
Sales and marketing expenses increased
$4.9 million
, or
16%
, for the three months ended
May 31, 2017
compared to the three months ended
May 31, 2016
, primarily due to increases of $2.1 million in compensation and personnel costs, primarily attributable to additional headcount and sales commission attainment, $2.0 million in marketing and channel partner program expenses, primarily attributable to higher search engine marketing and advertising spend, $0.6 million in travel and other related costs and $0.3 million in stock-based compensation expense. As a percentage of total revenue, sales and marketing expenses increased for the comparable period primarily due to the timing and nature of marketing campaigns.
General and administrative expenses on a dollar basis remained relatively consistent for the three months ended
May 31, 2017
compared to the three months ended
May 31, 2016
, primarily due to a $1.7 million charge for indirect tax costs, partially
offset by a decrease of $1.2 million in stock-based compensation expense and a gain of $0.4 million from the sale of net liabilities related to our CudaCam product offerings.
Other Income, Net
The change in other income, net was primarily due to an increase in net foreign exchange gains and interest income during the three months ended
May 31, 2017
compared to the three months ended
May 31, 2016
.
Provision for Income Taxes
We recorded an income tax provision of
$2.5 million
for the three months ended
May 31, 2017
. The difference between the income tax provision that would be derived by applying the statutory rate to our before tax income for the three months ended
May 31, 2017
and the income tax provision actually recorded is primarily due to the temporary differences we do not expect to benefit from due to our valuation allowance, as well as non-deductible stock-based compensation expense and other currently non-deductible items. For the three months ended
May 31, 2016
, we recorded an income tax provision of
$3.3 million
.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
2017
|
|
2016
|
|
|
|
|
|
(in thousands)
|
Net cash provided by operating activities
|
$
|
20,209
|
|
|
$
|
12,137
|
|
Net cash used in investing activities
|
$
|
(6,261
|
)
|
|
$
|
(5,158
|
)
|
Net cash provided by (used in) financing activities
|
$
|
(7,882
|
)
|
|
$
|
1,237
|
|
As of
May 31, 2017
, we had cash and cash equivalents of
$126.7 million
, of which approximately $12.8 million was held outside of the United States and not presently available to fund domestic operations and obligations. In addition, we held marketable securities of
$80.7 million
as of
May 31, 2017
. If we were to repatriate cash held outside of the United States, it could be subject to U.S. income taxes, less any previously paid foreign income taxes.
Our $25.0 million credit facility with Silicon Valley Bank (“SVB”) expires in November 2017. The credit facility includes an option to request an increase of the available funds to $50.0 million and is secured by a security interest on substantially all of our assets and contains restrictive covenants. Upon drawing the credit facility, the financial covenants will require us to maintain a minimum adjusted EBITDA, as defined in the credit facility, and a minimum adjusted quick ratio. The credit facility also sets forth specified events of default. No amounts had been drawn under the credit facility through
May 31, 2017
.
We believe that our existing cash, cash equivalents and marketable securities, our available credit facility and net cash provided by operating activities will be sufficient to meet our working capital and capital expenditure requirements, as well as to fund any principal and interest payments on notes payable and repurchases of our common stock, for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced solutions and service offerings and the continuing market acceptance of our solutions. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.
In addition, as described in the section "Legal Proceedings" included in Part II, Item 1 of this Quarterly Report on Form 10-Q, we are currently involved in ongoing litigation. Any adverse settlements or judgments in any litigation could have a material adverse impact on our results of operations, cash balances and cash flows in the period in which such events occur.
Operating Activities
Our primary source of cash from operating activities has been from cash collections from our customers. We expect cash inflows from operating activities to be affected by increases in sales and timing of collections. Our primary uses of cash from operating activities have been for personnel costs and investment in sales and marketing and research and development infrastructure. We expect cash outflows from operating activities to be affected by increases in sales and increases in personnel costs as we grow our business.
For the
three
months ended
May 31, 2017
, operating activities provided
$20.2 million
in cash primarily due to non-cash charges of $11.6 million related to stock-based compensation, depreciation and amortization expenses, a positive change of $5.8 million in our net operating assets and liabilities and our consolidated net income of
$2.7 million
.
For the
three
months ended
May 31, 2016
, operating activities provided
$12.1 million
in cash primarily due to non-cash charges of $12.2 million related to stock-based compensation, depreciation and amortization expenses and our consolidated net income of $2.8 million, partially offset by a negative change of $2.8 million in our net operating assets and liabilities.
Investing Activities
Our investing activities have generally consisted of transactions related to marketable and non-marketable securities, purchases of property and equipment and activity in connection with acquisitions. We expect to continue to purchase property and equipment to support the continued growth of our business as well as continue to invest in our data center infrastructure.
Cash used in investing activities of
$6.3 million
in the
three
months ended
May 31, 2017
was primarily related to purchases of marketable securities of
$10.8 million
and property and equipment of
$4.7 million
as well as payments related to an acquisition and the sale of net liabilities of $0.8 million, partially offset by proceeds from the sale and maturity of certain marketable securities of $10.0 million.
Cash used in investing activities of
$5.2 million
in the
three
months ended
May 31, 2016
was primarily related to purchases of marketable securities of $11.6 million and property and equipment of $1.9 million, partially offset by proceeds from the sale and maturity of certain marketable securities of $9.2 million.
Our annual capital expenditures generally have varied between approximately 2% and 5% of annual total revenue. We believe future capital expenditures are likely to be consistent with historical experience with variations above or below the range depending upon specific strategic opportunities.
Financing Activities
Our financing activities generally consist of equity related transactions, including proceeds from the exercises of employee stock options, excess tax benefits from equity incentive plans and tax payments associated with the net share settlements of equity awards and repurchases of common stock.
For the
three
months ended
May 31, 2017
, financing activities used
$7.9 million
in cash primarily related to repurchases of our common stock of
$6.5 million
, tax payments related to
$1.9 million
of net share settlements of equity awards and payments related to contingent considerations of $0.7 million, partially offset by proceeds from stock option exercises of
$1.3 million
.
For the
three
months ended
May 31, 2016
, financing activities provided
$1.2 million
in cash primarily from proceeds from stock option exercises of $3.0 million, partially offset by tax payments related to $1.6 million of net share settlements of equity awards.
Key Metrics
We monitor the following key metrics to help us evaluate growth trends, establish budgets and assess operational efficiencies. In addition to our results determined in accordance with GAAP, we believe the following non-GAAP and operational measures are useful in evaluating our operating performance.
The following presents our key metrics and provides reconciliations of the most directly comparable GAAP financial measure to each non-GAAP financial measure (in thousands, except active subscribers and percentages).
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
2017
|
|
2016
|
Gross billings
|
$
|
105,224
|
|
|
$
|
98,201
|
|
Year-over-year percentage change
|
7
|
%
|
|
|
Year-over-year percentage change on a constant currency basis
(1)
|
9
|
%
|
|
|
Adjusted EBITDA
(2)
|
$
|
16,529
|
|
|
$
|
17,714
|
|
Adjusted EBITDA as a percentage of total revenue
|
18
|
%
|
|
20
|
%
|
Free cash flow
(2)
|
$
|
15,472
|
|
|
$
|
10,188
|
|
Free cash flow as a percentage of total revenue
|
16
|
%
|
|
12
|
%
|
Active subscribers at period end
|
335,324
|
|
|
286,602
|
|
______________________
|
|
(1)
|
In order to determine how our business performed exclusive of the effect of foreign currency fluctuations, we compare the percentage change in our gross billings from one period to another using a constant currency. To present this gross billings information, the current and comparative prior period results for entities that operate in other than U.S. dollars are converted into U.S. dollars at constant exchange rates. For example, the rates in effect at
May 31, 2016
, which was the last day of our prior fiscal year’s comparable quarter, were used to convert current and comparable prior period gross billings rather than the actual exchange rates in effect during the respective period.
|
|
|
(2)
|
Beginning in the third quarter of fiscal 2017, we modified our reporting practices and our historical presentation of adjusted EBIDTA by no longer adjusting for changes in deferred revenue and associated deferred costs. Additionally, we have modified our historical presentation of adjusted free cash flow and will no longer adjust free cash flow for cash payment impact of acquisition and other charges. Refer to the "Acquisition and Other Charges" section below for additional details. These changes do not impact our current and historical presentation of GAAP results. Prior period information has been recast to conform to the adjusted calculations.
|
Gross billings
. We define gross billings as total revenue plus the change in deferred revenue and other adjustments which primarily reflect returns and reserves during a particular period. We use gross billings as a performance measurement, based on our business model of invoicing our customers at the time of sale of our solutions and recognizing revenue ratably over subsequent periods. Accordingly, we believe gross billings provide valuable insight into the sales of our solutions and the performance of our business. The gross billings we record in any period reflect sales to new customers plus renewals and additional sales to existing customers adjusted for returns, rebates and other offsets, which we do not expect to be recognized as revenue in future periods. In many cases, these returns, rebates and other offsets occur in periods different from the period of sale and are unrelated to the marketing efforts leading to the initial sale, and therefore by adjusting for such offsets, we believe our computation of gross billings better reflects the effectiveness of our sales and marketing efforts.
The following table reconciles total revenue to gross billings (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
2017
|
|
2016
|
Total revenue
|
$
|
94,179
|
|
|
$
|
86,654
|
|
Total deferred revenue, end of period
|
407,524
|
|
|
393,072
|
|
Less: total deferred revenue, beginning of period
|
(407,082
|
)
|
|
(392,774
|
)
|
Add: deferred revenue adjustments
|
10,603
|
|
|
11,249
|
|
Total change in deferred revenue and adjustments
|
11,045
|
|
|
11,547
|
|
Gross billings
|
$
|
105,224
|
|
|
$
|
98,201
|
|
Year-over-year percentage change
|
7
|
%
|
|
|
Year-over-year percentage change on a constant currency basis
(1)
|
9
|
%
|
|
|
______________________
|
|
(1)
|
In order to determine how our business performed exclusive of the effect of foreign currency fluctuations, we compare the percentage change in our gross billings from one period to another using a constant currency. To present this gross
|
billings information, the current and comparative prior period results for entities that operate in other than U.S. dollars are converted into U.S. dollars at constant exchange rates. For example, the rates in effect at
May 31, 2016
, which was the last day of our prior fiscal year’s comparable quarter, were used to convert current and comparable prior period gross billings rather than the actual exchange rates in effect during the respective period.
In the
three
months ended
May 31, 2017
, gross billings increased
7%
over the prior year’s comparable period. The increase in gross billings were primarily driven by our continued ability to cross-sell additional solutions to existing customers and the growth in our renewal subscriptions as a result of our high level of customer retention as well as additional lead generation opportunities and associated new customer billings. For the
three
months ended
May 31, 2017
, increased sales of our core products were the primary drivers for the increased gross billings. When evaluating our gross billings from period to period, we also evaluate our gross billings for the comparable period using a fixed exchange rate, thereby excluding the effect of currency fluctuations.
Adjusted EBITDA
. We define adjusted EBITDA as net income plus non-cash and non-operating charges, which include: (i) other income, net, (ii) provision for income taxes, (iii) acquisition and other charges, (iv) stock-based compensation expense, (v) amortization of intangible assets, including certain losses on disposal and impairment of intangible assets, and (vi) depreciation expense, including certain losses on disposal of fixed assets. Because adjusted EBITDA excludes certain non-cash and non-operating charges, this measure enables us to eliminate the impact of items we do not consider indicative of our ongoing operating performance, and therefore provides a better indication of profitability from our operations, and provides a consistent measure of our performance from period to period. Prior period information has been recast to conform to the current period presentation of adjusted EBIDTA and exclude changes in deferred revenue and associated deferred costs in our calculation of adjusted EBIDTA.
The following table reconciles net income to adjusted EBITDA (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
2017
|
|
2016
|
Net income
|
$
|
2,672
|
|
|
$
|
2,784
|
|
Other income, net
|
(1,184
|
)
|
|
(990
|
)
|
Provision for income taxes
|
2,523
|
|
|
3,310
|
|
Depreciation, amortization and impairment expense
(1)
|
4,216
|
|
|
4,281
|
|
Stock-based compensation expense
|
7,383
|
|
|
7,937
|
|
Acquisition and other charges
(2)
|
919
|
|
|
392
|
|
Adjusted EBITDA
|
$
|
16,529
|
|
|
$
|
17,714
|
|
Adjusted EBITDA as a percentage of total revenue
|
18
|
%
|
|
20
|
%
|
______________________
|
|
(1)
|
Represents expenses for the amortization of intangible assets and property and equipment, as well as certain losses on disposal and impairment of long-lived assets.
|
|
|
(2)
|
In calculating adjusted EBITDA, we also adjust for acquisition and other charges that we believe are non-recurring, infrequent and/or unusual in nature, can vary significantly in amount and frequency and are unrelated to our ongoing operating performance. We believe that adjusting for these charges allows us to better compare adjusted EBITDA from period to period in order to assess the ongoing operating results of our business. Refer to the "Acquisition and Other Charges" section below for additional details regarding these charges.
|
Adjusted EBITDA decreased to
$16.5 million
in the three months ended
May 31, 2017
from
$17.7 million
in the three months ended
May 31, 2016
. The decrease in adjusted EBITDA was primarily driven by increased sales and marketing expenses due to the timing and nature of certain marketing campaigns and gross margin decreases due to investments in employees, cloud infrastructure and core product lines to support the growth in core billings.
Free cash flow
. We define free cash flow as net cash provided by operating activities, less purchases of property and equipment. We consider free cash flow to be a useful liquidity measure that considers the investment in cloud and corporate infrastructure required to support our business. We use free cash flow to assess our business performance and evaluate the amount of cash generated by our business after adjusting for purchases of property and equipment. Prior period information has been recast to conform to the current period presentation of free cash flow and excludes the cash payment impact of acquisition and other charges in our calculation of free cash flow.
The following table reconciles net cash provided by operating activities to free cash flow (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
2017
|
|
2016
|
Net cash provided by operating activities
|
$
|
20,209
|
|
|
$
|
12,137
|
|
Less: purchases of property and equipment
|
(4,737
|
)
|
|
(1,949
|
)
|
Free cash flow
|
$
|
15,472
|
|
|
$
|
10,188
|
|
Free cash flow as a percentage of total revenue
|
16
|
%
|
|
12
|
%
|
Free cash flow increased to
$15.5 million
in the three months ended
May 31, 2017
from
$10.2 million
in the three months ended
May 31, 2016
, primarily driven by an
$8.1 million
increase in net cash provided by operating activities, partially offset by additional investments in property and equipment of $2.8 million.
Active subscribers
. We define an active subscriber as a discrete appliance, virtual appliance or cloud-only service that has activated at least one valid subscription that has not been terminated. We monitor the total number of active subscribers as a measure of the growth in our installed base, the success of our sales and marketing activities and the value that our solutions bring to our customers. As of
May 31, 2017
and
2016
, we had
335,324
and
286,602
active subscribers, respectively. The increase in active subscribers over these periods is primarily related to our ability to attract and acquire new customers.
Our non-GAAP measures have limitations as analytical tools and you should not consider them in isolation or as a substitute for an analysis of our results under GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their nearest GAAP equivalents. First, gross billings, adjusted EBITDA and free cash flow are not substitutes for total revenue, net income and cash provided by operating activities, respectively. Second, other companies may calculate non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. Finally, adjusted EBITDA excludes some costs, namely, non-cash stock-based compensation and depreciation, amortization and impairment expenses, which are recurring. Therefore adjusted EBITDA does not reflect the non-cash impact of stock-based compensation expense or working capital needs that will continue for the foreseeable future.
Acquisition and Other Charges
In calculating adjusted EBITDA, we exclude certain expense items resulting from acquisitions and other charges, which we believe are non-recurring, infrequent and/or unusual in nature, can vary significantly in amount and frequency and are unrelated to our ongoing operating performance indicative of ongoing operating performance or do not expect to recur in our continuing operating results. We believe that adjusting for these charges allows us to better compare adjusted EBITDA from period to period in order to assess the ongoing operating results of our business. We refer to these costs as our "acquisition and other charges" throughout this Quarterly Report on Form 10-Q. These costs consist of the following:
Acquisition and other costs
. Acquisition costs (including costs associated with prospective acquisitions) include acquisition-related expenses for legal, accounting and other professional fees, integration costs, fair value remeasurements of contingent consideration obligations and contingent consideration payments made under the terms of acquisition agreements. We believe these costs are unpredictable, can vary based on the size and complexity of each transaction, and are unrelated to our core operations or those of acquired businesses. Other costs are non-recurring, infrequent and/or unusual in nature and can vary significantly in amount and frequency. In fiscal 2017, these other costs included legal expenses incurred in connection with the C2C litigation matter. The acquisition and other costs are classified within operating expenses in our condensed consolidated statements of income.
Export compliance
. Export compliance costs include the settlement payments and the legal expenses incurred in connection with an internal investigation of our export controls compliance procedures and the submission and final resolution of all issues associated with our voluntary self-disclosures to the U.S. government in this regard. These costs are classified as general and administrative expenses in our condensed consolidated statements of income.
Gain on sale of net liabilities
. Gain on sale of net liabilities resulted from the disposition of assets and liabilities related to our CudaCam product offerings. We believe this gain is unrelated to our ongoing operating performance and is not expected to recur in our continuing operating results. The net liabilities included as part of the disposal group resulted in a gain recognized within general and administrative expenses in our condensed consolidated statements of income.
Indirect tax costs
. Indirect tax costs represent a one-time reserve based on estimated exposure related to potential tax assessments in various U.S. states. We believe these costs are unpredictable and can vary based on interpretation and application of various U.S. state regulations associated with indirect taxes. These costs are classified as general and administrative expenses in our condensed consolidated statements of income.
The following table presents the details of our acquisition and other charges and their impact on adjusted EBITDA (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
2017
|
|
2016
|
Acquisition and other costs
|
$
|
(336
|
)
|
|
$
|
381
|
|
Export compliance
|
—
|
|
|
11
|
|
Gain on sale of net liabilities
|
(449
|
)
|
|
—
|
|
Indirect tax costs
|
1,704
|
|
|
—
|
|
|
$
|
919
|
|
|
$
|
392
|
|
Contractual Obligations and Commitments
There have been no material changes outside the ordinary course of our business in the contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended
February 28, 2017
.
Off-Balance Sheet Arrangements
As of
May 31, 2017
, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.
There have been no significant changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the fiscal year ended
February 28, 2017
.
JOBS Act Accounting Election
We are an "emerging growth company," as defined in the Jumpstart Our Business Startup Act of 2012 (the "JOBS Act"). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Recent Accounting Pronouncements
Refer to the "Recently Adopted Accounting Pronouncements" and "Recent Accounting Pronouncements" sections in Note 1 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The market risk exposures described in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended
February 28, 2017
have not changed materially during the
three
months ended
May 31, 2017
.