UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
[X]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended June 30, 2004 |
OR
[ ]
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
Commission File Number 000-31523
IXIA
| California | 95-4635982 | |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) |
26601 West Agoura Road, Calabasas, CA 91302
(Address of principal executive offices, including zip code)
(818) 871-1800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Common Stock | 60,690,997 | |
| (Class of Common Stock) | (Outstanding at July 28, 2004) |
IXIA
TABLE OF CONTENTS
2
IXIA
| June 30, | December 31, | |||||||
| 2004 |
2003 |
|||||||
| (unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 60,107 | $ | 41,708 | ||||
Short-term investments in securities |
18,375 | 22,143 | ||||||
Accounts receivable, net of allowance for
doubtful accounts of $560 and $410 as of
June 30, 2004 and December 31, 2003,
respectively |
20,132 | 17,121 | ||||||
Inventories |
5,135 | 5,585 | ||||||
Income taxes receivable |
1,402 | 2,011 | ||||||
Prepaid expenses and other current assets |
7,286 | 6,927 | ||||||
Total current assets |
112,437 | 95,495 | ||||||
Investments in securities |
47,247 | 58,072 | ||||||
Property and equipment, net |
8,656 | 6,907 | ||||||
Goodwill |
8,821 | 1,592 | ||||||
Intangible assets, net |
21,636 | 19,960 | ||||||
Other assets |
2,065 | 2,992 | ||||||
Total assets |
$ | 200,862 | $ | 185,018 | ||||
Liabilities and Shareholders’ Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 1,741 | $ | 806 | ||||
Accrued expenses |
8,097 | 8,825 | ||||||
Deferred revenues |
6,079 | 5,436 | ||||||
Income taxes payable |
3,603 | 2,897 | ||||||
Total liabilities |
19,520 | 17,964 | ||||||
Shareholders’ equity: |
||||||||
Common stock, without par value; 200,000
shares authorized, 60,652 and 59,642 shares
issued and outstanding as of June 30, 2004
and December 31, 2003, respectively |
90,444 | 84,048 | ||||||
Additional paid-in capital |
49,688 | 48,769 | ||||||
Deferred stock-based compensation |
(14 | ) | (419 | ) | ||||
Retained earnings |
41,224 | 34,656 | ||||||
Total shareholders’ equity |
181,342 | 167,054 | ||||||
Total liabilities and shareholders’ equity |
$ | 200,862 | $ | 185,018 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
IXIA
| Three months ended | Six months ended | |||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net revenues |
$ | 26,811 | $ | 20,036 | $ | 51,724 | $ | 38,849 | ||||||||
Cost of revenues(1) |
4,851 | 3,773 | 9,262 | 7,082 | ||||||||||||
Amortization of purchased technology |
732 | — | 1,371 | — | ||||||||||||
Gross profit |
21,228 | 16,263 | 41,091 | 31,767 | ||||||||||||
Operating expenses: (1) |
||||||||||||||||
Research and development |
5,621 | 5,466 | 11,445 | 11,007 | ||||||||||||
Sales and marketing |
7,717 | 5,757 | 15,427 | 12,051 | ||||||||||||
General and administrative |
2,964 | 2,335 | 5,362 | 4,445 | ||||||||||||
Amortization of purchased intangible
assets |
379 | 237 | 788 | 465 | ||||||||||||
Total operating expenses |
16,681 | 13,795 | 33,022 | 27,968 | ||||||||||||
Income from operations |
4,547 | 2,468 | 8,069 | 3,799 | ||||||||||||
Interest and other income, net |
595 | 818 | 1,333 | 1,613 | ||||||||||||
Income before income taxes |
5,142 | 3,286 | 9,402 | 5,412 | ||||||||||||
Income tax expense |
1,596 | 820 | 2,834 | 1,434 | ||||||||||||
Net income |
$ | 3,546 | $ | 2,466 | $ | 6,568 | $ | 3,978 | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.06 | $ | 0.04 | $ | 0.11 | $ | 0.07 | ||||||||
Diluted |
$ | 0.06 | $ | 0.04 | $ | 0.10 | $ | 0.07 | ||||||||
Weighted average number of common and
common equivalent shares outstanding: |
||||||||||||||||
Basic |
60,447 | 58,007 | 60,170 | 57,820 | ||||||||||||
Diluted |
64,308 | 61,470 | 64,528 | 61,148 | ||||||||||||
(1) Stock-based compensation
included in: |
||||||||||||||||
Cost of revenues |
$ | 6 | $ | 42 | $ | 29 | $ | 92 | ||||||||
Research and development |
102 | 374 | 263 | 885 | ||||||||||||
Sales and marketing |
22 | (258 | ) | 75 | (3 | ) | ||||||||||
General and administrative |
2 | 59 | 37 | 174 | ||||||||||||
| $ | 132 | $ | 217 | $ | 404 | $ | 1,148 | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
IXIA
| Six months ended | ||||||||
| June 30, |
||||||||
| 2004 |
2003 |
|||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 6,568 | $ | 3,978 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Depreciation and amortization |
1,806 | 2,278 | ||||||
Amortization of intangible assets |
2,159 | 465 | ||||||
Provision for doubtful accounts |
150 | 150 | ||||||
Stock-based compensation |
404 | 1,148 | ||||||
Deferred income tax |
(551 | ) | — | |||||
Changes in operating assets and liabilities, net of
effect of acquisition: |
||||||||
Accounts receivable |
(2,911 | ) | (3,613 | ) | ||||
Inventories |
532 | (769 | ) | |||||
Income taxes receivable |
1,147 | — | ||||||
Prepaid expenses and other current assets |
240 | 320 | ||||||
Other assets |
(378 | ) | 15 | |||||
Accounts payable |
617 | 385 | ||||||
Accrued expenses |
(1,368 | ) | 1,541 | |||||
Deferred revenue |
367 | 1,509 | ||||||
Income taxes payable |
1,134 | 281 | ||||||
Net cash provided by operating activities |
9,916 | 7,688 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(3,470 | ) | (2,491 | ) | ||||
Purchases of investments |
(58,407 | ) | (30,020 | ) | ||||
Proceeds from investments |
73,000 | 26,535 | ||||||
Purchase of technology and other intangible assets |
(135 | ) | — | |||||
Payments in connection with acquisition of G3 Nova |
(5,138 | ) | — | |||||
Cash provided by (used in) investing activities |
5,850 | (5,976 | ) | |||||
Cash flows from financing activities: |
||||||||
Proceeds from exercise of stock options |
2,633 | 971 | ||||||
Net cash provided by financing activities |
2,633 | 971 | ||||||
Net increase in cash and cash equivalents |
18,399 | 2,683 | ||||||
Cash and cash equivalents at beginning of period |
41,708 | 58,865 | ||||||
Cash and cash equivalents at end of period |
$ | 60,107 | $ | 61,548 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
IXIA
Notes to Condensed Consolidated Financial Statements
June 30, 2004
(unaudited)
1. Business
Ixia (the “Company”) was incorporated on May 27, 1997 as a California corporation. The Company develops, markets and sells high performance IP network testing solutions. These solutions are highly scalable and generate, capture, characterize, and emulate network and application traffic, establishing definitive performance and conformance metrics of network devices or systems under test. The Company’s testing solutions are used by network and telephony equipment manufacturers, semiconductor manufacturers, service providers, and large enterprises to validate the functionality and reliability of complex IP networks, devices, and applications. The Company’s IxVoice products address the growing need for IP telephony test solutions for developing Voice over IP networks. The Company’s Real World Traffic Suite addresses the growing need to test applications and networks prior to deployment under realistic load conditions. The Company’s analysis solutions utilize a wide range of industry-standard interfaces, including Ethernet, SONET and ATM.
2. Basis of Presentation
The accompanying condensed consolidated financial statements as of June 30, 2004 and for the three and six months ended June 30, 2004 and 2003, are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, operating results and cash flows for the interim periods presented. The results of operations for the current interim periods presented are not necessarily indicative of results to be expected for the full year ending December 31, 2004 or any other future period.
These condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
3. Inventories
Inventories consist of the following (in thousands):
| June 30, | December 31, | |||||||
| 2004 |
2003 |
|||||||
Raw materials |
$ | 2,011 | $ | 2,085 | ||||
Work in process |
1,150 | 1,718 | ||||||
Finished goods |
1,974 | 1,782 | ||||||
| $ | 5,135 | $ | 5,585 | |||||
4. Stock-Based Compensation
The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and the related interpretations of FASB Interpretation (“FIN”) No. 44, “Accounting for Certain Transactions involving Stock
6
IXIA
Notes to Condensed Consolidated Financial Statements
Compensation.” Accordingly, compensation expense related to employee stock options is recorded only if, on the date of the grant, the fair value of the underlying stock exceeds the exercise price. The Company accounts for stock based awards issued to non-employees in accordance with the provisions of SFAS 123, “Accounting for Stock-Based Compensation” and Emerging Issues Task Force (“EITF”) 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees.”
As prescribed by SFAS 123, the Company calculated the fair value of each option grant on the respective dates of grant. The Company used the Black-Scholes option pricing model using the following assumptions:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Expected lives (in years) |
3.7 | 4.0 | 3.7 | 3.0 | ||||||||||||
Risk-free interest rates |
3.2 | % | 2.0 | % | 3.0 | % | 2.0 | % | ||||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
Expected volatility |
98.5 | % | 110.0 | % | 99.0 | % | 110.0 | % | ||||||||
The following table illustrates the effect on stock-based compensation, net income and earnings per share on a pro forma basis as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, except per share data):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Stock-based compensation: |
||||||||||||||||
As reported |
$ | 132 | $ | 217 | $ | 404 | $ | 1,148 | ||||||||
Additional stock-based
compensation expense determined
under the fair value method, net
of income tax |
4,395 | 2,041 | 6,891 | 4,820 | ||||||||||||
Pro forma |
$ | 4,527 | $ | 2,258 | $ | 7,295 | $ | 5,968 | ||||||||
Net income (loss): |
||||||||||||||||
As reported |
$ | 3,546 | $ | 2,466 | $ | 6,568 | $ | 3,978 | ||||||||
Additional stock-based
compensation expense determined
under the fair value method, net
of income tax |
(4,395 | ) | (2,041 | ) | (6,891 | ) | (4,820 | ) | ||||||||
Pro forma |
$ | (849 | ) | $ | 425 | $ | (323 | ) | $ | (842 | ) | |||||
Basic net income (loss) per share: |
||||||||||||||||
As reported |
$ | 0.06 | $ | 0.04 | $ | 0.11 | $ | 0.07 | ||||||||
Pro forma |
$ | (0.01 | ) | $ | 0.01 | $ | (0.01 | ) | $ | (0.01 | ) | |||||
Diluted net income (loss) per share: |
||||||||||||||||
As reported |
$ | 0.06 | $ | 0.04 | $ | 0.10 | $ | 0.07 | ||||||||
Pro forma |
$ | (0.01 | ) | $ | 0.01 | $ | (0.01 | ) | $ | (0.01 | ) | |||||
5. Earnings Per Share
Basic earnings per share is based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the weighted average number of common shares and dilutive potential common shares outstanding during the period.
7
IXIA
Notes to Condensed Consolidated Financial Statements
The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2004 and 2003 (in thousands, except per share data):
| Three months ended | Six months ended | |||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Basic presentation |
||||||||||||||||
Numerator: |
||||||||||||||||
Net income |
$ | 3,546 | $ | 2,466 | $ | 6,568 | $ | 3,978 | ||||||||
Denominator: |
||||||||||||||||
Weighted average common shares |
60,447 | 58,035 | 60,170 | 57,857 | ||||||||||||
Adjustment for common shares subject to repurchase |
— | (28 | ) | — | (37 | ) | ||||||||||
Denominator for basic calculation |
60,447 | 58,007 | 60,170 | 57,820 | ||||||||||||
Basic earnings per share |
$ | 0.06 | $ | 0.04 | $ | 0.11 | $ | 0.07 | ||||||||
Diluted presentation |
||||||||||||||||
Denominator: |
||||||||||||||||
Shares used above |
60,447 | 58,007 | 60,170 | 57,820 | ||||||||||||
Weighted average effect of dilutive securities: |
||||||||||||||||
Stock options and warrants |
3,861 | 3,435 | 4,358 | 3,291 | ||||||||||||
Common shares subject to repurchase |
— | 28 | — | 37 | ||||||||||||
Denominator for diluted calculation |
64,308 | 61,470 | 64,528 | 61,148 | ||||||||||||
Diluted earnings per share |
$ | 0.06 | $ | 0.04 | $ | 0.10 | $ | 0.07 | ||||||||
6. Concentrations
International Revenues:
Net revenues from international product shipments were $6.4 million and $4.7 million for the three months ended June 30, 2004 and 2003, respectively, and $14.3 million and $11.5 million for the six months ended June 30, 2004 and 2003, respectively.
Significant Customer:
For the three and six months ended June 30, 2004 and 2003, only one customer comprised more than 10% of net revenues as follows (in thousands, except percentages):
| Three months ended | Six months ended | |||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Amount of net revenues |
$ | 9,911 | $ | 7,074 | $ | 18,680 | $ | 12,244 | ||||||||
As a percentage of total net revenues |
37 | % | 35 | % | 36 | % | 32 | % | ||||||||
As of June 30, 2004 and December 31, 2003, the Company had receivable balances from the customer approximating 33% and 20%, respectively, of total accounts receivable.
7. Acquisition of G3 Nova
On February 20, 2004, the Company completed the acquisition of all of the outstanding capital stock of G3 Nova Technology, Inc. (“G3 Nova”). G3 Nova develops and sells Voice over IP test tools for enterprise call centers,
8
IXIA
Notes to Condensed Consolidated Financial Statements
communication networks and network devices. This acquisition opens new growth opportunities for the Company by allowing the Company to offer a broader portfolio of products to customers, as well as gain access to new customer segments. The results of G3 Nova’s operations have been included in the consolidated financial statements since the acquisition date.
The purchase price of $9.4 million included $5.5 million in cash, of which $550,000 will be payable six months after the closing date to cover any undisclosed contingencies, 307,020 shares of the Company’s common stock valued at $3.8 million and legal and other acquisition costs of $150,000. In addition, a contingent payment of up to $2.5 million may be paid based upon sales of G3 Nova products from July 2004 until June 2005. Future contingent payments under the earn-out will be reflected as additional goodwill when or if payments become due. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
Current assets |
$ | 355 | ||
Property and equipment |
131 | |||
Intangible assets |
3,700 | |||
Goodwill |
7,229 | |||
Total assets acquired |
11,415 | |||
Current liabilities assumed |
(2,001 | ) | ||
Net assets acquired |
$ | 9,414 | ||
Of the $3.7 million of acquired intangible assets, $2.5 million was assigned to acquired technology, $1.0 million was assigned to customer contracts, relationships and backlog and $200,000 was assigned to a covenant not to compete. These intangible assets will be amortized using a straight-line method over their expected useful lives ranging from three to four and one half years. No goodwill is deductible for income tax purposes.
The following table summarizes the pro forma revenue, net income and earnings per share had the G3 Nova acquisition occurred on January 1, 2004 and 2003, respectively (in thousands, except per share data):
| Six months ended | ||||||||
| June 30, |
||||||||
| 2004 |
2003 |
|||||||
Net revenues |
$ | 52,050 | $ | 39,737 | ||||
Net income |
6,209 | 3,601 | ||||||
Earnings per share: |
||||||||
Basic |
0.10 | 0.06 | ||||||
Diluted |
0.10 | 0.06 | ||||||
The pro forma results have been prepared for comparative purposes only and include adjustments for amortization of identifiable intangible assets resulting from the acquisition. These results do not purport to be indicative of the results of operations which would have resulted had the acquisition been in effect as of January 1, 2003 or the future results of operations of the combined organization.
8. Recent Accounting Pronouncements
In March 2004, the EITF reached a consensus on Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments.” EITF No. 03-1 requires disclosures of investments accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” in an unrealized loss position and are designed to help financial statement users analyze a company’s unrealized losses and better understand the basis for any management conclusion that the impairment is temporary. Quantitative and qualitative disclosures for investments are effective for the first annual reporting period ending after December 15,
9
IXIA
Notes to Condensed Consolidated Financial Statements
2003. All new disclosures related to cost method investments are effective for the annual reporting period ending after June 15, 2004. The Company anticipates that the adoption of EITF No. 03-1 will not have a material impact on our financial position, results of operations or cash flows.
In February 2004, the FASB issued FASB Staff Position (“FSP”) FIN 46(R)-1 “Reporting Variable Interests in Specified Assets of Variable Interest Entities under Paragraph 13 of FASB Interpretation No. 46 (Revised December 2003) (“FIN 46(R)”), Consolidation of Variable Interest Entities” to replace FIN 46-2 as a result of the release of FIN 46R in December 2003. The FSP states that a specified asset of a variable interest entity and the liability secured by the asset should not be deemed a separate variable interest entity. The effective date for the FSP follows the effective date and transition guidance specified in FIN 46R. The Company anticipates that the adoption of FIN 46(R)-1 will not have a material impact on our financial position, results of operations or cash flows.
10
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three and six months ended June 30, 2004, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2004, or for any other future period. The following discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, including the “Risk Factors” section and the consolidated financial statements and notes included therein.
OVERVIEW
We develop, market and sell high performance IP network testing solutions. These solutions are highly scalable and generate, capture, characterize, and emulate network and application traffic, establishing definitive performance and conformance metrics of network devices or systems under test. Our testing solutions are used to validate the functionality and reliability of complex IP networks, devices, and applications. Our IxVoice products address the growing need for IP telephony test solutions for developing Voice over IP networks. Our Real World Traffic Suite addresses the growing need to test applications and networks prior to deployment under realistic load conditions. Our analysis solutions utilize a wide range of industry-standard interfaces, including Ethernet, SONET and ATM. The following table sets forth, for the periods indicated, our net revenues by principal product category in dollars and as a percentage of total net revenues:
| Three months ended | Six months ended | |||||||||||||||||||||||||||||||
| June 30, |
June 30, |
|||||||||||||||||||||||||||||||
| Products |
2004 |
2003 |
2004 |
2003 |
||||||||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||||||||
Ethernet |
$ | 17,462 | 65.1 | % | $ | 14,105 | 70.4 | % | $ | 32,791 | 63.4 | % | $ | 26,212 | 67.5 | % | ||||||||||||||||
SONET |
1,425 | 5.3 | 2,010 | 10.0 | 3,913 | 7.6 | 3,779 | 9.7 | ||||||||||||||||||||||||
Software |
4,276 | 16.0 | 1,802 | 9.0 | 8,241 | |||||||||||||||||||||||||||