OPSWARE INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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 October 31, 2004

¨	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: 000-32377

OPSWARE INC.

(Exact name of registrant as specified in its charter)

Delaware

94-3340178

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer

Identification Number)

599 N. Mathilda Avenue, Sunnyvale, CA 94085

(Address, including zip code, of Registrant’s principal executive offices)

Registrant’s telephone number, including area code: (408) 744-7300

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 Exchange Act Rule 12b-2 of the Exchange Act). YES x NO ¨

There were 85,114,307 shares of the registrant’s Common Stock, par value $0.001, outstanding on November 30, 2004.

TABLE OF CONTENTS


			Page
PART I		FINANCIAL INFORMATION	2

	ITEM 1	FINANCIAL STATEMENTS	2

		CONDENSED CONSOLIDATED BALANCE SHEETS	2

		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	3

		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	4

		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	5

	ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19

	ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	39

	ITEM 4	CONTROLS AND PROCEDURES	39

PART II		OTHER INFORMATION	41

	ITEM 1	LEGAL PROCEEDINGS	41

	ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	41

	ITEM 3	DEFAULTS UPON SENIOR SECURITIES	41

	ITEM 4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	41

	ITEM 5	OTHER INFORMATION	41

	ITEM 6	EXHIBITS	41

		SIGNATURE	42

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. These statements relate to our, and in some cases our customers’ or partners’, future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to, statements regarding anticipated market trends and uncertainties, financial results, operating results, revenue generated from the sale of our Opsware System software, including our license and maintenance agreement with EDS, operating expenses, anticipated capital expenditures and lease commitments, the adequacy of our capital resources to fund our operations, operating losses and cash flow, the anticipated increase in customers and expansion of our product offerings and target markets, our expectations regarding ongoing development of our Opsware System software and other technical capabilities, formation of strategic partnerships, potential expansion in our direct and indirect sales organizations, and recognition of compensation expense in connection with option grants.

These statements involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results, level of activity, performance or achievements to be materially different from the outcomes expressed or implied by these statements. These factors include those listed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including “Risk Factors” in this Quarterly Report on Form 10-Q, and elsewhere in this Quarterly Report.

Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we will not necessarily update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q whether as a result of new information, future events or otherwise. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.

The condensed consolidated financial statements and related information contained in this Quarterly Report on Form 10-Q reflect our results as they existed for the interim periods presented.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OPSWARE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)


	October 31, 2004			January 31, 2004
	(unaudited)			(A)
ASSETS
Current assets:
Cash and cash equivalents	$	56,261		$	55,205
Accounts receivable, net		4,146			1,687
Prepaid expenses and other current assets		3,100			3,216

Total current assets		63,507			60,108
Property and equipment, net		4,037			3,777
Restricted cash		2,740			2,911
Prepaid rent		2,461			3,001
Other assets		361			1,010
Intangible assets, net		4,463			—
Goodwill		3,617			—

Total assets	$	81,186		$	70,807

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,177		$	330
Accrued data center facilities costs		328			6,850
Other accrued liabilities		3,869			3,594
Advances from customers		9,055			4,235
Deferred revenue, current portion		7,642			4,716
Accrued restructuring costs, current portion		173			478
Capital lease obligations		—			23

Total current liabilities		22,244			20,226

Deferred revenue, net of current portion		905			1,202
Accrued restructuring costs, net of current portion		1,620			2,154
Stockholders’ equity:
Common stock		85			82
Additional paid-in capital		522,919			509,202
Notes receivable from stockholders		(49	)		(328	)
Deferred stock compensation		(148	)		(462	)
Accumulated deficit		(466,384	)		(461,273	)
Accumulated other comprehensive income (loss)		(6	)		4

Total stockholders’ equity		56,417			47,225

Total liabilities and stockholders’ equity	$	81,186		$	70,807

(A)	The balance sheet at January 31, 2004 has been derived from the audited consolidated financial statements at that date, but does not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

See accompanying notes.

OPSWARE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended October 31,						Nine Months Ended October 31,
	2004			2003			2004			2003
Net revenue:
License revenue	$	7,284		$	3,834		$	19,144		$	9,021
Services revenue		2,946			1,176			7,065			2,795

Net revenue		10,230			5,010			26,209			11,816
Cost and expenses:
Cost of license revenue		4,165			38			4,245			64
Cost of services revenue*		2,147			1,134			5,829			3,123
Amortization of developed technology		179			—			496			—
Research and development*		3,941			2,111			9,841			6,608
Sales and marketing*		4,124			2,240			10,515			6,501
General and administrative*		2,076			2,396			4,945			7,060
In-process research and development charges		—			—			610			—
Restructuring costs (recoveries), net		(54	)		269			(1,058	)		1,184
Amortization of other acquisition related intangibles		158			—			438			—
Amortization (reversal) of deferred stock compensation		1			66			(131	)		445

Total cost and expenses		16,737			8,254			35,730			24,985

Loss from operations		(6,507	)		(3,244	)		(9,521	)		(13,169	)
Gain on sale of assets and liabilities from Managed Services Business		—			1,052			4,338			1,184
Interest and other income, net		193			156			462			2,959

Loss before income taxes		(6,314	)		(2,036	)		(4,721	)		(9,026	)
Provision for income taxes		1			1			390			15

Net loss	$	(6,315	)	$	(2,037	)	$	(5,111	)	$	(9,041	)

Basic and diluted net loss per share	$	(0.08	)	$	(0.03	)	$	(0.06	)	$	(0.12	)

Shares used in computing basic and diluted net loss per share		83,965			79,425			83,039			78,060

* Excludes amortization (reversal) of deferred stock compensation of the following (1):


	Three Months Ended October 31,					Nine Months Ended October 31,
	2004		2003			2004			2003
Cost of services revenue	$	1	$	61		$	(177	)	$	155
Research and development		—		(72	)		15			192
Sales and marketing		—		40			4			145
General and administrative		—		37			27			(47	)

Total amortization (reversal) of deferred stock compensation	$	1	$	66		$	(131	)	$	445

(1)	Given the non-cash nature of the expense, we believe presenting amortization (reversal) of deferred stock compensation, incurred in connection with our initial public offering, in a separate line item more accurately reflects the results of our individual operating expense categories.

See accompanying notes.

OPSWARE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Months Ended October 31,
	2004			2003
Operating activities:
Net loss	$	(5,111	)	$	(9,041	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		1,869			2,198
Amortization of intangibles		934			—
Charge (benefit) related to stock-based compensation agreements		(619	)		2,124
Amortization (reversal) of deferred stock compensation		(131	)		445
Recovery on disposal of property and equipment		(6	)		(140	)
In-process research and development charges		610			—
Changes in operating assets and liabilities:
Accounts receivable, net		(772	)		(3,168	)
Prepaid expenses, other current assets and other assets		505			(496	)
Prepaid rent		540			(3,197	)
Accounts payable		524

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