UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________ 
FORM 10-Q
 _________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2015
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: 001-33347
_________________________________________________ 
Aruba Networks, Inc.
(Exact name of registrant as specified in its charter)
 _________________________________________________
Delaware
 
02-0579097
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
1344 Crossman Ave.
Sunnyvale, California 94089-1113
(408) 227-4500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
_________________________________________________ 
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of outstanding shares of the registrant's common stock was 108,315,234 as of March 5, 2015.
 




ARUBA NETWORKS, INC.
FORM 10-Q
QUARTER ENDED JANUARY 31, 2015

INDEX
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



 PART I. FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Financial Statements

ARUBA NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
 (in thousands, except per share amounts)
 
January 31,
2015
 
July 31,
2014
 
 
 
 
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
151,949

 
$
118,594

Short-term investments
139,049

 
166,359

Accounts receivable, less allowances of $410 and $333, respectively
114,109

 
102,256

Inventory
45,273

 
39,836

Deferred costs of revenue
12,113

 
12,721

Prepaids and other current assets
17,372

 
18,063

Deferred income tax assets, current
14,840

 
25,676

Total current assets
494,705

 
483,505

Property and equipment, net
30,360

 
27,261

Goodwill
67,242

 
67,242

Intangible assets, net
18,079

 
19,505

Deferred income tax assets, non-current
22,698

 
23,962

Other non-current assets
8,779

 
8,185

Total assets
$
641,863

 
$
629,660

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
19,615

 
$
23,763

Accrued liabilities
95,221

 
80,578

Deferred revenue, current
153,510

 
135,160

Total current liabilities
268,346

 
239,501

Deferred revenue, non-current
47,225

 
44,977

Other non-current liabilities
14,229

 
12,686

Total liabilities
329,800

 
297,164

Commitments and contingencies (Note 11)

 

Stockholders’ equity
 
 
 
Common stock: $0.0001 par value; 350,000 shares authorized; 107,289 and 107,557 shares issued and outstanding, respectively
11

 
11

Additional paid-in capital
479,510

 
508,374

Accumulated other comprehensive loss
(1,518
)
 
(1,523
)
Accumulated deficit
(165,940
)
 
(174,366
)
Total stockholders’ equity
312,063

 
332,496

Total liabilities and stockholders’ equity
$
641,863

 
$
629,660

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

3



ARUBA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except per share amounts)
Revenue
 
 
 
 
 
 
 
Product
$
173,721

 
$
141,755

 
$
342,191

 
$
272,586

Support and professional services
39,210

 
34,601

 
78,561

 
64,697

Total revenue
212,931

 
176,356

 
420,752

 
337,283

Cost of revenue
 
 
 
 
 
 
 
Product
51,536

 
43,303

 
103,166

 
83,421

Support and professional services
8,820

 
10,050

 
18,429

 
18,483

Total cost of revenue
60,356

 
53,353

 
121,595

 
101,904

Gross profit
152,575

 
123,003

 
299,157

 
235,379

Operating expenses
 
 
 
 
 
 
 
Research and development
43,179

 
42,585

 
85,413

 
83,030

Sales and marketing
72,280

 
69,569

 
144,255

 
132,613

General and administrative
15,674

 
14,468

 
31,289

 
28,983

Restructuring charges
(482
)
 

 
6,072

 

Total operating expenses
130,651

 
126,622

 
267,029

 
244,626

Operating income (loss)
21,924

 
(3,619
)
 
32,128

 
(9,247
)
Other income (expense), net
 
 
 
 
 
 
 
Interest income
192

 
217

 
391

 
478

Other income (expense), net
(1,266
)
 
(80
)
 
(2,018
)
 
190

Total other income (expense), net
(1,074
)
 
137

 
(1,627
)
 
668

Income (loss) before income taxes
20,850

 
(3,482
)
 
30,501

 
(8,579
)
Provision for income taxes
15,167

 
7,219

 
22,075

 
9,949

Net income (loss)
$
5,683

 
$
(10,701
)
 
$
8,426

 
$
(18,528
)
 
 
 
 
 
 
 
 
Net income (loss) per share - basic
$
0.05

 
$
(0.10
)
 
$
0.08

 
$
(0.17
)
Net income (loss) per share - diluted
$
0.05

 
$
(0.10
)
 
$
0.07

 
$
(0.17
)
Shares used in per share calculation - basic
107,891

 
107,153

 
108,132

 
109,608

Shares used in per share calculation - diluted
113,393

 
107,153

 
114,711

 
109,608

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

4


ARUBA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
 
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
 
 
 
 
 
 
 
Net income (loss)
$
5,683

 
$
(10,701
)
 
$
8,426

 
$
(18,528
)
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
Unrealized gains, net
36

 
57

 
14

 
205

Realized gains reclassified into earnings
(9
)
 
(35
)
 
(9
)
 
(65
)
Net change in unrealized gains on short-term investments
27

 
22

 
5

 
140

Other comprehensive income
27

 
22

 
5

 
140

 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
5,710

 
$
(10,679
)
 
$
8,431

 
$
(18,388
)
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


5



ARUBA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Six Months Ended January 31,
 
2015
 
2014
 
(in thousands)
Cash flows from operating activities
 
 
 
Net income (loss)
$
8,426

 
$
(18,528
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
14,267

 
14,250

Change in provision for doubtful accounts
79

 
(173
)
Inventory reserves for excess, obsolescence and other
5,027

 
2,937

Stock-based compensation expense
48,294

 
56,163

Amortization of discounts and premiums on short-term investments
680

 
1,129

(Gain) loss on disposal of property and equipment, intangibles and other
(712
)
 
232

Deferred income taxes
11,231

 
3,979

Excess tax benefit associated with stock-based compensation
(6,365
)
 
(721
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(11,932
)
 
11,212

Inventory
(9,430
)
 
(11,451
)
Deferred costs of revenue
608

 
(4,069
)
Prepaids and other current assets
211

 
2,373

Other non-current assets
606

 
(2,058
)
Accounts payable, accrued liabilities and other non-current liabilities
24,784

 
(34,700
)
Deferred revenue
20,598

 
34,028

Net cash provided by operating activities
106,372

 
54,603

Cash flows from investing activities
 
 
 
Purchases of short-term investments
(65,720
)
 
(87,119
)
Proceeds from sales of short-term investments
12,799

 
89,240

Proceeds from maturities of short-term investments
79,559

 
99,083

Purchases of property and equipment
(13,031
)
 
(7,854
)
Purchases of intangible assets
(2,840
)
 

Investment in a privately-held company
(1,200
)
 

Net cash provided by investing activities
9,567

 
93,350

Cash flows from financing activities
 
 
 
Proceeds from issuance of common stock
16,051

 
10,473

Repurchases of common stock under stock repurchase program
(105,000
)
 
(193,504
)
Excess tax benefit associated with stock-based compensation
6,365

 
721

Net cash used in financing activities
(82,584
)
 
(182,310
)
Net increase (decrease) in cash and cash equivalents
33,355

 
(34,357
)
Cash and cash equivalents, beginning of period
118,594

 
144,919

Cash and cash equivalents, end of period
$
151,949

 
$
110,562

 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
Income taxes paid
$
2,970

 
$
3,046

Non-cash investing and financing activities
 
 
 
Net change in accounts payable and accrued liabilities related to purchases of property and equipment
$
105

 
$
891

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

6

ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


1.
The Company and its Significant Accounting Policies
The Company
Aruba Networks, Inc. (the “Company”) is a leading global provider of enterprise mobility solutions. The Company develops, markets and sells products and services that help solve its customers’ secure mobility requirements through its Mobility-Defined Networks, a network architecture designed to automatically optimize infrastructure-wide performance and trigger security actions that previously required manual intervention by information technology (“IT”) departments. Aruba Mobility-Defined Networks are comprised of the following three major components: Aruba's mobility-centric network infrastructure, Aruba's ClearPass Access Management System, and Aruba's mobility applications. The Company’s goal is to provide simplified, dependable solutions that enable IT departments to quickly, securely and cost-effectively meet their mobility and bring-your-own-device (“BYOD”) needs. The Company’s Mobility-Defined Networks are designed for the all-wireless workplace and an increasingly mobile universe of end-users, who the Company refers to as GenMobile, who rely on mobile devices for nearly every aspect of their work life and personal communication. The Company derives its revenue primarily from sales of Mobility Controllers with ArubaOS operating system software, controller-less and controller-managed wireless access points, value-added security software modules, access management system solutions, multi-vendor management software, mobility management solutions and other software, Mobility Access Switches, and support and professional services. The Company has offices in the Americas, Europe, the Middle East and the Asia Pacific regions and employs staff around the world.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States of America ("U.S.") generally accepted accounting principles ("GAAP") for interim financial information, pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances, transactions and cash flows have been eliminated. The July 31, 2014 Condensed Consolidated Balance Sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
The unaudited Condensed Consolidated Financial Statements have been prepared on the same basis as the Company's audited financial statements as of and for the year ended July 31, 2014 and include all adjustments necessary for the fair statement of the Company’s financial position as of January 31, 2015; the results of operations and statements of comprehensive income (loss) for the three and six months ended January 31, 2015 and 2014; and the statements of cash flows for the six months ended January 31, 2015 and 2014. The results of operations for the three and six months ended January 31, 2015 are not necessarily indicative of the operating results for any subsequent quarter, for the fiscal year ending July 31, 2015 or any future periods.
The accompanying statements are unaudited and should be read in conjunction with the audited Consolidated Financial Statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended July 31, 2014, filed with the SEC on September 24, 2014.
Significant Accounting Policies
There have been no significant changes in the Company’s accounting policies for the second quarter of fiscal 2015, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended July 31, 2014.

7


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

Recent Accounting Pronouncements
New Accounting Updates Recently Adopted
In March 2013, the Financial Accounting Standards Board ("FASB") issued an accounting standard update requiring an entity to release into net income (loss) the entire amount of a cumulative translation adjustment related to its investment in a foreign entity when as a parent, it either sells a part or all of its investment in the foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within the foreign entity. This standard became effective for the Company beginning in the first quarter of fiscal 2015. The adoption of this standard did not have an impact on the Company's Consolidated Financial Statements.
In July 2013, the FASB issued an accounting standard update that provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists, with the purpose of reducing diversity in practice. This standard requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. This standard became effective for the Company beginning in the first quarter of fiscal 2015. The adoption of this standard did not have an impact on the Company's Consolidated Financial Statements.
In November 2014, the FASB issued an accounting standard update which provides to all acquired entities the option to apply pushdown accounting when an acquirer obtains control of them. The guidance also allows any subsidiary of an acquired entity to apply pushdown accounting to its separate financial statements, regardless of whether the acquired entity elects to apply pushdown accounting. This standard became effective for the Company in the second quarter of fiscal 2015. The adoption of this standard did not have an impact on the Company's Consolidated Financial Statements.
Recent Accounting Updates Not Yet Effective
In April 2014, the FASB issued an accounting standard update that changes the criteria for reporting discontinued operations. This standard raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures around both discontinued operations and certain other disposals that do not meet the definition of discontinued operation. Under the revised standard, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on an entity's operations and financial results when either it qualifies as held for sale, disposed of by sale, or disposed of other than by sale. This standard will be effective for the Company beginning in the first quarter of fiscal 2016. The adoption of this standard is not expected to have a material impact on the Company's Consolidated Financial Statements.
In May 2014, the FASB issued an accounting standard update which provides for new revenue recognition guidance. The new standard is expected to supersede nearly all existing revenue recognition guidance. The core principle of the new guidance is to recognize revenue when promised goods or services are transferred to customers, in an amount that reflects the consideration to which the vendor expects to receive for those goods or services. The new standard is expected to require more judgment and estimates within the revenue recognition process than currently required under existing U.S. 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 separate performance obligations. This standard will be effective for the Company beginning in the first quarter of fiscal 2018, with no early adoption permitted. The Company will use one of two methods of adoption: (i) retrospective to each prior reporting period presented, with the option to elect certain practical expedients as defined within the standard; or (ii) retrospective with the cumulative effect of initially applying the standard recognized at the date of initial application inclusive of certain additional disclosures. The Company is currently evaluating these transition methods as well as the impact of this standard on its Consolidated Financial Statements.

8


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued


2.
Goodwill and Intangible Assets
The following table summarizes details of the Company’s goodwill:
 
Amount
 
(in thousands)
Balance at July 31, 2013
$
67,242

Changes in goodwill

Balance at July 31, 2014
67,242

Changes in goodwill

Balance at January 31, 2015
$
67,242


The following table summarizes details of the Company’s intangible assets:
 
Estimated
Useful Lives
 
Gross
Value
 
Accumulated
Amortization
 
Net
Value
 
(in thousands, except estimated useful lives)
Balance at January 31, 2015
 
 
 
 
 
 
 
Existing technology
3 to 7 years
 
$
41,383

 
$
(32,505
)
 
$
8,878

Patents
2 to 13 years
 
14,636

 
(6,537
)
 
8,099

Customer contracts
4 to 7 years
 
7,533

 
(6,758
)
 
775

Support agreements
5 to 6 years
 
2,917

 
(2,856
)
 
61

Tradenames and trademarks
1 to 5 years
 
1,150

 
(917
)
 
233

Non-compete agreements
 2 to 4 years
 
912

 
(879
)
 
33

Total
 
 
$
68,531

 
$
(50,452
)
 
$
18,079

In the second quarter of fiscal 2015, the Company entered into a perpetual patent license agreement for $2.8 million to support its product development and research and development activities.

 
Estimated
Useful Lives
 
Gross
Value
 
Accumulated
Amortization
 
Net
Value
 
(in thousands, except estimated useful lives)
Balance at July 31, 2014
 
 
 
 
 
 
 
Existing technology
3 to 7 years
 
$
41,383

 
$
(29,196
)
 
$
12,187

Patents
2 to 13 years
 
11,796

 
(5,881
)
 
5,915

Customer contracts
4 to 7 years
 
7,533

 
(6,536
)
 
997

Support agreements
5 to 6 years
 
2,917

 
(2,839
)
 
78

Tradenames and trademarks
1 to 5 years
 
1,150

 
(867
)
 
283

Non-compete agreements
 2 to 4 years
 
912

 
(867
)
 
45

Total
 
 
$
65,691

 
$
(46,186
)
 
$
19,505


The following table summarizes the amortization expense related to intangible assets recorded in the Condensed Consolidated Statements of Operations:
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Cost of product revenue
$
1,941

 
$
2,025

 
$
3,936

 
$
4,030

Sales and marketing
144

 
353

 
288

 
706

Research and development
6

 
6

 
13

 
12

General and administrative
15

 

 
29

 

Total
$
2,106

 
$
2,384

 
$
4,266

 
$
4,748


9


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued


The following table summarizes the estimated future amortization expense of the Company's intangible assets as of January 31, 2015:
 
Amount
 
(in thousands)
Fiscal Year
 
2015 (remaining six months)
$
4,279

2016
4,829

2017
2,018

2018
1,764

2019
1,031

Thereafter
4,158

Total
$
18,079

3.
Net Income (Loss) Per Common Share
Basic and diluted net income (loss) per common share is calculated by dividing net income (loss) by the weighted-average shares of common stock outstanding during the reporting period. The Company's dilutive potential common shares are not included when their effect is anti-dilutive.
Potentially dilutive common shares consist of common shares issuable upon exercise of stock options, issuances of Employee Stock Purchase Plan ("ESPP") shares, vesting of Restricted Stock Units ("RSUs"), and vesting of Market Stock Units ("MSUs"). The Company includes the common shares underlying MSUs in the calculation of diluted net income per share when they become contingently issuable and excludes such shares when they are not contingently issuable.
The dilutive effect of potentially dilutive common shares is calculated based on the average share price for each fiscal reporting period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are collectively assumed to be used to repurchase shares.
The following table sets forth the computation of basic and diluted net income (loss) per share:
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except per share data)
Net income (loss)
$
5,683

 
$
(10,701
)
 
$
8,426

 
$
(18,528
)
Weighted-average shares outstanding - basic
107,891

 
107,153

 
108,132

 
109,608

Dilutive effect of potential shares
5,502

 

 
6,579

 

Weighted-average shares outstanding - diluted
113,393

 
107,153

 
114,711

 
109,608

Net income (loss) per share - basic
$
0.05

 
$
(0.10
)
 
$
0.08

 
$
(0.17
)
Net income (loss) per share - diluted
$
0.05

 
$
(0.10
)
 
$
0.07

 
$
(0.17
)

The following table summarizes the potentially dilutive common shares that were excluded from the computation of the diluted net income (loss) per share for the periods presented, because including them would have had an anti-dilutive effect:
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Options to purchase common stock
1,013

 
1,102

 
1,023

 
1,201

Restricted stock awards
1,833

 
1,345

 
1,357

 
1,295

Market stock units
580

 

 
429

 



10


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

4.
Short-Term Investments
The following table summarizes the Company's short-term investments:
 
Cost Basis
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
Balance at January 31, 2015
 
 
 
 
 
 
 
Corporate bonds
$
44,254

 
$
27

 
$
(8
)
 
$
44,273

U.S. government agency securities
79,514

 
42

 
(14
)
 
79,542

U.S. treasury bills
9,834

 
3

 

 
9,837

Commercial paper
5,395

 
2

 

 
5,397

Total
$
138,997

 
$
74

 
$
(22
)
 
$
139,049


 
Cost Basis
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
Balance at July 31, 2014
 
 
 
 
 
 
 
Corporate bonds
$
54,969

 
$
79

 
$
(15
)
 
$
55,033

U.S. government agency securities
90,681

 
17

 
(58
)
 
90,640

U.S. treasury bills
14,560

 
17

 

 
14,577

Commercial paper
4,587

 
4

 

 
4,591

Municipal notes and bonds
1,518

 

 

 
1,518

Total
$
166,315

 
$
117

 
$
(73
)
 
$
166,359


The following table summarizes the cost basis and fair value of the short-term investments by contractual maturity:
 
Cost
Basis
 
Fair
Value
 
(in thousands)
Balance at January 31, 2015
 
 
 
One year or less
$
75,684

 
$
75,709

Over one year and less than two years
63,313

 
63,340

Total
$
138,997

 
$
139,049


 
Cost
Basis
 
Fair
Value
 
(in thousands)
Balance at July 31, 2014
 
 
 
One year or less
$
110,184

 
$
110,280

Over one year and less than two years
56,131

 
56,079

Total
$
166,315

 
$
166,359

The Company reviews the individual securities in its portfolio to determine whether a decline in a security’s fair value below the amortized cost basis is other-than-temporary. The Company determined that as of January 31, 2015 and July 31, 2014 there were no securities in its portfolio that were other-than-temporarily impaired.

11


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

The following table summarizes the fair value and gross unrealized losses of the Company’s investments with unrealized losses aggregated by type of investment instrument and the length of time that individual securities have been in a continuous unrealized loss position:
 
Less than 12 Months
 
Fair
Value
 
Unrealized
Loss
 
(in thousands)
Balance at January 31, 2015
 
 
 
Corporate bonds
$
15,396

 
$
(8
)
U.S. government agency securities
30,613

 
(14
)
Total
$
46,009

 
$
(22
)

 
Less than 12 Months
 
Fair
Value
 
Unrealized
Loss
 
(in thousands)
Balance at July 31, 2014
 
 
 
Corporate bonds
$
14,101

 
$
(15
)
U.S. government agency securities
57,566

 
(58
)
Total
$
71,667

 
$
(73
)
As of January 31, 2015 and July 31, 2014, there were no securities in an unrealized loss position for more than twelve consecutive months.
5.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be either recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which it would transact, and it also considers assumptions that market participants would use when pricing the asset or liability. Short-term investments are recorded at fair value.
The Company determines the fair values of its financial instruments based on a three-level 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. 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 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as 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 — Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities and reflect the Company's own assumptions in measuring fair value. As of January 31, 2015 and July 31, 2014, the Company had no investments valued as Level 3 investments.
Level 1 instruments are valued based on quoted market prices in active markets for identical instruments. Level 1 instruments consist primarily of bank deposits with third-party financial institutions and highly liquid money market securities with original maturities at date of purchase of 90 days or less and are stated at cost, which approximates fair value.
Level 2 securities are valued using quoted market prices for similar instruments, non-binding market prices that are corroborated by observable market data, or discounted cash flow techniques, and consist primarily of certain corporate bonds, U.S. government agency securities, U.S. treasury bills, commercial paper, municipal notes, and bonds.
There were no transfers between levels during the reporting periods presented.

12


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

The following table summarizes the fair value measurements of the Company’s cash, cash equivalents and short-term investments:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Balance at January 31, 2015
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash deposits with third-party financial institutions
$
122,634

 
$

 
$

 
$
122,634

Money market funds
27,815

 

 

 
27,815

Commercial paper

 
1,500

 

 
1,500

Short-term investments:
 
 
 
 
 
 
 
Corporate bonds

 
44,273

 

 
44,273

U.S. government agency securities

 
79,542

 

 
79,542

U.S. treasury bills

 
9,837

 

 
9,837

Commercial paper

 
5,397

 

 
5,397

Total
$
150,449

 
$
140,549

 
$

 
$
290,998


 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Balance at July 31, 2014
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash deposits with third-party financial institutions
$
113,303

 
$

 
$

 
$
113,303

Money market funds
2,291

 

 

 
2,291

Commercial paper

 
3,000

 

 
3,000

Short-term investments:
 
 
 
 
 
 
 
Corporate bonds

 
55,033

 

 
55,033

U.S. government agency securities

 
90,640

 

 
90,640

U.S. treasury bills

 
14,577

 

 
14,577

Commercial paper

 
4,591

 

 
4,591

Municipal notes and bonds

 
1,518

 

 
1,518

Total
$
115,594

 
$
169,359

 
$

 
$
284,953

Other Investments
As of January 31, 2015 and July 31, 2014, the Company had investments in privately-held companies of $3.0 million and $1.8 million, respectively, which are included in other non-current assets in the accompanying Condensed Consolidated Balance Sheets. These investments are recorded at cost and are adjusted to fair value in the event that they become other-than-temporarily impaired. There have been no impairments of these investments recorded in any of the periods presented.

13


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

6.
Condensed Consolidated Balance Sheet Components
The following tables summarize selected components of the Company's Condensed Consolidated Balance Sheets:
 
January 31,
2015
 
July 31,
2014
 
(in thousands)
Inventory
 
 
 
Raw materials
$
472

 
$
348

Finished goods
44,801

 
39,488

Total
$
45,273

 
$
39,836


 
Estimated
Useful Lives
 
January 31,
2015
 
July 31,
2014
 
(in thousands, except estimated useful lives)
 Property and Equipment, net
 
Computer equipment
2 to 5 years
 
$
26,993

 
$
25,779

Computer software
2 to 5 years
 
19,341

 
16,675

Machinery and equipment
2 to 5 years
 
42,951

 
36,500

Furniture and fixtures
2 to 5 years
 
5,299

 
4,756

Leasehold improvements
1 to 6 years
 
10,345

 
8,128

Total, gross
 
 
104,929

 
91,838

Less: accumulated depreciation and amortization
 
 
(74,569
)
 
(64,577
)
Total, net
 
 
$
30,360

 
$
27,261

Depreciation and amortization expense for property and equipment for the second quarter of fiscal 2015 and 2014 was $4.9 million and $4.8 million, respectively. Depreciation and amortization expense for property and equipment for the first half of fiscal 2015 and 2014 was $10.0 million and $9.5 million, respectively.
 
January 31,
2015
 
July 31,
2014
 
(in thousands)
Accrued Liabilities
 
 
 
Compensation and benefits
$
42,946

 
$
37,737

Marketing
27,420

 
24,782

Other
24,855

 
18,059

Total
$
95,221

 
$
80,578


14


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

 
January 31,
2015
 
July 31,
2014
 
(in thousands)
 Deferred Revenue
 
Product
$
59,525

 
$
50,678

Support and professional services
93,985

 
84,482

Total, current
153,510

 
135,160

Product, non-current
2,629

 
3,497

Support and professional services, non-current
44,596

 
41,480

Total, non-current
47,225

 
44,977

Total
$
200,735

 
$
180,137

Deferred product revenue relates to arrangements where not all revenue recognition criteria have been met. Deferred support and professional services revenue primarily represents customer payments made in advance for support and professional services contracts. Support contracts are typically billed on an annual basis in advance and revenue is recognized ratably over the support period, typically one to five years. Non-current product deferred revenue relates to software products sold as part of a multiple-element arrangement for which Vendor Specific Objective Evidence ("VSOE") had not been established. Revenue for these software products is recognized ratably over the related support period. The primary changes in the deferred revenue balances are due to quarter-end inventory stocking orders of our value-added distributors, growth of annual maintenance contracts from customers, and transactions which have certain acceptance or deployment provisions that will be recognized as revenue when revenue recognition criteria are met.
7.
Income Taxes
The effective tax rate in all periods is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. For the second quarter and first half of fiscal 2015, the Company’s effective tax rates differ from the tax computed at the U.S. federal statutory income tax rate due primarily to state taxes, non-deductible stock-based compensation, and losses in foreign operations with no tax benefit. Future effective tax rates could be adversely affected if earnings are lower than anticipated in countries with lower statutory tax rates or by unfavorable changes in tax laws and regulations or their interpretation. The Company’s effective tax rates were 72.7% and 207.3% for the second quarter of fiscal 2015 and 2014, respectively, and 72.4% and 116.0% for the first half of fiscal 2015 and 2014, respectively.
For the second quarter and first half of fiscal 2015, the Company computed the provision for income taxes based on the projected annual effective tax rate, as the Company determined that small changes in the estimated income or loss between tax jurisdictions would not result in significant fluctuations in the estimated annual effective tax rate.
For the second quarter and first half of fiscal 2014, the Company’s effective tax rates differ from the tax computed at the U.S. federal statutory income tax rate primarily due to non-deductible stock-based compensation, foreign operations, and fixed amortization of deferred tax charges related to the fiscal 2012 intercompany sale of intellectual property rights. For the second quarter and first half fiscal 2014, the Company computed the quarterly provision for income taxes based on the actual tax rate, as the Company determined that small changes in the estimated income or loss between tax jurisdictions would result in significant changes in the estimated annual effective tax rate.
The difference in the effective tax rates between the second quarter of fiscal 2015 and 2014 and the effective tax rates between the first half of fiscal 2015 and 2014 are primarily due to the tax benefits recognized in the second quarter and first half of fiscal 2015 relating to the reinstatement of the U.S. federal research credit, a difference in the mix of earnings among jurisdictions with different tax rates, and a reduction in deferred tax charges in the second quarter and first half of fiscal 2015. In the second quarter of fiscal 2015, the “Tax Increase Prevention Act of 2014 (“2014 Act”) was signed into law, thereby extending the U.S. federal research and development credit through December 31, 2014.
In fiscal 2012, the Company implemented a new corporate organizational structure to more closely align its corporate organization with the international nature of its business activities and to reduce its overall effective tax rate through changes in how it develops and uses its intellectual property and the structure of its international procurement and sales, including transfer-price arrangements for intercompany transactions. Therefore, the Company incurred and recorded IP structure charges starting in fiscal 2012. The Company also records deferred charges on other intra-entity transfers of intangible properties as they occur.
IP structure charges consist primarily of non-recurring gains recognized in the U.S. related to the international restructuring of the Company’s corporate organization during fiscal 2012, including the transfer of certain IP and inventory overseas. The “Amortization of deferred tax charge on IP restructuring” consists of taxes paid that resulted from intra-entity

15


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

transfers and that are deferred and amortized for financial reporting purposes under Accounting Standards Codification (“ASC”) 740-10-25-3(e), Income Taxes, and ASC 810-10-45-8, Consolidation. For fiscal 2014, 2013 and 2012, the corporate reorganization resulted in an increase to the effective tax rate due to a non-recurring gain triggered in the U.S. related to the reorganization as described above. As of July 31, 2014, the Company had largely amortized the deferred charges from its fiscal 2012 international restructuring of the Company’s corporate organization. The Company continues to record amortization of deferred tax charges on other similar intra-entity transfers that occurred after fiscal 2012. As of January 31, 2015, the balance in prepaids and other assets and other non-current assets was $1.0 million and $1.5 million, respectively. The deferred charge is amortized on a straight-line basis as a component of income tax expense over three to eleven years, based on the economic life of the intellectual property, and will increase the Company's effective tax rate during the amortization period. The deferred charges resulted in a 1.6 point increase to the projected annual effective tax rate as of January 31, 2015, from 75.9% to 77.5%.
Each fiscal quarter, the Company assesses the likelihood that it will be able to recover its deferred tax assets. The Company will reduce a deferred tax asset by a valuation allowance if it is "more likely than not" that some portion or all of the deferred tax asset will not be realized. A deferred tax asset is recorded when there is a future deductible amount, but a valuation allowance is needed if taxable income is anticipated to be insufficient to realize the future deductible amount. The Company considers available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance.
The Company believes that its California tax research credit carryforwards are not more likely than not to be realized and thus recorded a partial valuation allowance in its fiscal 2013 financial statements. In the first half of fiscal 2015, the Company recorded an increase in the valuation allowance of $1.0 million relating to this item. It is reasonably possible that a material increase in the valuation allowance could occur in the future depending on changes, if any, in the mix of earnings in the jurisdictions in which the Company operates, the percentage of revenue from California customers, the Company's evaluation of prudent and feasible tax planning strategies, the Company's expectation of exercising elections available under the applicable tax laws, or the Company's projections of the future growth and forecasted earnings. An increase to the valuation allowance would have the effect of increasing the income tax provision in the Condensed Consolidated Statements of Operations.
The Company files income tax returns in the following jurisdictions: U.S. federal jurisdiction, various U.S. state and local jurisdictions, and various foreign jurisdictions. Due to the Company's net operating loss and credit carryforwards, substantially all years are subject to examination. There are no material income tax audits currently in progress as of January 31, 2015, with the exception of India. The Company is currently under exam in India, however the Company believes that its reserves are adequate for any potential settlement payment.

16


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

8.
Equity Incentive Plans and Benefit Plans
Stock Option and Award Activity
The following table summarizes information about shares available for grant and outstanding stock option activity: 
 
 
 
Options Outstanding
 
 
 
 
 
Shares
Available for
Grant
 
Number of
Shares
 
Weighted
Average
Exercise
Price
per Share
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
(in thousands)
Balance at July 31, 2013
557,585

 
10,047,569

 
$
6.29

 
2.9
 
$
121,227

Shares reserved for issuance
5,670,469

 


 
 
 
 
 
 
Restricted stock awards granted
(4,350,155
)
 


 
 
 
 
 
 
Restricted stock awards forfeited
1,238,196

 


 
 
 
 
 
 
Options exercised

 
(2,778,312
)
 
3.73

 
 
 
42,871

Options cancelled
131,142

 
(131,142
)
 
19.98

 
 
 
 
Balance at July 31, 2014
3,247,237

 
7,138,115

 
7.03

 
2.0
 
82,533

Shares reserved for issuance
5,377,830

 


 
 
 
 
 
 
Restricted stock awards granted
(2,441,672
)
 


 
 
 
 
 
 
Restricted stock awards forfeited
1,016,745

 


 
 
 
 
 
 
Market stock units granted
(595,000
)
 


 
 
 
 
 
 
Market stock units forfeited
30,000

 
 
 
 
 
 
 
 
Options exercised

 
(1,996,705
)
 
3.89

 
 
 
32,147

Options cancelled
15,547

 
(15,547
)
 
21.82

 
 
 
 
Balance at January 31, 2015
6,650,687

 
5,125,863

 
$
8.21

 
1.6
 
$
49,331

Restricted Stock Award Activity
The following table summarizes information about non-vested restricted stock awards and units: 
 
Shares
 
Weighted 
Average
Grant Date
Fair Value
per Share
Balance at July 31, 2013
10,787,754

 
$
18.87

Awards granted
4,350,155

 
18.67

Awards vested
(5,009,273
)
 
19.07

Awards forfeited
(1,238,196
)
 
19.28

Balance at July 31, 2014
8,890,440

 
18.61

Awards granted
2,441,672

 
22.82

Awards vested
(2,520,714
)
 
20.42

Awards forfeited
(1,016,745
)
 
19.17

Balance at January 31, 2015
7,794,653

 
$
19.26


17


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

Fair Value Disclosures
Employee Stock Options
The fair value of each option is estimated on the date of grant using the Black-Scholes model. There were no stock options granted during the reporting periods presented.
Employee Stock Purchase Plan
The fair value of the purchase right for the Employee Stock Purchase Plan ("ESPP") is estimated on the date of grant using the Black-Scholes model with the following weighted average assumptions:
 
Six Months Ended January 31,
 
2015
 
2014
Risk-free interest rates
0.1% to 0.5%
 
0.1% to 0.4%
Expected term (in years)
0.5 to 2.0
 
0.5 to 2.0
Dividend yield
—%
 
—%
Volatility
37.7% to 49.8%
 
57.2% to 64.4%
The following table summarizes the shares issued and the weighted average purchase price per share for each ESPP purchase date during the first half of fiscal 2015 and 2014:
 
September 1,
2014
 
September 1,
2013
Shares issued
565,396

 
432,749

Weighted average purchase price per share
$
14.64

 
$
14.12

Market Stock Units
In September 2014, the Compensation Committee of the Company's Board of Directors approved the adoption of the Market Stock Unit program with the purpose of aligning key management and senior leadership with stockholders' interests over the long-term and to retain key employees. Market Stock Unit ("MSU") awards are granted under the Company's 2007 Equity Incentive Plan.
In the first quarter of 2015, the Company granted 595,000 MSUs, with 100% of the shares to be earned upon the achievement of an objective relative total stockholder return measured over a three-year performance period. There were no MSU awards granted during the second quarter of fiscal 2015.
Each MSU award granted in the first quarter of fiscal 2015 contains three separate tranches of an equal number of shares, with 100% of the shares of Tranche 1, Tranche 2, and Tranche 3 to be earned based on the achievement of an objective total stockholder return measured over one-year, two-year and three-year performance periods, respectively. MSUs will be awarded and fully vested upon the Compensation Committee's certification of the level of achievement following the performance period of each tranche. MSU participants have the ability to receive up to 150% of the target number of shares initially granted.
The fair value of each MSU award is determined by multiplying the fair value per share by the underlying number of shares. The fair value per share was determined on the grant date using the Monte Carlo valuation methodology and the assumptions described in the table below. The fair value per share for Tranche 1, Tranche 2, and Tranche 3 is $28.10, $26.90 and $26.74, respectively. The Company amortizes the fair value of each MSU award using the graded-vesting method, adjusted for estimated forfeitures. Stock-based compensation expense associated with participants who fulfill their requisite service period is not reversed even if the performance conditions are not met. However, stock-based compensation expense is reversed for participants who forfeit their MSU awards prior to fulfilling their requisite service period.

18


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

The fair value of the MSUs granted during the first half of fiscal 2015 was estimated using the following weighted-average assumptions:
 
Six Months Ended
 
January 31, 2015
Risk-free interest rates
1.03%
Expected term (in years)
2.87
Dividend yield
—%
Volatility
50.73%
As of January 31, 2015, the shares awarded under the MSU program have yet to be earned. The following table summarizes information about the MSU awards granted in the first half of fiscal 2015:
 
Target
Shares
Granted
 
Maximum
Shares Eligible
to Receive
Balance at July 31, 2014


 


Awarded
595,000

 
892,500

Forfeited
(30,000
)
 

Earned

 

Balance at January 31, 2015
565,000

 
892,500

The following table summarizes information about the outstanding MSUs at January 31, 2015:
 
Number of
Shares
 
Weighted
Average Remaining Contractual Life
 
Aggregate
Intrinsic
Value (*)
 
 
 
(years)
 
(in thousands)
MSUs outstanding
565,000

 
2.5
 
$
9,368

MSUs vested and expected to vest
531,773

 
2.5
 
$
8,817

(*) The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market value at January 31, 2015 was $16.58.
Stock-based Compensation Expense
Stock-based compensation expense consists primarily of expenses for stock options, restricted stock awards, MSUs, and employee stock purchase rights granted to employees. The following table summarizes stock-based compensation expense recorded in the Condensed Consolidated Statements of Operations:
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Cost of revenue
$
1,745

 
$
2,202

 
$
3,444

 
$
4,360

Research and development
8,977

 
11,306

 
18,541

 
22,114

Sales and marketing
8,902

 
11,071

 
18,478

 
21,382

General and administrative
3,844

 
4,165

 
7,558

 
8,307

Restructuring charges

 

 
273

 

Total
$
23,468

 
$
28,744

 
$
48,294

 
$
56,163


19


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

The following table presents stock-based compensation expense by award-type:
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Stock options
$
333

 
$
1,259

 
$
1,016

 
$
2,958

Stock awards
18,631

 
25,098

 
39,438

 
48,932

Employee stock purchase plan
1,950

 
2,387

 
4,073

 
4,273

Market stock units
2,554

 

 
3,767

 

Total
$
23,468

 
$
28,744

 
$
48,294

 
$
56,163

Stock Repurchase Program
As of January 31, 2015, the Company's Board of Directors had authorized a stock repurchase program for an aggregate amount of up to $500.0 million (consisting of an original $100.0 million authorization on June 13, 2012, plus subsequent authorizations of $100.0 million on July 15, 2013, $100.0 million on October 9, 2013, and $200.0 million on February 20, 2014).
The Company is authorized to make repurchases in the market until the Board of Directors terminates the program or until such repurchases reach the authorized amount, whichever occurs first. Any repurchases under the program will be funded either from available working capital or external financing. The number of shares repurchased and the timing of repurchases are based on the price of the Company's common stock, general business and market conditions, and other investment considerations. Shares are retired upon repurchase. The Company's policy related to repurchases of its common stock is to charge any excess of cost over par value entirely to additional paid-in capital.
During the second quarter and first half of fiscal 2015, the Company repurchased a total of 4,181,863 and 5,309,470 shares for a total purchase price of $80.0 million and $105.0 million, respectively. During the second quarter and first half of fiscal 2014, the Company repurchased a total of 4,653,460 and 11,017,240 shares for a total purchase price of $80.0 million and $193.5 million, respectively. As of January 31, 2015, remaining funds available under the stock repurchase program totaled $25.9 million.
9.
Restructuring Charges
In August 2014, the Company announced a restructuring plan to optimize its administrative and operational costs by realigning its workforce to better reflect the Company's operations and scaling the Company with a global infrastructure. While the Company has reduced its workforce and relocated certain personnel functions to lower cost regions, the Company continues hiring to support the expansion of its global go-to-market strategy as well as to support continued product innovation.
At the time of the announcement, the Company expected a reduction of up to 66 positions, or 3.7% of its global workforce, and the relocation of up to 75 positions, or 4.2% of its global workforce, to the Company’s facilities located in Portland, Oregon, Bangalore, India, and Cork, Ireland.
At the time of the announcement, the Company projected pre-tax restructuring charges of between approximately $6.0 million and $8.0 million, consisting primarily of severance, other termination benefits and other associated costs. During the first half of fiscal 2015, the Company has recognized $6.1 million in restructuring charges. As of January 31, 2015, the Company expects pre-tax restructuring charges to be in the low end of the range, with the majority of the charges recognized during the first half of fiscal 2015.
During the second quarter of fiscal 2015, the restructuring plan resulted in a net reduction to the restructuring reserve of $0.5 million, primarily as a result of savings of $0.4 million related to unpaid employee severance benefits due to changes in planned terminations (e.g., role reassignment) and savings of $0.3 million related to unused insurance and outplacement costs, as impacted employees integrated into the job market faster than anticipated. These savings were partially offset by additional charges of $0.2 million related to third party professional services directly associated with the restructuring.

20


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

The following table summarizes the restructuring activities through January 31, 2015:
 
Employee Severance and Benefits
 
Other
 
Total
 
(in thousands)
Balance at July 31, 2014
$

 
$

 
$

Gross charges
6,203

 
351

 
6,554

Cash payments
(2,743
)
 
(351
)
 
(3,094
)
Non-cash charges
(273
)
 

 
(273
)
Balance at October 31, 2014
$
3,187

 
$

 
$
3,187

Gross charges
58

 
228

 
286

Change in estimate related to first quarter of fiscal 2015
(768
)
 

 
(768
)
Cash payments
(1,874
)
 
(228
)
 
(2,102
)
Balance at January 31, 2015
$
603

 
$

 
$
603

The balance of restructuring charges accrued at January 31, 2015 totaled $0.6 million and is included in accrued liabilities in the Condensed Consolidated Balance Sheet as of January 31, 2015.
Other One-time Charges
In connection with the restructuring plan, the Company has also incurred certain other one-time charges, consisting primarily of redundant salaries, recruiting services and travel related expenses, and other related charges. Under U.S. GAAP, these charges do not qualify for presentation in the restructuring charges line of the Condensed Consolidated Statements of Operations. Thus, such expenses are reflected in their related functional departments. At the time of the announcement, the Company projected these other one-time charges would be between approximately $2.3 million and $4.3 million. Through January 31, 2015, the Company has recognized $1.5 million in other one-time charges related to restructuring actions, of which $1.1 million was recognized in the second quarter of fiscal 2015. As of January 31, 2015, the Company expects these other one-time charges to be in the low end of the range, with the majority of the charges to be recognized during the first nine months of fiscal 2015.
The following table summarizes other one-time charges recorded in the Condensed Consolidated Statements of Operations:
 
Three Months Ended
 
Six Months Ended
 
January 31, 2015
 
January 31, 2015
 
(in thousands)
Cost of revenue
$
26

 
$
27

Research and development
7

 
7

Sales and marketing
286

 
370

General and administrative
792

 
1,139

Total
$
1,111

 
$
1,543

10.
Segment Information and Significant Customers
The Company operates as one reportable and operating segment. The Company derives its revenue primarily from sales of Mobility Controllers with ArubaOS operating system software, controller-less and controller-managed wireless access points, Mobility Access Switches, value-added security software modules, access management system solutions, multi-vendor management software, mobility management solutions and other software, and support and professional services.
A reportable segment is defined as a component of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker ("CODM"), or decision making group, for resource allocation and for assessing performance. The Company’s CODM is its chief executive officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Revenue is attributed by geographic location based on the ship-to location of the Company’s customers.

21


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

The following table summarizes the Company's total revenue by geographic region:
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
United States
$
134,931

 
$
113,890

 
$
267,696

 
$
222,205

Europe, Middle East and Africa
42,706

 
33,768

 
87,563

 
59,764

Asia Pacific
29,188

 
24,260

 
55,194

 
47,254

Rest of World
6,106

 
4,438

 
10,299

 
8,060

Total
$
212,931

 
$
176,356

 
$
420,752

 
$
337,283

The following table presents significant channel partners contributing 10% or more of total revenue:
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
ScanSource, Inc.
17.4%
 
20.3%
 
17.5%
 
20.8%
Synnex Corp.
*
 
10.9%
 
11.0%
 
12.2%
(*) Indicates less than 10%.
The following table presents significant channel partners accounting for 10% or more of the balance of net accounts receivable: 
 
January 31,
2015
 
July 31,
2014
ScanSource, Inc.
11.1%
 
17.2%
Synnex Corp.
*
 
11.8%
Avnet Logistics U.S. LP
16.6%
 
15.3%
Dell, Inc.
*
 
11.5%
(*) Indicates less than 10%.
The following table summarizes the Company's property and equipment by geographic region based on the location of the asset:
 
January 31,
2015
 
July 31,
2014
 
(in thousands)
United States
$
20,217

 
$
18,242

India
5,907

 
4,894

All other countries
4,236

 
4,125

Total
$
30,360

 
$
27,261

11.
Commitments and Contingencies
Legal Matters
The Company reviews all legal matters at least quarterly and assesses whether an accrual for loss contingencies needs to be recorded. The assessment reflects the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. The Company records an accrual for loss contingencies when management believes that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal matters are subject to uncertainties and are inherently unpredictable; however, the Company believes that it has valid defenses with respect to its pending legal matters. Actual liability in any such matters may be materially different from the Company's estimates, which could result in the need to adjust the liability and record additional expenses. Patent litigation in particular is subject to significant postural shifts over short time frames, making the Company’s ability to assess probable liability particularly speculative in any given fiscal quarter even though the matter may be resolved in the next fiscal quarter. If an unfavorable resolution were to occur, there exists the possibility of a material adverse impact on the Company's consolidated financial condition, results of operations or cash flows for the period in which the resolution occurs or in future periods.

22


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

The Company is involved in disputes, claims, litigation, investigations, proceedings and other legal actions, consisting of intellectual property, commercial, securities, and employment matters from time to time that arise in the ordinary course of business, including the legal matters identified below.
U.S. Federal Court Class Action Litigation. On May 23, 2013, a purported stockholder class action lawsuit captioned Mazzafero v. Aruba Networks, Inc., et al., was filed in the United States District Court for the Northern District of California against the Company and certain of its officers. The purported class action alleges claims for violations of the federal securities laws, and seeks unspecified compensatory damages and other relief. On August 1, 2014, the Court dismissed the case but granted leave to amend. On September 26, 2014, the purported class filed an amended complaint which made allegations similar in nature to those in the original complaint. On October 27, 2014, the Company filed a motion to dismiss the amended complaint. On February 2, 2015, the Court granted Company’s motion to dismiss and entered judgment in favor of the Company. On February 23, 2015, Mazzafero filed a notice of appeal in the United States Court of Appeals for the Ninth Circuit appealing the decision of the district court. The Company believes it has meritorious defenses to these claims and will defend this litigation vigorously.
Azalea Networks China Lawsuit. In March 2011, a former customer (the "Plaintiff") of Azalea Networks ("Azalea"), a Chinese entity acquired by the Company on September 2, 2010, filed a lawsuit in Beijing, China, against the Company. The Plaintiff alleged breach of contract for the failure of certain products to perform according to specifications. The Company believed it had meritorious defenses to these claims and defended this litigation vigorously. On December 24, 2014, the Company and the Plaintiff reached a settlement agreement, which was consented to by the former Azalea shareholders, under which the Company agreed to make a cash payment to the Plaintiff of $750,000 in consideration for the release of the Company's liability for the alleged defective products. Pursuant to the merger agreement entered in connection with the acquisition of Azalea, the Company made a claim against the escrow shares seeking full reimbursement of the legal settlement payment. As a result, 40,560 shares with a fair value of approximately $750,000 (determined on the settlement date) were returned to the Company and recorded as a gain offsetting the legal settlement expense. The remaining shares, which have been held in escrow pending completion of this matter, were released and distributed to the former Azalea shareholders.
Shareholders Class Action. On March 9, 2015, a shareholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned Ballester v. Aruba Networks, Inc., et al., C.A. No. 10765 (Del. Ch. filed March 9, 2015), on behalf of a purported class of Aruba shareholders and naming as defendants Aruba, Aruba's Board of Directors, Hewlett-Packard Company, and Aspen Acquisition Sub, Inc., a wholly-owned subsidiary of Hewlett-Packard Company. For further information, refer to Note 12, Subsequent Events, of the Notes to Condensed Consolidated Financial Statements.
In addition, these actions or other third-party claims against the Company may cause the Company to incur costly litigation and/or substantial settlement charges. Furthermore, the outcome of any patent related matters may require the Company to make ongoing royalty payments, which could adversely affect gross margins in future periods. If any of those events were to occur, the Company's business, financial condition, results of operations, and cash flows could be adversely affected in any particular period by an unfavorable resolution of one or more of these contingencies.
Lease Obligations
The Company leases office space under non-cancelable operating leases with various expiration dates through March 2023. The following table summarizes the Company's future minimum lease payments under non-cancelable operating leases at January 31, 2015:
 
Amount
Fiscal Year
(in thousands)
2015 (remaining six months)
$
4,366

2016
9,168

2017
4,041

2018
2,210

2019
847

Thereafter
2,381

Total
$
23,013


23


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

Employee Agreements
The Company has signed various employment agreements with certain executives pursuant to which if their employment is terminated without cause, the executives are entitled to receive certain benefits, including, but not limited to, accelerated stock vesting.
Non-cancelable Purchase Commitments
The Company outsources the production of its hardware to third-party contract manufacturers, and enters into various inventory-related purchase commitments with these contract manufacturers and other suppliers. In addition, from time to time, the Company also enters into significant information technology and marketing agreements with its vendors, which are non-cancelable. The Company had $48.0 million and $45.4 million in non-cancelable purchase commitments as of January 31, 2015 and July 31, 2014, respectively. During the first quarter of fiscal 2015, the Company recognized a reserve for excess inventory of $1.0 million associated with a non-cancelable purchase order, which was included in product cost of revenue in the Condensed Consolidated Statement of Operations.
Product Warranty
The Company’s liability for estimated future product warranty costs is included as a component of accrued liabilities in the Condensed Consolidated Balance Sheets. The following table summarizes the activity related to the Company’s accrued liability for estimated future warranty costs:
 
Product Warranty
First half of fiscal 2015:
(in thousands)
Balance at July 31, 2014
$
943

Changes to the provision
657

Obligations fulfilled during period
(241
)
Balance at January 31, 2015
$
1,359

 
Product Warranty
First half of fiscal 2014:
(in thousands)
Balance at July 31, 2013
$
777

Changes to the provision
365

Obligations fulfilled during period
(240
)
Balance at January 31, 2014
$
902

Indemnification
In its sales agreements, the Company may agree to indemnify its direct and indirect sales channels and end user customers for certain expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification provisions are generally perpetual any time after execution of the agreement. The agreements generally limit the scope of the available remedies in a variety of industry-standard methods, including, but not limited to, product usage and geography-based limitations, a right to control the defense or settlement of any claim, and a right to replace or modify the infringing products to make them non-infringing. In certain circumstances, the Company may be subject to uncapped indemnity obligations. To date the Company has not paid material amounts to settle claims or defend lawsuits pursuant to such indemnification provisions. The Company has no liabilities recorded for these agreements as of January 31, 2015 and July 31, 2014. In addition, the Company indemnifies its officers, directors, and certain key employees while they are serving in good faith in their company capacities.
12.
Subsequent Events
Merger Agreement
On March 2, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Hewlett-Packard Company (“Parent” or “HP”) and Aspen Acquisition Sub, Inc., a wholly-owned subsidiary of Parent (“Merger Sub”), pursuant to which, subject to the satisfaction or waiver of certain conditions therein, Merger Sub will merge with and into the Company (the “Merger”). As a result of the Merger, Merger Sub will cease to exist, and the Company will survive as a wholly-owned subsidiary of HP.

24


ARUBA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Continued

Pursuant to the Merger Agreement, among other things, at the effective time of the Merger, each share of the Company’s Common Stock issued and outstanding immediately prior to such time (excluding (i) any shares held in the treasury of the Company or owned, directly or indirectly, by Parent or Merger Sub at the effective time of the Merger and (ii) any shares of the Company issued and outstanding at the effective time of the Merger that are held by any holder who has not voted in favor of the Merger and who is entitled to demand and properly demands appraisal of such shares pursuant to Section 262 of the Delaware General Corporation Law) will be cancelled and extinguished and automatically converted into the right to receive $24.67 in cash, without interest, and subject to deduction for any required withholding tax. Outstanding options exercisable for the Company’s Common Stock, restricted stock units and market stock units will be treated at the effective time of the Merger as more fully set forth in the Merger Agreement.
The completion of the Merger is subject to customary conditions, including without limitation, approval of the Merger by the Company’s stockholders, the absence of certain legal impediments, antitrust regulatory approval pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the antitrust laws of certain other jurisdictions, and the expiration or termination of the respective waiting periods required in connection with such required antitrust approvals.
The Merger Agreement contains certain termination rights for both the Company and HP, and provides that, upon termination of the Merger Agreement under specified circumstances, including, but not limited to, if the Company accepts a superior acquisition proposal, the Company may be required to pay HP a termination fee of $90.0 million.
A description of the Merger Agreement is contained in the Company’s Current Report on Form 8-K filed with the SEC on March 3, 2015, and a copy of the Merger Agreement is attached thereto as Exhibit 2.1.
Shareholder Class Action
On March 9, 2015, a shareholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned Ballester v. Aruba Networks, Inc., et al., C.A. No. 10765 (Del. Ch. filed March 9, 2015), on behalf of a purported class of Aruba shareholders and naming as defendants Aruba, Aruba's Board of Directors, HP, and the Merger Sub. The plaintiffs alleges that, in connection with the proposed acquisition of Aruba by HP, the individual defendants breached their fiduciary duties to Aruba shareholders by, among other things, failing to take steps to maximize the value of Aruba to its shareholders and agreeing to certain terms in the merger agreement. The complaint further alleges that HP and the Merger Sub aided and abetted the individual defendants in the alleged breaches of their fiduciary duties. The complaint seeks, among other things, an order enjoining the defendants from consummating the proposed transaction, and attorneys' fees and costs. The Company believes that it has meritorious defenses to these claims and intends to defend the litigation vigorously.

25



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information, discussion and analysis of our financial condition and results of operations should be read together with our Condensed Consolidated Financial Statements and related notes included elsewhere in this report.
In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "predict," "potential," "should," "will," "would" and other similar expressions. These statements include, among other things, statements concerning our expectations:
that revenue from our indirect channels will continue to constitute a significant majority of our future revenue;
that the number of mobile devices will continue to grow exponentially;
that competition will intensify in the future as other companies introduce new products with advanced technologies in the same markets we serve or intend to enter;
our stock-based compensation expense in fiscal 2015 will decrease on an absolute dollar basis and decrease as a percentage of revenue compared with fiscal 2014, with continued reductions as a percentage of revenue expected in fiscal 2016 and fiscal 2017;
that our solutions offerings, in particular our Mobility-Defined Networks™ architecture, including our new and expanding 802.11ac wireless LAN portfolio and Cloud WiFi, will enable broader networking initiatives by both our current and potential customers;
that we will increase offshore operations by establishing additional offshore capabilities for certain engineering, customer support, operations, and general and administrative functions in China, India and Ireland;
that within our indirect channel, sales through our value-added distributors, ("VADs"), and original equipment manufacturers ("OEMs"), will continue to be significant;
that international revenue for fiscal 2015 will increase in absolute dollars and remain in the approximate percentage range of recent years;
that in fiscal 2015 we intend to continue to invest significantly in our research and development efforts and will increase on an absolute dollar basis and decrease as a percentage of revenue compared with fiscal 2014;
that sales and marketing expenses for fiscal 2015 will continue to be our most significant operating expense and will increase on an absolute dollar basis as we continue to invest strategically in this area and will decrease as a percentage of revenue compared with fiscal 2014;
that general and administrative expenses for fiscal 2015 will increase on an absolute dollar basis and decrease as a percentage of revenue compared with fiscal 2014;
regarding our pending acquisition by Hewlett-Packard Company;
that our restructuring plan announced in August 2014 will improve our cost structure and result in pre-tax restructuring charges of up to $8.0 million;
that our tax reserves are adequate;
that we may continue to incur significant legal costs defending ourselves against claims made by third parties and depending on the timing and outcome of lawsuits and the legal process, legal costs and any resulting damages could have a significant impact on our financial statements;
that our existing cash, cash equivalents, short-term investments and future cash generated from our operations will be sufficient to meet anticipated cash requirements for at least the next 12 months;
that we will continue to ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk; and
that we will increase our market penetration and extend our geographic sales reach both domestically and internationally through our network of channel partners and by increasing our direct sales force.
These forward-looking statements are based on information available to us as of the date of this report and current expectations, forecasts and assumptions are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report, and in particular, the risks discussed under the heading “Risk Factors” in Part II, Item 1A of this report and those discussed in other documents we file with the Securities and Exchange Commission, or SEC. Our forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we are under no obligation to, and expressly disclaim any responsibility to, update or alter our forward-looking statements, whether as a result of new information, future events or otherwise. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

26



Overview
Aruba Networks, Inc. is a leading global provider of enterprise mobility solutions. We develop, market and sell solutions that help solve our customers' secure mobility requirements through our Mobility-Defined Networks™, a fundamentally new network architecture designed to automatically optimize infrastructure-wide performance and trigger security actions that previously required manual intervention by information technology (“IT”) departments. Mobility-Defined Networks gather and correlate contextual data about user roles, device types, application flows and location, which is critical in dynamic, ever-changing mobility environments where end-users roam. This self-healing, self-optimizing approach to mobility can greatly reduce IT helpdesk tickets and offer stronger data protection.
We believe the market for mobility solutions is changing and that the explosive growth of mobile devices, in part as a result of the bring-your-own-device (“BYOD”) phenomenon, is forcing IT departments to radically revise the way they approach provisioning and supporting these devices. Our goal is to provide simplified, dependable solutions that enable our customers to quickly, securely and cost-effectively meet their mobility and BYOD needs. Our Aruba Mobility-Defined Networks are designed for the all-wireless workplace and an increasingly mobile universe of end-users, whom we refer to as GenMobile, who rely on mobile devices for nearly every aspect of work, life and personal communication and demand to stay connected virtually all the time, no matter where they are.
Aruba Mobility-Defined Networks are comprised of three major components. The first component consists of our mobility-centric network infrastructure, including Mobility Controllers with ArubaOS™ operating system software, value-added security software modules, controller-less and controller-managed wireless access points, Remote Access Points, virtual private network (“VPN”) client software, and our AirWave™ and cloud-based Aruba Central® management solutions, Bluetooth Low Energy (“BLE”) beacons and Mobility Access Switches. The second component is our Aruba ClearPass Access Management System™, our next-generation access management system, which is designed to simplify and automate policy management, guest network access, mobile device onboarding, and mobile device health checks. The third component consists of our mobility applications, including application programming interfaces (“APIs”) for location and analytics applications as well as our Meridian™-powered mobile applications, which engage visitors through their mobile devices by providing indoor way-finding with turn-by-turn directions and targeted location-aware push notifications.
We conduct business in three primary geographic regions: Americas, Europe, Middle East and Africa ("EMEA"), and Asia Pacific ("APAC"). Our solutions have been sold to more than 40,000 customers worldwide, including some of the largest and most complex global organizations. Our customer base spans major industries and verticals, including general enterprise, high tech enterprise, industrial enterprise, higher education, K-12 education, health care, retail, federal/state/local government, financial services and hospitality. We typically sell to and support these customers through a two-tier distribution model in most areas of the world, including the U.S. Our Value Added Distributors ("VADs") and Original Equipment Manufacturers ("OEMs") sell our portfolio of products, including a variety of our support services, to a diverse number of Value Added Resellers ("VARs"), systems integrators and service providers. Also, certain of our OEMs sell directly to end customers.
Headquartered in Sunnyvale, California and founded in 2002, Aruba is led by Dominic Orr, President and Chief Executive Officer, and Keerti Melkote, Founder and Chief Technology Officer. Our website address is www.arubanetworks.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC website at www.sec.gov.
Recent Developments
On March 2, 2015, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Hewlett-Packard Company (“Parent” or “HP”) and Aspen Acquisition Sub, Inc., a wholly-owned subsidiary of Parent (“Merger Sub”), pursuant to which, subject to the satisfaction or waiver of certain conditions therein, Merger Sub will merge with and into us (the “Merger”). As a result of the Merger, Merger Sub will cease to exist, and we will survive as a wholly-owned subsidiary of HP.
Pursuant to the Merger Agreement, among other things, at the effective time of the Merger, each share of our Common Stock issued and outstanding immediately prior to such time (excluding (i) any shares held in the treasury of the Company or owned, directly or indirectly, by Parent or Merger Sub at the effective time of the Merger and (ii) any shares of the Company issued and outstanding at the effective time of the Merger that are held by any holder who has not voted in favor of the Merger and who is entitled to demand and properly demands appraisal of such shares pursuant to Section 262 of the Delaware General Corporation Law) will be cancelled and extinguished and automatically converted into the right to receive $24.67 in cash, without interest, and subject to deduction for any required withholding tax. Outstanding options exercisable for our Common Stock, restricted stock units and market stock units will be treated at the effective time of the Merger as more fully set forth in the Merger Agreement.
The completion of the Merger is subject to customary conditions, including without limitation, approval of the Merger by our stockholders, the absence of certain legal impediments, antitrust regulatory approval pursuant to the Hart-Scott-Rodino

27



Antitrust Improvements Act of 1976 and the antitrust laws of certain other jurisdictions, and the expiration or termination of the respective waiting periods required in connection with such required antitrust approvals.
The Merger Agreement contains certain termination rights for both us and HP, and provides that, upon termination of the Merger Agreement under specified circumstances, including, but not limited to, if we accept a superior acquisition proposal, we may be required to pay HP a termination fee of $90.0 million.
A description of the Merger Agreement is contained in our Current Report on Form 8-K filed with the SEC on March 3, 2015, and a copy of the Merger Agreement is attached thereto as Exhibit 2.1.
Major Trends Affecting Our Financial Results
Revenue
Our ability to increase our revenue will depend significantly on, among other things, continued growth in the market for enterprise mobility and remote networking solutions, continued acceptance of our products in the marketplace, our ability to continue to attract and retain new customers and distribution partners, our ability to compete, the willingness of customers to displace wired networks with wireless LANs, and our ability to continue to sell into our installed base of existing customers. We believe that our Aruba Mobility-Defined Networks, including our 802.11ac WLAN, ClearPass and Aruba Instant offerings, and software as a service solutions, will enable broader networking initiatives by both our current and potential customers. Our growth in support revenue is tied to increasing the number of products under support contracts, which is dependent on growing our installed base of customers, maintaining or improving the attach rate of support offerings to product sales and renewing existing support contracts. While we rely primarily on our partners to deliver professional services associated with our products, we sometimes deliver professional services directly to end customers, especially as we introduce new products. Our future profitability and rate of growth, if any, will also be directly affected by the timing and size of orders, product and channel mix, relative amount of professional services, seasonality of demand and sales patterns, average selling prices, costs of our products, our ability to effectively manage our multi-tier distribution model, general economic conditions, timing and impact of product transitions, and the extent to which we invest in our sales and marketing, research and development, and general and administrative resources.
The revenue growth that we have experienced has been driven primarily by an expansion of our customer base coupled with increased purchases from existing customers, which we believe reflects the need of business enterprises and other organizations to provide secure mobility to their users in a manner that is more cost effective than the traditional approach of using port-centric networks. Our revenue grew 20.7% and 24.7% in the second quarter and first half of fiscal 2015, respectively, as compared to the same periods in fiscal 2014.
Our ability to meet our product revenue expectations is dependent upon (1) new bookings received, shipped, and recognized in a given quarter, (2) the amount of bookings from prior quarters not shipped that are shipped and recognized in the current quarter, and (3) the amount of deferred revenue entering a given quarter that is recognized as revenue in the quarter. We typically ship products within 10 days after the receipt of an order.
Our product deferred revenue is comprised of:
product orders that have shipped but where the terms of the agreement, typically with our large customers, contain acceptance terms and conditions or other terms that require that the revenue be deferred until all revenue recognition criteria are met; and
product orders shipped to our VADs and OEMs for which we have not yet received persuasive evidence of sell-through from the VADs or OEMs.
Backlog
In our experience, the actual amount of product backlog at any particular time is not a meaningful indication of our future business prospects. Because we allow customers to cancel or change their bookings with limited advance notice prior to shipment or performance and because some bookings remain in backlog due to concerns about the credit worthiness of the partner or customer, we do not consider backlog to be firm and do not believe our backlog information is a reliable indicator of our ability to achieve any particular level of revenue or financial performance.

28



Product Transitions
We started in fiscal 2014 and continue to be in the midst of an access point product transition cycle from the 802.11n standard to the new 802.11ac standard. These types of product transitions present both an opportunity to increase our market share (as occurred during the last transition from 802.11abg to 802.11n) as well as containing corresponding risks, as further discussed under the heading “Risk Factors” in Part II, Item 1A of this report. Our new 802.11ac access points are among the fastest ramping access points in our history. We often introduce new premium products, such as our AP-225 802.11ac access point, for early adopter segments, and subsequently follow with the introduction of value-priced products for larger market segments, such as our AP-205 802.11ac access point, which was introduced in the fourth quarter of fiscal 2014, and our AP-215 802.11ac access point, which was introduced to the market towards the end of our first quarter of fiscal 2015.
Early premium products generally require higher initial production costs than both existing products and subsequently introduced value-priced products. Although we expect production costs to decrease over time, we have experienced, and may experience in the future, pressures on our gross margins when our customers adopt newer standards earlier than we expect and purchase the new higher cost products at a rate faster than we forecast, before we are able to lower our production costs. Product transitions may offer opportunities to capture market share, which can compound these early market pressures. In addition, we have faced and we may face in the future competition on pricing that could impact our ability to capture market share at this standard-changing inflection point or otherwise continue to pressure our gross margins.
Costs and Expenses
The substantial majority of our cost of product revenue consists of payments to third parties to manufacture our products. Wistron NeWeb Corporation ("WNC"), Sercomm and Accton Technology Corporation ("Accton") were our largest contract manufacturers in the second quarter and first half of fiscal 2015.
Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. The largest component of our operating expenses in each of these categories is personnel costs. Personnel costs consist of salaries, benefits and incentive compensation for our employees, including commissions for sales personnel and stock-based compensation expense for employees. As we continue our transition to a higher mix of cash-based compensation relative to stock-based compensation, in fiscal 2015 we expect our stock-based compensation expense will decrease on an absolute dollar basis and decrease as a percentage of revenue compared with fiscal 2014, with continued reductions expected as a percentage of revenue in fiscal 2016 and fiscal 2017.
As of January 31, 2015 and January 31, 2014, we had 1,797 employees and 1,687 employees worldwide, respectively, representing an increase of 110 employees, or 6.5% of our workforce. This increase in employees is the most significant driver behind the increase in costs and operating expenses in the second quarter and first half of fiscal 2015 compared to the same period in fiscal 2014. Even though we have adopted a restructuring plan described below that has reduced certain positions and shifted other positions to lower-cost, talent-rich locations, we expect to continue hiring additional employees as we scale our business and optimize our global structure.
Restructuring Plan
In August 2014, we announced a restructuring plan to optimize our administrative and operational costs by realigning our workforce to better reflect our operations and scaling our Company with a global infrastructure. While we have reduced our workforce and relocated certain personnel functions to lower cost regions, we continue hiring to support the expansion of our global go-to-market strategy as well as to support continued product innovation.
At the time of the announcement, we expected reduction of up to 66 positions, or 3.7% of our global workforce, and the relocation of up to 75 positions, or 4.2% of our global workforce, to our facilities located in Portland, Oregon, Bangalore, India, and Cork, Ireland.
At the time of the announcement, we projected pre-tax restructuring charges of between approximately $6.0 million and $8.0 million, consisting primarily of severance, other termination benefits and other associated costs. For the first half of fiscal 2015, we have recognized $6.1 million in restructuring charges. As of January 31, 2015, we expect pre-tax restructuring charges to be in the low end of the range, with the majority of the charges recognized during the first half of fiscal 2015.
In connection with the restructuring plan, we have also incurred certain other one-time charges, consisting primarily of redundant salaries, recruiting services and travel related expenses, and other related charges. Under U.S. GAAP, these charges do not qualify for presentation in the restructuring charges line of the Condensed Consolidated Statements of Operations. Thus, such expenses are reflected in their related functional departments. At the time of the announcement, we projected these other one-time charges would be between approximately $2.3 million and $4.3 million. Through January 31, 2015, we have recognized $1.5 million in other one-time charges related to restructuring actions, of which $1.1 million was recognized in the second quarter of fiscal 2015. As of January 31, 2015, we expect these other one-time charges to be in the low end of the range, with the majority of the charges to be recognized during the first nine months of fiscal 2015.

29



For further information, refer to Note 9, Restructuring Charges, of the Notes to Condensed Consolidated Financial Statements.
Stock Repurchase Program
As of January 31, 2015, our Board of Directors had authorized a stock repurchase program for an aggregate amount of up to $500.0 million (consisting of an original $100.0 million authorization on June 13, 2012, plus subsequent authorizations of $100.0 million on July 15, 2013, $100.0 million on October 9, 2013, and $200.0 million on February 20, 2014).
We are authorized to make repurchases in the market until our Board of Directors terminates the program or until such repurchases reach the authorized amount, whichever occurs first. Any repurchases under the program will be funded either from available working capital or external financing. The number of shares repurchased and the timing of repurchases are based on the price of our common stock, general business and market conditions, and other investment considerations. Our policy related to repurchases of our common stock is to charge any excess of cost over par value entirely to additional paid-in capital and retire the shares upon repurchase.
During the second quarter and first half of fiscal 2015, we repurchased a total of 4,181,863 and 5,309,470 shares for a total purchase price of $80.0 million and $105.0 million, respectively. During the second quarter and first half of fiscal 2014, we repurchased a total of 4,653,460 and 11,017,240 shares for a total purchase price of $80.0 million and $193.5 million, respectively. As of January 31, 2015, remaining funds available under our stock repurchase program totaled $25.9 million.
Revenue, Cost of Revenue and Operating Expenses
Revenue
We derive our revenue primarily from sales of our ArubaOS operating system, controllers and gateways, wireless access points, application software modules, access management solution, multi-vendor management software, switches, mobile engagement solutions, and support and professional services.
We sell our products to channel partners and end customers located in the U.S., EMEA, APAC, and other parts of the world. We continue to expand into international locations and introduce our products in new markets. For fiscal 2015, we expect international revenue to increase in absolute dollars and remain in the approximate percentage range of recent years. For more information about our international revenue, see Note 10, Segment Information and Significant Customers, of the Notes to Condensed Consolidated Financial Statements.
Support services consist of software updates, on a when-and-if available basis, and telephone and Internet access to technical support personnel and hardware support. We provide customers with rights to unspecified software product upgrades and to maintenance releases and patches released during the term of the support period. Professional services consist of consulting and training services. Consulting services primarily consist of design as well as onsite and remote support services. Training services are typically instructor-led or online courses on the use of our products.
Cost of Revenue
Cost of product revenue consists primarily of manufacturing costs for our products, shipping and logistics costs, charges for inventory obsolescence, amortization of existing technology, and warranty obligations. We utilize third parties to manufacture our products and perform shipping logistics. We have outsourced the substantial majority of our manufacturing, repair and supply chain operations. Accordingly, the substantial majority of our cost of product revenue consists of payments to our contract manufacturers. Our contract manufacturers produce our products primarily in Asia, using quality assurance programs and standards that we jointly established. Cost of product revenue also includes amortization expense from purchased intangible assets.
Cost of support and professional services revenue is primarily comprised of personnel costs, including stock-based compensation expense, for providing technical support. In addition, we engage third-party support vendors to complement our internal support resources, the costs of which are included within costs of support and professional services revenue.
Gross Margin
Our gross margin has been, and will continue to be, affected by a variety of factors, including:
changes in the mix of products and services sold or manner in which products are sold in our channel;
the percentage of revenue from international regions;
changes in price competition, discounting pressures or promotions;
changes in material, labor or other manufacturing-related costs;
excess product component or obsolescence charges from our contract manufacturers;
write-downs for obsolete or excess inventory;

30



changes in costs due to changes in component pricing or charges incurred due to component holding periods if our forecasts do not accurately anticipate product demand;
timing of revenue recognition and revenue deferrals;
warranty-related issues;
freight charges;
timing and pricing with regard to the introduction of new products or new product platforms and the related transition from older products to newer products;
entry into new markets with different pricing and cost structures;
amortization expense from our intangible assets which is mainly existing technology;
amortization of capitalized software development costs;
support attach rates and customer renewal rates; and
timing of investments in headcount and resources to support our professional service offerings.
Due to higher net effective discounts for products sold through our indirect channels, our overall gross margin for indirect channel sales are typically lower than those associated with direct sales. We expect product revenue from our indirect channels to continue to be a significant majority of our future revenue. Further, we expect that within our indirect channels, sales through our VADs and OEMs will continue to be significant, which will negatively impact our gross margins as VADs and OEMs generally experience a larger net effective discount than our other channel partners.
Research and Development Expenses
Research and development expenses primarily consist of personnel costs and facilities costs. We expense research and development expenses as incurred. We are devoting substantial resources to the continued development of additional functionality for existing products and the development of new products. We intend to continue to invest significantly in our research and development efforts because we believe it is essential to maintaining our competitive position. For fiscal 2015, we expect research and development expenses to increase on an absolute dollar basis and decrease as a percentage of revenue compared to fiscal 2014.
Sales and Marketing Expenses
Sales and marketing expenses represent the largest component of our operating expenses and primarily consist of personnel costs, sales commissions, marketing programs and facilities costs. A portion of the amortization expense related to our intangible assets is also included in sales and marketing expenses. Marketing programs are intended to generate revenue from new and existing customers and are expensed as incurred. We plan to continue to invest strategically in sales and marketing with the intent to add new customers and increase penetration within our existing customer base, expand our domestic and international sales and marketing activities, build brand awareness and sponsor additional marketing events. We expect sales and marketing expenses will continue to be our most significant operating expense. Generally, new sales personnel are not as productive as existing personnel, and thus, the increase in sales and marketing expenses that we experience as we hire additional sales personnel is not expected to immediately result in increased revenue. Some of our sales personnel may never become as productive as anticipated or may not become as productive in the time frame originally expected. As a result, these expenses will reduce our operating margin unless and until the new sales personnel become equally productive and generate the amount of revenue expected. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance. For fiscal 2015, we expect sales and marketing expenses will continue to be our most significant operating expense and will increase on an absolute dollar basis as we continue to invest strategically in this area and will decrease as a percentage of revenue compared to fiscal 2014.
General and Administrative Expenses
General and administrative expenses primarily consist of personnel and facilities costs related to our executive, finance, human resources, information technology and legal organizations, as well as insurance, investor relations, and IT infrastructure costs related to our enterprise resource planning ("ERP") and other systems. Further, our general and administrative expenses include professional services consisting of outside legal, audit, tax, Sarbanes-Oxley and IT consulting costs, and non-income tax reserves. We have incurred in the past, and may continue to incur, significant legal costs defending ourselves against claims made by third parties. These expenses are expected to continue as part of our ongoing operations and, depending on the timing and outcome of lawsuits and the legal process, legal costs and any resulting damages or settlements could have a significant impact on our financial statements. For fiscal 2015, we expect general and administrative expenses will increase in absolute dollars and will decrease as a percentage of revenue compared to fiscal 2014. However, third-party professional services are subject to material fluctuations given the needs of the business, which may cause our expected expenditures in absolute dollars and as a percentage of revenue to differ from our forecasted expectations.

31



Other Income (Expense), net
Other income (expense), net includes interest income primarily from cash equivalents and short-term investments, accretion of discounts or amortization of premiums on short-term investments, and losses or gains from foreign exchange rate changes.
Critical Accounting Policies
Our Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make estimates and judgments that affect the reported amounts of assets and liabilities as of the date of the Condensed Consolidated Financial Statements, as well as the reported amounts of revenue and expenses during the periods presented. We believe that the estimates and judgments upon which we rely are reasonable based upon information available to us at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, our Condensed Consolidated Financial Statements will be affected. The accounting policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include revenue recognition, stock-based compensation, inventory valuation, allowance for doubtful accounts, impairment of goodwill and intangible assets, and accounting for income taxes.
Our critical accounting policies are disclosed in our Annual Report on Form 10-K for our fiscal year ended July 31, 2014, filed with the SEC on September 24, 2014. There have been no material changes in the matters for which we make critical accounting estimates in the preparation of our Condensed Consolidated Financial Statements during the second quarter and first half of fiscal 2015, as compared to those disclosed in our Annual Report for fiscal 2014.
Recent Accounting Pronouncements
Refer to Recent Accounting Pronouncements under Note 1, The Company and its Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements for recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, that the pronouncements could have on us.
Results of Operations
The following table presents our historical operating results as a percentage of total revenue for the periods indicated:
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
Product
81.6
 %
 
80.4
 %
 
81.3
 %
 
80.8
 %
Support and professional services
18.4
 %
 
19.6
 %
 
18.7
 %
 
19.2
 %
Total revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenue:
 
 
 
 
 
 
 
Product
24.2
 %
 
24.6
 %
 
24.5
 %
 
24.7
 %
Support and professional services
4.1
 %
 
5.7
 %
 
4.4
 %
 
5.5
 %
Total cost of revenue
28.3
 %
 
30.3
 %
 
28.9
 %
 
30.2
 %
Gross margin
71.7
 %
 
69.7
 %
 
71.1
 %
 
69.8
 %
Operating expenses:
 
 
 
 
 
 
 
Research and development
20.3
 %
 
24.1
 %
 
20.4
 %
 
24.6
 %
Sales and marketing
33.9
 %
 
39.4
 %
 
34.3
 %
 
39.3
 %
General and administrative
7.4
 %
 
8.3
 %
 
7.4
 %
 
8.6
 %
Restructuring charges
(0.2
)%
 
 %
 
1.4
 %
 
 %
Total operating expenses
61.4
 %
 
71.8
 %
 
63.5
 %
 
72.5
 %
Operating income (loss)
10.3
 %
 
(2.1
)%
 
7.6
 %
 
(2.7
)%
Other income (expense), net:
 
 
 
 
 
 
 
Interest income
0.1
 %
 
0.1
 %
 
0.1
 %
 
0.1
 %
Other income (expense), net
(0.6
)%
 
 %
 
(0.5
)%
 
0.1
 %
Income (loss) before income taxes
9.8
 %
 
(2.0
)%
 
7.2
 %
 
(2.5
)%
Provision for income taxes
7.1
 %
 
4.1
 %
 
5.2
 %
 
3.0
 %
Net income (loss)
2.7
 %
 
(6.1
)%
 
2.0
 %
 
(5.5
)%

32




Revenue
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Total revenue
$
212,931

 
$
176,356

 
$
420,752

 
$
337,283

Type of revenue:
 
 
 
 
 
 
 
Product
$
173,721

 
$
141,755

 
$
342,191

 
$
272,586

Support and professional services
39,210

 
34,601

 
78,561

 
64,697

Total revenue
$
212,931

 
$
176,356

 
$
420,752

 
$
337,283

Percent revenue by type:
 
 
 
 
 
 
 
Product
81.6
%
 
80.4
%
 
81.3
%
 
80.8
%
Support and professional services
18.4
%
 
19.6
%
 
18.7
%
 
19.2
%
Revenue by geography:
 
 
 
 
 
 
 
United States
$
134,931

 
$
113,890

 
$
267,696

 
$
222,205

Europe, the Middle East and Africa
42,706

 
33,768

 
87,563

 
59,764

Asia Pacific
29,188

 
24,260

 
55,194

 
47,254

Rest of World
6,106

 
4,438

 
10,299

 
8,060

Total revenue
$
212,931

 
$
176,356

 
$
420,752

 
$
337,283

Percent revenue by geography:
 
 
 
 
 
 
 
United States
63.3
%
 
64.6
%
 
63.7
%
 
65.9
%
Europe, the Middle East and Africa
20.1
%
 
19.1
%
 
20.8
%
 
17.7
%
Asia Pacific
13.7
%
 
13.8
%
 
13.1
%
 
14.0
%
Rest of World
2.9
%
 
2.5
%
 
2.4
%
 
2.4
%
Total revenue by sales channel:
 
 
 
 
 
 
 
Indirect
$
200,850

 
$
157,300

 
$
395,870

 
$
306,501

Direct
12,081

 
19,056

 
24,882

 
30,782

Total revenue
$
212,931

 
$
176,356

 
$
420,752

 
$
337,283

Percent revenue by sales channel:
 
 
 
 
 
 
 
Indirect
94.3
%
 
89.2
%
 
94.1
%
 
90.9
%
Direct
5.7
%
 
10.8
%
 
5.9
%
 
9.1
%
For the second quarter of fiscal 2015, total revenue increased $36.6 million, or 20.7%, over the second quarter of fiscal 2014. For the first half of fiscal 2015, total revenue increased $83.5 million, or 24.7%, over the first half of fiscal 2014. Revenue growth in both reporting periods was driven primarily by an expansion of our customer base coupled with incremental purchases from existing customers as a result of ongoing strength in the enterprise mobility market, which continues to benefit from BYOD initiatives, strong uptake of our 802.11ac access point products, and our investments in expanding our sales force to support our global go-to-market strategy. We believe the rapid proliferation of Wi-Fi enabled mobile devices, the increase in demand for multimedia-rich mobility applications, and the rise of both server and desktop virtualization are driving the increase in demand for our solutions, allowing us to add new customers every fiscal quarter. Our mobility solutions continue to gain momentum as companies move toward a next generation Mobility-Defined Network.
Product revenue increased $32.0 million, or 22.6%, in the second quarter of fiscal 2015 over the second quarter of fiscal 2014, and $69.6 million, or 25.5%, in the first half of fiscal 2015 over the first half of fiscal 2014. The increase in product revenue was primarily driven by strong demand for our access point products, particularly our 802.11ac and Instant access point products, and our ClearPass software product. Sales of our Airwave products also increased.
Support and professional services revenue increased $4.6 million, or 13.3%, in the second quarter of fiscal 2015 over the second quarter of fiscal 2014, and $13.9 million or 21.4%, in the first half of fiscal 2015 over the first half of fiscal 2014. The increase was primarily due to an increase in post-contract support ("PCS") revenue. The increase in PCS revenue was primarily a result of increased initial sales and renewals of PCS agreements boosted by higher product sales.




33



U.S. revenue increased $21.0 million, or 18.5%, in the second quarter of fiscal 2015 over the second quarter of fiscal 2014, and $45.5 million, or 20.5%, in the first half of fiscal 2015 over the first half of fiscal 2014. Revenue from shipments to locations outside the U.S. increased $15.5 million, or 24.9%, in the second quarter of fiscal 2015 over the second quarter of fiscal 2014, and $38.0 million, or 33.0%, in the first half of fiscal 2015 over the first half of fiscal 2014. The increase in revenue in the U.S. and locations outside the U.S. was primarily due to overall market growth and increased market penetration led by a larger sales organization in the first half of fiscal 2015.
Revenue from our indirect sales channels increased $43.6 million, or 27.7%, in the second quarter of fiscal 2015 over the second quarter of fiscal 2014, and $89.4 million, or 29.2%, in the first half of fiscal 2015 over the first half of fiscal 2014. The increase in revenue from our indirect sales channels was primarily due to overall market growth and increased market penetration.
Going forward, we expect to continue to derive a significant majority of our total revenue from indirect channels as we continue to focus on expanding our channels and improving the efficiency of marketing and selling our products through these channels.

Cost of Revenue and Gross Margin
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Total revenue
$
212,931

 
$
176,356

 
$
420,752

 
$
337,283

 
 
 
 
 
 
 
 
Cost of product revenue
51,536

 
43,303

 
103,166

 
83,421

Cost of support and professional services
8,820

 
10,050

 
18,429

 
18,483

Total cost of revenue
60,356

 
53,353

 
121,595

 
101,904

Gross profit
$
152,575

 
$
123,003

 
$
299,157

 
$
235,379

 
 
 
 
 
 
 
 
Gross margin
71.7
%
 
69.7
%
 
71.1
%
 
69.8
%
For the second quarter and first half of fiscal 2015, our total cost of revenue increased $7.0 million, or 13.1%, and $19.7 million, or 19.3%, respectively, compared to the same periods in fiscal 2014. This increase was primarily due to the corresponding increase in our product revenue. The substantial majority of our cost of product revenue consisted of payments to WNC, Sercomm, and Accton, our largest contract manufacturers. For the second quarter of fiscal 2015, purchases from WNC, Sercomm, and Accton constituted approximately 43%, 23%, and 15%, respectively, of our material purchases of $47.5 million. For the first half of fiscal 2015, purchases from WNC, Sercomm, and Accton constituted approximately 39%, 25%, and 17%, respectively, of our material purchases of $92.9 million.
For the second quarter of fiscal 2015, our cost of support and professional services revenue decreased $1.2 million, or 12.2%, compared to the same period in fiscal 2014. This decrease was primarily due to a reduction of $1.1 million in third party professional services related to a large transaction in the second quarter of fiscal 2014 that did not repeat. Personnel compensation and related expenses, exclusive of stock-based compensation, increased $0.2 million, or 5.1%, compared to the second quarter of fiscal 2014, primarily due to higher cash-based compensation. This increase was offset by a decrease in stock-based compensation for approximately the same amount, as part of our transition to a higher mix of cash-based compensation relative to stock-based compensation in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014.
For the first half of fiscal 2015, our cost of support and professional services revenue decreased $0.1 million, or 0.3%, compared to the same period in fiscal 2014. Personnel compensation and related expenses, exclusive of stock-based compensation, increased $1.0 million, or 13.7%, compared to the same period in fiscal 2014 primarily as a result of increased headcount and higher cash-based compensation. This increase was partially offset by a decrease in stock-based compensation expense of $0.6 million, or 23.5%, as part of our transition to a higher mix of cash-based compensation relative to stock-based compensation in the second half of fiscal 2015 compared to the same period in fiscal 2014. Third party professional services decreased $1.1 million, or 16.5%, in the first half of fiscal 2015 as a result of a large transaction entered in the second quarter of fiscal 2014 that did not repeat. Additionally, services for restocking inventory to support our customer base increased $0.7 million, or 50.3%, compared to the first half of fiscal 2014.
Our total gross margin increased 200 basis points to 71.7% for the second quarter of fiscal 2015, compared to 69.7% for the comparable period in fiscal 2014. Gross margin increased 130 basis points to 71.1% for the first half of fiscal 2015, compared to 69.8% for the comparable period in fiscal 2014. The increase in gross margin was primarily due to higher access

34



point gross margins and a lower mix of professional services revenue. The increase was partially offset by inventory excess and obsolescence charges and a lower mix of controller-based software due to strength in our Instant access point product growth.
As we expand internationally, we will likely incur additional costs to conform our products to comply with local laws or local product specifications.

Research and Development Expenses
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Research and development expenses
$
43,179

 
$
42,585

 
$
85,413

 
$
83,030

Percent of total revenue
20.3
%
 
24.1
%
 
20.4
%
 
24.6
%
For the second quarter of fiscal 2015, research and development expenses increased $0.6 million, or 1.4%, compared to the same period in fiscal 2014. Personnel compensation and related expenses, exclusive of stock-based compensation, increased $3.0 million, or 17.6%, compared to the second quarter of fiscal 2014, primarily due to an increase in headcount and higher cash-based compensation. This increase was partially offset by a decrease in stock-based compensation of $2.3 million, or 20.6%, as part of our transition to a higher mix of cash-based compensation relative to stock-based compensation in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014. Facilities and IT-related expenses related to our research and development organization also increased $0.8 million, or 16%, compared to the same period in fiscal 2014. We also experienced a decrease of $0.9 million, or 18.6%, in expensed equipment, product certifications, and depreciation and amortization expenses, as a result of timing of efforts to support the development and introduction of new products in the second quarter of fiscal 2015 compared to the same period in fiscal 2014.
For the first half of fiscal 2015, research and development expenses increased $2.4 million, or 2.9%, compared to the same period in fiscal 2014. Personnel compensation and related expenses, exclusive of stock-based compensation, increased $6.1 million, or 18.1%, compared to the same period in fiscal 2014 primarily as a result of increased headcount and higher cash-based compensation. This increase was partially offset by a decrease in stock-based compensation expense of $3.6 million, or 16.2%, as part of our transition to a higher mix of cash-based compensation relative to stock-based compensation in the second half of fiscal 2015 compared to the same period in fiscal 2014. Facilities and IT-related expenses related to our worldwide research and development organization also increased $1.0 million, or 10.6%, as the result of an increase in personnel during the first half of fiscal 2015 compared to the same period in fiscal 2014. We also saw a decrease in expensed equipment, product certifications, depreciation and amortization expenses of $1.2 million, or 11.9%, as a result of timing of efforts to support the development and introduction of new products in the second half of fiscal 2015 compared to the same period in fiscal 2014.

Sales and Marketing Expenses
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Sales and marketing expenses
$
72,280

 
$
69,569

 
$
144,255

 
$
132,613

Percent of total revenue
33.9
%
 
39.4
%
 
34.3
%
 
39.3
%
For the second quarter of fiscal 2015, sales and marketing expenses increased $2.7 million, or 3.9%, compared to the same period in fiscal 2014. Personnel compensation and related expenses, exclusive of stock-based compensation, increased $4.9 million, or 12.4%, compared to the second quarter of fiscal 2014 as a result of increased headcount and higher cash-based compensation. This increase was partially offset by a decrease of $2.2 million, or 19.6%, in stock-based compensation expense, as we moved to a higher mix of cash-based compensation relative to stock-based compensation in the second quarter of fiscal 2015 compared to the same period in fiscal 2014. Marketing expenses increased by $0.9 million, or 21.8%, compared to the second quarter of fiscal 2014, primarily due to field marketing efforts and programs to introduce and promote our new and existing products. Facilities and IT-related expenses related to our sales and marketing organization also increased $0.6 million, or 20.0%, compared to the same period in fiscal 2014. As a result of better controls on travel and entertainment expenses, outside recruiting and other expenditures, and the timing of our sales kickoff, these expenses decreased by $1.8 million, or 30.9%, in the first half of fiscal 2015 compared to the same period in fiscal 2014. In connection with our restructuring plan announced in August 2014, we also incurred other one-time charges related to restructuring actions of $0.3 million in the second quarter of fiscal 2015. These charges do not qualify for presentation in the restructuring charges line of the Consolidated Statements of Operations.

35



For the first half of fiscal 2015, sales and marketing expenses increased $11.6 million, or 8.8%, compared to the same period in fiscal 2014. Personnel and related costs, exclusive of stock-based compensation, increased $14.1 million, or 18.9%, compared to the same period in fiscal 2014 as a result of increased headcount and higher cash-based compensation. This increase was partially offset by a decrease of $2.9 million, or 13.6%, in stock-based compensation expense, as we moved to a higher mix of cash-based compensation relative to stock-based compensation in the first half of fiscal 2015 compared to the same period in fiscal 2014. Marketing expenses increased $0.4 million, or 4.8%, during the first half of fiscal 2015 compared to the same period in fiscal 2014, primarily due to field marketing efforts and programs to introduce and promote our new and existing products. Facilities and IT-related expenses related to our sales and marketing organization also increased $1.1 million, or 19.1%, during the first half of fiscal 2015 compared to the same period in fiscal 2014. As a result of better controls on travel and entertainment expenses, outside recruiting and other expenditures, these expenses decreased by $1.6 million, or 15.6%, in the first half of fiscal 2015 compared to the same period in fiscal 2014. In connection with our restructuring plan announced in August 2014, we also incurred other one-time charges related to restructuring actions of $0.4 million in the first half of fiscal 2015. These charges do not qualify for presentation in the restructuring charges line of the Consolidated Statements of Operations.

General and Administrative Expenses
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
General and administrative expenses
$
15,674

 
$
14,468

 
$
31,289

 
$
28,983

Percent of total revenue
7.4
%
 
8.3
%
 
7.4
%
 
8.6
%
For the second quarter of fiscal 2015, general and administrative expenses increased $1.2 million, or 8.3%, compared to the same period in fiscal 2014. Personnel and related costs, exclusive of stock-based compensation, increased $0.6 million, or 11.9%, compared to the second quarter of fiscal 2014 as a result of increased headcount and higher cash-based compensation. This increase was partially offset by a decrease of $0.3 million, or 7.7%, in stock-based compensation expense, as we moved to a higher mix of cash-based compensation relative to stock-based compensation in the second quarter of fiscal 2015 compared to the same period in fiscal 2014. In connection with our restructuring plan announced in August 2014, we incurred other one-time charges related to restructuring actions of $0.8 million in the second quarter of fiscal 2015. These charges do not qualify for presentation in the restructuring charges line of the Consolidated Statements of Operations.
For the first half of fiscal 2015, general and administrative expenses increased $2.3 million, or 8.0%, compared to the same period in fiscal 2014. Personnel and related costs, exclusive of stock-based compensation, increased $1.7 million, or 19.3%, over the same period in fiscal 2014, as a result of increased headcount and higher cash-based compensation. This increase was partially offset by a decrease of $0.7 million, or 9.0%, in stock-based compensation expense, as we moved to a higher mix of cash-based compensation relative to stock-based compensation in the first half of fiscal 2015 compared to the same period in fiscal 2014. In connection with our restructuring plan announced in August 2014, we incurred other one-time charges related to restructuring actions of $1.1 million in the first half of fiscal 2015. These charges do not qualify for presentation in the restructuring charges line of the Consolidated Statements of Operations.

Restructuring Charges
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Restructuring charges
$
(482
)
 
$

 
$
6,072

 
$

Percent of total revenue
(0.2
)%
 
%
 
1.4
%
 
%
In August 2014, we announced a restructuring plan to optimize our administrative and operational costs by realigning our workforce to better reflect our operations and scaling our Company with a global infrastructure. While we have reduced our workforce and relocated certain personnel functions to lower cost regions, we continue hiring to support the expansion of our global go-to-market strategy as well as to support continued product innovation.
During the second quarter of fiscal 2015, the restructuring plan resulted in a net reduction to the restructuring reserve of $0.5 million, primarily as a result of savings of $0.4 million related to unpaid employee severance benefits due to changes in planned terminations (e.g., role reassignment) and savings of $0.3 million related to unused insurance and outplacement costs, as impacted employees integrated into the job market faster than anticipated. These savings were partially offset by additional charges of $0.2 million related to third party professional services directly associated with the restructuring.

36



During the first half of fiscal 2015, the Company recognized restructuring charges of $6.1 million, which consisted primarily of severance, other termination benefits and other charges directly associated with the restructuring.
In connection with the restructuring plan, the Company has also incurred certain other one-time charges, consisting primarily of redundant salaries, recruiting services and travel related expenses, and other related charges. Under U.S. GAAP, these charges do not qualify for presentation in the restructuring charges line of the Condensed Consolidated Statements of Operations. Thus, such expenses are reflected in their related functional departments, as discussed in the above sections. Through January 31, 2015, the Company has recognized $1.5 million in other one-time charges related to restructuring actions, of which $1.1 million was recognized in the second quarter of fiscal 2015.
For further information, refer to Note 9, Restructuring Charges, of the Notes to Condensed Consolidated Financial Statements.

Other Income (Expense), Net
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Interest income
$
192

 
$
217

 
$
391

 
$
478

Other income (expense), net
(1,266
)
 
(80
)
 
(2,018
)
 
190

Total other income (expense), net
$
(1,074
)
 
$
137

 
$
(1,627
)
 
$
668

Percent of total revenue
(0.5
)%
 
0.1
%
 
(0.4
)%
 
0.2
%
For the second quarter and first half of fiscal 2015, total other income (expense), net decreased $1.2 million and $2.3 million, respectively, compared to the same period in fiscal 2014.
For the periods presented, we have not experienced significant changes in interest income as we have not had significant fluctuations in the average balance of our investments and/or underlying rate of returns.
Other income (expense), net decreased $1.2 million and $2.2 million in the second quarter and first half of fiscal 2015, respectively, over the same periods in fiscal 2014, primarily as a result of foreign exchange losses from the holding of weakened Euro and British Pound cash balances by our international subsidiaries.

Provision for Income Taxes
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Income (loss) before income taxes
$
20,850

 
$
(3,482
)
 
$
30,501

 
$
(8,579
)
Provision for income taxes
15,167

 
7,219

 
22,075

 
9,949

Net income (loss)
$
5,683

 
$
(10,701
)
 
$
8,426

 
$
(18,528
)
Effective tax rate
72.7
%
 
207.3
%
 
72.4
%
 
116.0
%
Our effective tax rate in all periods is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. For the second quarter and first half of fiscal 2015, our effective tax rates differ from the tax computed at the U.S. federal statutory income tax rate due primarily to state taxes, non-deductible stock-based compensation, and losses in foreign operations with no tax benefit. Future effective tax rates could be adversely affected if earnings are lower than anticipated in countries where we have lower statutory tax rates or by unfavorable changes in tax laws and regulations or their interpretation. For the second quarter and first half of fiscal 2015, we computed our provision for income taxes based on the projected annual effective tax rate, as we determined that small changes in the estimated income or loss between tax jurisdictions would not result in significant fluctuations in the estimated annual effective tax rate.
For the second quarter and first half of fiscal 2014, our effective tax rates differ from the tax computed at the U.S. federal statutory income tax rate primarily due to non-deductible stock-based compensation, foreign operations, and fixed amortization of deferred tax charges related to the fiscal 2012 intercompany sale of intellectual property rights. For the second quarter and first half fiscal 2014, we computed our quarterly provision for income taxes based on the actual tax rate, as we determined that small changes in the estimated income or loss between tax jurisdictions would result in significant changes in the estimated annual effective tax rate.
The difference in the effective tax rates between the second quarter of fiscal 2015 and 2014 and the effective tax rates between the first half of fiscal 2015 and 2014 are primarily due to the tax benefits recognized in the second quarter and first

37



half of fiscal 2015 relating to the reinstatement of the U.S. federal research credit, a difference in the mix of earnings among jurisdictions with different tax rates, and a reduction in deferred tax charges in the second quarter and first half of fiscal 2015. In the second quarter of fiscal 2015, the “Tax Increase Prevention Act of 2014 (“2014 Act”) was signed into law, thereby extending the U.S. federal research and development credit through December 31, 2014.
For further information, refer to Note 7, Income Taxes, of the Notes to Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
 
January 31,
2015
 
July 31,
2014
 
(in thousands)
Working capital
$
226,359

 
$
244,004

Cash and cash equivalents
$
151,949

 
$
118,594

Short-term investments
$
139,049

 
$
166,359

 
 
Six Months Ended January 31,
 
2015
 
2014
 
(in thousands)
Cash provided by operating activities
$
106,372

 
$
54,603

Cash provided by investing activities
$
9,567

 
$
93,350

Cash used in financing activities
$
(82,584
)
 
$
(182,310
)
As of January 31, 2015, our principal sources of liquidity were our cash, cash equivalents and short-term investments. Cash and cash equivalents are comprised of cash, sweep funds, money market funds, and commercial paper with an original maturity of 90 days or less at the time of purchase. Short-term investments include corporate bonds, U.S. government agency securities, U.S. treasury bills, commercial paper, and municipal notes and bonds.
Cash, cash equivalents and short-term investments increased by $6.0 million in the first half of fiscal 2015 from $285.0 million as of July 31, 2014 to $291.0 million as of January 31, 2015, primarily as a result of cash generated from operations, offset by cash used in our stock repurchase program, as further described below.
As of January 31, 2015 and July 31, 2014 we had $69.4 million and $76.0 million of cash and cash equivalents, respectively, held outside the U.S. All of our cash and cash equivalents held outside the U.S. are required for foreign working capital needs or can be used to make tax-free repayments of intercompany balances owed to Aruba Networks, Inc. If in the future, funds held outside the United States exceed amounts required for working capital needs, amounts intended for permanent reinvestment outside the United States, and amounts required to repay intercompany balances owed to Aruba Networks, Inc., then we would be required to accrue and pay U.S. taxes to repatriate these funds. Historically, we have required capital principally to fund our working capital needs, stock repurchase program and acquisition activities. It is our investment policy to invest excess cash in a manner that preserves capital, provides liquidity and maintains appropriate diversification and optimizes current income within our policy’s framework. We are averse to principal loss and attempt to ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. Our investment policy is designed to prevent fluctuations in market value which could materially affect our financial results.

Cash Flows from Operating Activities
Our cash flows from operating activities will continue to be affected principally by our profitability, working capital requirements, the extent to which we increase spending on personnel and the continued growth in revenue and cash collections. The timing of hiring sales personnel in particular affects cash flows as there is a lag between the hiring of sales personnel and the generation of revenue and related cash flows. In the future, we anticipate achieving cash tax savings and a reduction in our overall tax rate as a result of our corporate organization structure implemented in fiscal 2012 offset by increases in our cash tax obligations after our tax loss and credit carryforwards have been utilized. Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash from operating activities are for personnel-related expenditures, purchases of inventory, and facilities and IT-related expenditures.
During the first half of fiscal 2015, net cash provided by operating activities increased $51.8 million compared to the first half of fiscal 2014. This increase was primarily the result of an increase of $21.7 million generated from our net income adjusted by non-cash charges, primarily as a result of an increase in our net income from a net loss position of $18.5 million for the first half of fiscal 2014 to a net income position of $8.4 million for the first half of fiscal 2015.

38



Our cash from operations also increased by $30.1 million derived from changes of our operating assets and liabilities. This increase was primarily the result of an increase of accounts payable, accrued liabilities and other current and non-current liabilities of $59.5 million, primarily due to higher partner rebates, stronger sales towards the end of the period, timing of payments of liabilities, and the decrease in deferred cost of revenue of $4.7 million, primarily due to the timing of revenue recognition. This increase was partially offset by an increase in accounts receivable of $23.1 million, primarily as a result of stronger sales towards the end of the period and timing of billings and collections, and a decrease in deferred revenue of $13.4 million, primarily due to the timing of revenue recognition.

Cash Flows from Investing Activities
Cash provided by investing activities decreased by $83.8 million in the first half of fiscal 2015 compared to the first half of fiscal 2014. This decrease was primarily due to lower sales and maturities, net of purchases, of short-term investments of $74.6 million, as a result of significantly lower funds invested in our stock repurchase program in the first half of fiscal 2015 compared to the same period in fiscal 2014. Additionally, we had higher investments in property and equipment and intangible assets of $8.0 million to support our operational growth and increased headcount, primarily as a result of our global optimization plan announced in August 2014.

Cash Flows from Financing Activities
Cash used in financing activities decreased by $99.7 million in the first half of fiscal 2015 over the same period in fiscal 2014. This decrease is the result of $88.5 million lower purchases under our stock repurchase program, an increase in cash proceeds from options exercised of $5.6 million, and an increase in the tax benefit associated with stock-based compensation of $5.6 million.
Based on our current cash, cash equivalents, short-term investments, and cash generated from operations we expect that we will have sufficient resources to fund our operations for the next 12 months. However, we may, in the future, seek to raise additional capital or incur indebtedness to fund our operations or support acquisition activity. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of expansion into new territories, the timing of introductions of new products and enhancements to existing products, the extent of future acquisition activity, and the continuing market acceptance of our products and potential future business acquisitions.
Contractual Obligations and Commitments
Operating leases and purchase obligations
The following is a summary of our contractual obligations at January 31, 2015:
 
 
Total
 
Less Than
1 Year
 
1 — 3
Years
 
4 — 5
Years
 
More
Than
5 Years
 
 
(in thousands)
Operating leases
 
$
23,013

 
$
8,921

 
$
10,015

 
$
2,126

 
$
1,951

Purchase obligations (1)
 
47,998

 
40,359

 
5,689

 
500

 
1,450

Total contractual obligations
 
$
71,011

 
$
49,280

 
$
15,704

 
$
2,626

 
$
3,401

(1)
Purchase obligations represent contractual amounts that will be due to purchase goods and services to be used in our operations and exclude contractual amounts that are cancelable without penalty. These contractual amounts are related principally to inventory, information technology and marketing related purchase agreements.
Uncertain tax positions
Other long-term liabilities in our Condensed Consolidated Balance Sheet at January 31, 2015 include $13.0 million of long-term income taxes payable for uncertain tax positions. We are unable to reliably estimate the timing of future payments related to uncertain tax positions and therefore we have excluded them from the preceding table.

39



Off-Balance Sheet Arrangements
In the ordinary course of business, we have invested in privately held companies, which we evaluate on an ongoing basis to determine if they should be accounted for as variable interest entities. In the second quarter of fiscal 2015, we evaluated our investments in these privately held companies and concluded that we are not the primary beneficiary of any variable interest on these investments. As a result, we account for these investments on a cost basis and do not consolidate their activity. Certain events may require a reassessment of our investments on these privately held companies to determine if they meet the criteria for variable interest entities and to determine which stakeholders in such entities will be the primary beneficiary. Because we do not control these entities, we do not have the ability to influence these events. In the event of a reassessment, we may be required to make additional disclosures or consolidate these entities in future periods. As of January 31, 2015, we had no off-balance sheet arrangements.

40



Item 3.
Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk
As of January 31, 2015, foreign currency cash accounts totaled $28.6 million, primarily in Euro, British Pounds, Chinese Yuan, Indian Rupees, and Australian Dollars.
All of our sales contracts are denominated in U.S. Dollars. Although our revenue is not subject to significant foreign currency risk, if the dollar’s value continues to increase, we run the risk that our products and services will become more expensive in relative terms which may impact our ability to sell into those markets. Our operating expenses and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British Pound, Chinese Yuan, Indian Rupee, and Australian Dollar. To date, we have not entered into hedging contracts because expenses in foreign currencies have not been material, and exchange rate fluctuations have had little impact on our operating results and cash flows.
We assessed the risk of loss in fair values from the impact of hypothetical changes in foreign currency exchange rates. For foreign currency exchange rate risk, a 10% increase or decrease of foreign currency exchange rates against the U.S. dollar with all other variables held constant would have resulted in a $2.9 million change in the value of our foreign currency cash accounts at January 31, 2015.

Interest Rate Sensitivity
We had cash, cash equivalents and short-term investments totaling $291.0 million and $285.0 million as of January 31, 2015, and July 31, 2014, respectively. The cash, cash equivalents and short-term investments are primarily held for working capital for general corporate purposes. We do not use derivative financial instruments in our investment portfolio. We have an investment portfolio of fixed income securities that are classified as short-term investments. These securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if market interest rates increase. We attempt to limit this exposure by investing primarily in short-term securities. Due to the short duration and conservative nature of our investment portfolio, a movement of 10% in market interest rates would not have a material impact on our operating results and the total value of the portfolio over the next fiscal year. If overall interest rates had fallen by 10% during the first three months of fiscal 2015, our interest income on cash, cash equivalents and short-term investments would not have resulted in a material decrease assuming consistent investment levels.
Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our chief executive officer ("CEO") and chief financial officer ("CFO"), evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended (the "Exchange Act"). In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on our evaluation, our CEO and CFO concluded that, as of January 31, 2015, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the second quarter of fiscal 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Internal control over financial reporting means a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

41



 PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
The information set forth under the heading "Legal Matters" in Note 11, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q is incorporated herein by reference.
On March 9, 2015, a shareholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned Ballester v. Aruba Networks, Inc., et al., C.A. No. 10765 (Del. Ch. filed March 9, 2015), on behalf of a purported class of Aruba shareholders and naming as defendants Aruba, Aruba's Board of Directors, Hewlett-Packard Company (“HP”), and Aspen Acquisition Sub, Inc. (“Merger Sub”). The plaintiffs alleges that, in connection with the proposed acquisition of Aruba by HP, the individual defendants breached their fiduciary duties to Aruba shareholders by, among other things, failing to take steps to maximize the value of Aruba to its shareholders and agreeing to certain terms in the merger agreement. The complaint further alleges that HP and the Merger Sub aided and abetted the individual defendants in the alleged breaches of their fiduciary duties. The complaint seeks, among other things, an order enjoining the defendants from consummating the proposed transaction, and attorneys' fees and costs. We believe that we have meritorious defenses to these claims and intend to defend the litigation vigorously.
For additional discussion of certain risks associated with legal proceedings, see Item 1A, "Risk Factors."
Item 1A.
Risk Factors
Set forth below and elsewhere in this report, and in other documents we file with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and in our other public statements. Because of the following factors, as well as other factors affecting our financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. The description below includes any material changes to and supersedes the description of the risk factors affecting our business previously discussed in "Part I, Item 1A Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended July 31, 2014 and "Part II, Other Information, Item 1A. Risk Factors" of our Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2014. These risks are not presented in order of importance or probability of occurrence.
This section should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and accompanying Notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q.
Risks Related to Our Business and Industry
Risks Relating to Our Finances and Operations
The pendency of our agreement to be acquired by Hewlett-Packard Company or our failure to complete the merger could have an adverse effect on our business.
On March 2, 2015, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Hewlett-Packard Company (“Parent”) and Aspen Acquisition Sub, Inc., a wholly-owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into Aruba Networks, Inc. (the “Merger”), with Aruba Networks, Inc. surviving the Merger as a wholly-owned subsidiary of Parent. Completion of the Merger is subject to the satisfaction of various conditions, including approval of the Merger by our stockholders, the absence of certain legal impediments, antitrust regulatory approval pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the antitrust laws of certain other jurisdictions, and the expiration or termination of the respective waiting periods required in connection with such required antitrust approvals. There is no assurance that all of the various conditions will be satisfied, or that the Merger will be completed on the proposed terms, within the expected time frame, or at all. The Merger gives rise to inherent risks that include:
the inability to complete the Merger due to the failure to obtain stockholder approval or failure to satisfy the other conditions to the completion of the Merger, including receipt of the required regulatory approvals;
pending and potential future stockholder litigation that could prevent or delay the Merger or otherwise negatively impact our business and operations;
if the Merger is not completed, the price of our common stock will change to the extent that the current market price of our stock reflects an assumption that the Merger will be completed;
the pendency of the Merger, even if ultimately completed, may create uncertainty in the marketplace and could lead customer and prospective customers to purchase from other vendors or delay purchasing from the Company;
the amount of cash to be paid under the agreement governing the Merger is fixed and will not be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or results of operations, including any

42



potential long-term value of the successful execution of our current strategy as an independent company or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock;
legal or regulatory proceedings, including regulatory approvals from various domestic and foreign governmental entities (including any conditions, limitations or restrictions placed on these approvals) and the risk that one or more governmental entities may delay or deny approval, or other matters that affect the timing or ability to complete the transaction as contemplated;
the possibility of disruption to our business, including increased costs and diversion of management time and resources;
difficulties maintaining and renewing business and operational relationships, including relationships with significant customers, contract manufacturers and component suppliers, channel partners, and other business partners;
the possibility of slowing sales and renewals by clients;
the inability to attract and retain key personnel pending consummation of the Merger;
the inability to pursue alternative business opportunities, including strategic acquisitions and investments, or make changes to our business pending the completion of the Merger, and other restrictions on our ability to conduct our business;
the requirement to pay a termination fee of $90 million if the agreement governing the Merger is terminated under certain circumstances;
the fact that under the terms of the Merger Agreement, we are unable to solicit other acquisitions proposals during the pendency of the Merger;
the amount of the costs, fees, expenses and charges related to the Merger Agreement or the Merger, and the possibility that our employees could lose productivity as a result of uncertainty regarding their employment post-Merger;
developments beyond our control including, but not limited to, changes in domestic or global economic conditions that may affect the timing or success of the Merger; and
the risk that if the Merger is not completed, the market price of our common stock could decline, investor confidence could decline, stockholder litigation could be brought against us, relationships with customers, contract manufacturers and component suppliers, channel partners, and other business partners may be adversely impacted, we may be unable to retain key personnel, and profitability may be adversely impacted due to costs incurred in connection with the proposed Merger.
Our operating results may fluctuate significantly, which makes our future results difficult to predict and could cause our operating results to fall below expectations or our guidance and could cause our stock price to fluctuate.
Our annual and quarterly operating results have fluctuated in the past and may fluctuate significantly in the future, which makes it difficult for us to predict our future results. These fluctuations may be due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful, and investors should not rely on our past results as an indication of our future performance.
In general, our product revenue reflects orders shipped in the same quarter that orders are received. In addition, we receive a substantial portion of our orders for each fiscal quarter in the last month of that fiscal quarter, which is a trend we expect to continue. We face risks of both under-estimating and over-estimating the amount and timing of orders from our customers. On the one hand, even though we may have business indicators about customer demand during a quarter, if we are unable to ship enough product to fulfill the orders we receive in the last month of each fiscal quarter, we would be forced to delay those shipments and the revenue that goes with those orders. On the other hand, because our budgeted expense levels depend in part on our expectations of future revenue, if the orders we receive in the last month of each fiscal quarter do not meet our expectations, we may not be able to reduce our costs quickly enough to compensate for the amount of unexpected revenue shortfall. In addition, we may incur unanticipated costs in connection with expediting orders which have exceeded our order forecasts. If any of these eventualities were to occur, we would expect our revenue, profits or margin to be adversely affected, and we might fail to meet securities analysts' and investors' expectations, which could cause our stock price to decline.
In addition to other risks listed in this "Risk Factors" section, factors that may cause our operating results to fluctuate include:
the impact of unfavorable worldwide economic and market conditions;
product mix and average selling prices, as well as competitive discounting by us and our competitors;
the amount of orders booked but not shipped in prior quarters that are shipped in the current quarter;
reductions in customers' budgets for information technology purchases and delays in their purchasing cycles;
the sale of our solutions in the time frames we anticipate, including the number and size of orders in each quarter;
our dependence on several large vertical markets, including the government, health care, retail, enterprise and education vertical markets, some of which are prone to seasonal buying patterns and which buying patterns may be impacted as a group by market specific conditions;
our ability to control costs, including our operating expenses, and the costs of the components we purchase;
our ability to maintain volume manufacturing pricing from our contract manufacturers and component suppliers;

43



our contract manufacturers' and component suppliers' ability to meet our product demand forecasts;
any decision to increase or decrease operating expenses in response to changes in the marketplace or perceived marketplace opportunities;
our ability to derive benefits from our investments in sales, marketing, engineering or other activities;
volatility in our stock price, which may lead to higher stock compensation expenses;
the timing of revenue recognition in any given quarter as a result of timing of the orders meeting the relevant revenue recognition criteria;
fluctuations in our tax rate due to various factors, including the mix of our domestic and international revenue and profit;
the impact of one-time events, such as acquisitions, restructurings and litigation settlements;
our ability to recruit and retain employees;
the regulatory environment for the certification and sale of certain of our solutions; and
seasonal demand for our solutions and selling patterns of our sales force, both of which are particularly strong in our fiscal fourth quarters and can become more pronounced as our company grows in size. This seasonality may not be evident in our prior fiscal years.
Our prospects should be considered and evaluated in light of the risks and uncertainties frequently encountered by companies of our size, resources and operating history in rapidly evolving markets characterized by frequent technological change. Because our quarterly operating results are difficult to predict even in the near term, in one or more future quarterly periods, our operating results may fall below the expectations of securities analysts and investors or below any guidance we may provide to the market. If this were to occur, the trading price of our common stock could decline significantly. Stock price declines could occur, and have occurred in the past, even when we have met our publicly stated revenue and/or earnings guidance.
We expect our gross margin to vary over time and our recent level of product and services gross margin may not be sustainable. Fluctuations and/or declines in our gross margin could cause our stock price to decline.
Our product and services gross margins vary from quarter to quarter and from year to year. For example, our level of gross margin declined in the third quarter of fiscal 2014 relative to the comparable period in fiscal 2013. Our level of gross margin may continue to fluctuate and may be adversely affected in the future by numerous factors, including: changes in the mix of products and services sold (for example, selling in any given fiscal quarter more of our switching products or professional services relative to our higher gross margin solutions or selling more of our solutions that contain a lower mix of software), the percentage of revenue we receive from international regions, increased price competition and discounting pressures (particularly on larger deals and in connection with the timing and transition to new solutions), increases in material, labor or other manufacturing-related costs (including expenditures required to meet unexpected demand for solutions), excess product component or obsolescence charges from our contract manufacturers, write-downs for obsolete or excess inventory (particularly during product transitional periods and as we increase our use of stocking distributors), increased costs due to changes in component pricing or charges incurred due to component holding periods if our forecasts do not accurately anticipate demand, timing of revenue recognition and revenue deferrals, warranty-related issues, freight charges, the timing and pricing with regard to the introduction of new solutions or new platforms and the related transition from older solutions to newer solutions, or entry into new markets with different pricing and cost structures. If one or more of these factors were to negatively impact our results, our company and product gross margins may be adversely affected, which in turn could cause our stock price to decline.
If we fail to adequately manage our globalization plan, we may suffer a number of adverse consequences, any of which could harm our business and results of operations.
In August 2014, we announced a globalization plan designed to reduce certain positions, and to shift other positions to lower-cost, talent rich locations in order to efficiently scale our company with a global infrastructure. As a result of this plan, we have faced and continue to face a number of additional risks, any of which could prevent us from achieving our stated goals and otherwise harm our business, including the following risks that:
we may not be able to efficiently and effectively relocate certain functions that have been selected for relocation to lower cost centers of operation;
in the event existing personnel identified for relocation do not relocate, we may not be able to recruit new hires in those locations as rapidly or cost-efficiently as we expect;
we have not retained some and may not be able to retain remaining personnel identified for transition roles for the full length of the expected transition period, which has resulted and may cause us in the future to incur additional costs to fulfill those functions during the remainder of the transition period;
we may have difficulty retaining key personnel and recruiting new hires in light of our announced cost reductions;
our IT and finance teams may be adversely impacted by the transition, making them unable to support mission-critical systems and controls through our transition to these lower cost operation centers;

44



we may not be able to improve our training, controls, and supervisory systems in our expected lower cost centers of operation to ensure that these functions are able to scale as we grow and provide the same or better quality of services at lower overall cost;
we may have difficulty finding personnel to manage our expanded lower cost centers of operations;
the corporate culture of our expanded, lower cost centers of operations may not be compatible with our current corporate culture; and
our business may be disrupted, or be perceived to be disrupted, due to our announced cost reductions.
If any of these risks were to occur, our ability to achieve our expected cost optimizations could be adversely impacted, which could harm our business and results of operations.
If we fail to manage future growth effectively, our business would be harmed.
Even though our globalization plan was, in part, designed to reduce certain positions, a significant part of that plan also included a shifting of other positions to lower-cost, talent rich locations because we intend to continue to expand our operations in order to sustain and increase our growth. To that end, we intend to continue our international expansion and increase our market penetration both domestically and internationally through our network of channel partners and by increasing our direct sales force. For example, during fiscal 2014, we significantly increased the size of our direct sales force. In addition, we have increased our domestic and non-domestic operations by expanding capabilities for certain engineering and general and administrative functions in Oregon, as well as in China, India and Ireland, which we plan to continue.
This growth has placed and, we expect it will continue to place, significant demands on our management, infrastructure and other resources. To manage any future growth, we will need to hire, integrate and retain highly skilled and motivated employees. We will also need to continue to improve and expand our information technology and financial infrastructure, operating and administrative systems and controls, and continue to manage headcount, capital and processes in an efficient manner. As we grow and consolidate certain of our operational strengths in our offshore and other locations, especially during the transition period resulting from our globalization plan, we will need to improve our training, controls, and supervisory systems to ensure that these offshore functions are able to scale as we grow and provide the same or better quality of services at lower overall cost to us.
If we fail to manage our growth effectively, we may experience a wide variety of negative impacts to our business. For example, we expect that our continued growth will require us to make significant investments in information technology, or IT, infrastructure. If we do not timely purchase or properly implement these IT infrastructure purchases, we could inaccurately forecast customer demand for a particular product, which could lead to insufficient inventory and lost sales opportunities. In addition, our IT systems relating to sales could, if improperly implemented, result in incorrect forecasts, lost productivity, or inaccurate commissions, any of which could negatively impact our sales and employee morale. Also, if our IT systems fail to operate as we intend, we could overestimate demand and finish a quarter with obsolete or excess inventory. If any of these were to occur, our growth rate and our financial results could be negatively impacted. In addition, if our IT systems and related control environments are insufficient to scale with the growth of our operations, including our transition of certain personnel and operations to lower costs centers in connection with our globalization plan, we may identify one or more significant deficiencies or material weaknesses in our internal control over financial reporting. If this were to occur, we could miss a filing deadline for one of our periodic reports, which could in turn cause investors to lose confidence in us, negatively impact our ability to access the capital market and cause our stock price to decline.
Also, any future growth would add complexity to our organization and to our business, which would require effective coordination within our organization and potentially lead to increased risks associated with complex accounting as well as management of geographically disparate business functions. We may not be able to successfully implement improvements to our systems and processes in a timely or efficient manner to manage our increasingly geographically disparate and complex organization, which could result in additional operating inefficiencies and could cause our costs to increase more than planned, negatively impact our ability to provide high quality solutions and services, damage our reputation and brand, and ultimately reduce our rate of growth and harm our business. In addition, if our expanded sales force does not produce results consistent with our expectations, we will not grow our revenue as quickly as planned and the increased expense for new sales personnel without the anticipated offsetting revenue could negatively impact our operating margins and profitability.
Our business, operating results and growth rates may be adversely affected by unfavorable economic and market conditions.
Our business depends significantly on economic conditions generally and the demand for our solutions in the enterprise mobility market specifically. Global economic conditions have been challenging due to the recent recession, adverse global credit conditions, low economic growth, high unemployment rates in certain geographic regions, reduced capital spending, weakening foreign exchange rates, sovereign debt default risks in certain European Union and South American countries, Japanese recession, and geopolitical unrest and hostilities in the Middle East, Eastern Europe, Africa, and elsewhere. Economic growth in the U.S. has recently begun to improve but extent and duration of that growth is unknown.

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These global and regional adverse economic conditions directly and indirectly impact our customers and the decisions they make regarding whether to make capital commitments and spend resources on IT generally and our solutions in particular. A customer's decision to purchase our solutions, or to replace existing infrastructure, tends to be discretionary and generally involves a significant commitment of capital and other resources. Even if global economic conditions are favorable, localized unfavorable economic conditions may impact a particular market segment into which we sell. As a result, when our customers and potential customers are faced with weak economic conditions, we can expect one or more of the following customer reactions: reductions in overall IT expenditures, longer sales cycles, demand for lower prices, requests for longer payment terms, reduced unit sales, and purchases of lower cost solutions with fewer features.
These types of customer reactions have in the past resulted in (and may in the future continue to result in) delayed sales cycles, canceled sales and lower overall revenues, which have (as we experienced in the third quarter of fiscal 2013) negatively impacted (and may again negatively impact) our ability to meet our financial forecasts and achieve our expected rates of growth. Although we would expect the impacts of these customer reactions to ameliorate as economic conditions improve, one or all of these reactions could continue or increase even if global and regional economic and market conditions become more favorable.
Although demand for products and services in the enterprise mobility market has continued to grow despite the global economic slowdown, the rate of that growth has slowed. We believe that the adverse global economic climate has played (and will continue to play) a role in the slower growth rates for products and services in the enterprise mobility market, including our suite of solutions. If the overall market demand for the types of solutions we sell does not grow or fails to grow at the rates we expect (and we do not otherwise increase our share of the market), then our revenue, business and operating results would likely be adversely impacted. In addition, if interest rates were to rise or foreign exchange rates were to weaken further for our international customers, overall demand for our solutions could be further dampened, and related IT spending might be reduced. Furthermore, any increase in worldwide commodity prices might result in higher component prices and increased shipping costs, both of which would be likely to negatively impact our financial results.
In our recent history we have incurred net losses and we may not achieve profitability in the future.
We have a history of losses, with a few quarters of profitability during our fiscal 2014, 2013 and 2012. We reported a net loss of $29.0 million for fiscal 2014, $31.6 million for fiscal 2013, and $8.9 million for fiscal 2012. As of July 31, 2014 and 2013, our accumulated deficit was $174.4 million and $145.4 million, respectively. Expenses associated with the continued development and expansion of our business, including expenditures to hire and retain additional personnel for sales and marketing and technology development, as well as costs of investing in infrastructure and IT systems to sustain our business, could limit our ability to sustain operating profits. If we fail to increase revenue or manage our cost structure, we may not achieve profitability again in the future. As a result, our business could be harmed, and our stock price could decline.
Impairment of our goodwill or other assets would negatively affect our results of operations.
Our acquisitions have resulted in total goodwill of $67.2 million and intangible assets, net of $18.1 million as of January 31, 2015. Goodwill is reviewed for impairment at least annually. Other intangible assets that are deemed to have finite useful lives are amortized over their useful lives but reviewed for impairment upon certain events or changes in circumstances. Screening for and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, requires significant judgment. Therefore, it is possible that a charge to operations might occur as a result of future goodwill and intangible asset impairment tests.
If goodwill or intangible assets were deemed to be impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets would be recognized, which would result in incremental expenses for that quarter and a reduction to any earnings or an increase to any loss for the period in which the impairment was determined to have occurred. If and when these write-downs occur, they could harm our business, financial condition, and results of operations. No goodwill or long-lived assets impairment charges were recorded during our fiscal 2014, 2013, or 2012.
As in the past, any future economic weakness could cause price and volume fluctuations in global stock markets that might also reduce the market price of our common stock. Declines in our stock price, level of revenues or gross margins would increase the risk that goodwill and intangible assets might become impaired in future periods, which would have an adverse effect on our results of operations. In addition, in response to changes in industry and market conditions, we may be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses. Any decision to limit investment in or dispose of or otherwise exit businesses may result in the recording of special charges, such as inventory and technology-related write-offs, workforce reduction costs, charges relating to consolidation of excess facilities, or claims from third parties who were resellers or users of discontinued products.
We may need to raise additional funds in the future and those funds may not be available on acceptable terms or at all.
We believe that our existing cash, cash equivalents, short-term investments and cash generated from operations will be sufficient to meet our anticipated cash requirements for at least the next 12 months. We may, however, seek to raise substantial

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additional capital to: fund our operations, continue our research and development, develop and commercialize new solutions, acquire companies, license products or other intellectual property, expand sales and marketing activities, or repurchase shares of our common stock.
Our future funding requirements will depend on many factors, including: customer acceptance of our solutions, cost of our research and development efforts, cost of establishing additional sales, marketing and distribution channels, cost of defending and prosecuting intellectual property infringement claims, competition from our competitors, including pricing pressures that negatively affect our gross margins, the market for different types of funding and overall economic conditions, and the cost of building out our infrastructure.
We may require additional funds in the future, and we may not be able to obtain those funds on acceptable terms, or at all. If we raise additional funds by issuing equity or convertible debt securities, our stockholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or additional equity financing that we might raise could contain terms that are not favorable to us or our stockholders.
If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our solutions or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or to grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, or delay, reduce the scope of or eliminate some or all of our development programs. We also may have to reduce sales, marketing, customer support or other resources devoted to our solutions or cease operations. Any of these actions could harm our operating results.
Access to capital and ability to bid for acquisitions against much larger capitalized competitors could prevent us from making acquisitions, which could cause us to forego opportunities that would otherwise have increased our market share or expanded our solution portfolio.
We have in the past, and may in the future, seek to acquire businesses or technologies to stimulate our growth, enhance our existing solutions, acquire additional talented employees and/or foster our ability to bring new solutions to market. We may address these needs through acquisitions of other companies, business divisions, technologies, and personnel. However, even if we are able to identify attractive acquisition targets, we may not be able to complete those acquisitions, which could negatively impact our growth strategy and cause us to unnecessarily expend management time and other resources.
In any competitive bidding contest for a prospective acquisition target, we may not be able to provide the most attractive offer because several of our competitors have significantly greater cash available for acquisitions. As a result, we may be required to make our offer contingent upon obtaining outside equity or debt financing, which could be perceived by the target as inferior to a non-contingent cash offer, even if our offer were higher. In addition, our larger competitors have greater resources than we do to devote to identifying potential acquisition targets, which also puts us at a competitive disadvantage. If our larger competitors are successful in identifying more candidates and/or placing more favorable bids for target companies, we would be compelled to forego opportunities that otherwise might have increased our market share, employee count or technologies. Furthermore, if our larger competitors purchase market-leading companies in a complementary space, we then might not be able to partner with or purchase another company in the same space. If this were to occur, the solutions we offer would lack a desirable feature set (unless we were able to spend the time and money necessary to build that feature set ourselves), which would place us at a competitive disadvantage and could result in us losing market share to our larger competitors.
We may engage in future acquisitions that could disrupt our business, cause dilution to our stockholders and harm our business, operating results and financial condition.
In the event we are successful in acquiring new businesses, products or technologies, we will face additional risks, including the following:
difficulties in integrating the personnel, operations, systems (including financial reporting and internal control systems), technologies and products of the acquired companies, particularly companies located in foreign jurisdictions or with widespread operations and/or complex products;
challenges in retaining and motivating key personnel from these acquired businesses, particularly those critical to the continued success of those businesses;
markets not evolving as we anticipated or acquired technologies not proving to be those needed to be successful in our markets;
difficulties in maintaining uniform standards, controls, procedures and policies across locations, or in managing geographically or culturally diverse locations;
acquired product quality complications or exposures to new legal liabilities;
diversion of management attention from normal daily operations;
challenges of managing larger and more widespread operations;

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difficulties in completing projects associated with in-process research and development (R&D) intangibles;
challenges in entering markets in which we have no or limited direct prior experience that have strong competitors;
challenges of creating a new go-to market sales action for acquired products outside our traditional area of expertise;
increased expenses without sufficient offsetting revenue from the acquired business;
failure to achieve targeted cost and revenue synergies;
acquired business liabilities, including claims of patent or other intellectual property infringement;
initial dependence on unfamiliar or small supply partners; and
loss of key employees, customers, distributors, vendors and other business partners of both us and the companies we acquire.
In addition, even if we manage these integration and other risks, the acquisition may fall short of our expectations and may not strengthen our competitive position or otherwise achieve our goals. Moreover, any future acquisition could be viewed negatively by financial markets or investors, which could cause a decline in our stock price.
Depending on the terms of the acquisitions, we could be required to take one or more of the following actions:
issue shares of our common stock, which would cause dilution;
use a substantial portion of our cash resources, or incur debt, which may require us to agree to restrictive financial covenants;
assume known or unknown liabilities;
record goodwill and non-amortizable intangible assets that are subject to potential periodic impairment charges;
incur amortization expenses related to intangible assets;
incur tax expenses related to the acquisition effect on our intercompany cost sharing arrangement and legal structure; or
incur large and immediate write-offs and restructuring expenses.
Certain acquisition candidates in the industries in which we participate, particularly in the software business, may carry higher relative valuations (based on earnings multiples) than we do. Acquiring a business may be dilutive to our earnings, especially if the acquired business has little or no revenue. Ultimately, mergers and acquisitions of high-technology companies are inherently risky and subject to many factors outside of our control, and we cannot assure investors that our previous or future acquisitions will be successful.
Risks Relating to our Solutions, Target Market and Competition
The market in which we compete is highly competitive, and competitive pressures from existing and new companies and emerging technologies may have a material adverse effect on our business, revenue, growth rates and market share.
The enterprise mobility market in which we compete is highly competitive and is influenced by the following factors:
comprehensiveness of our solutions;
performance, reliability and features of our solutions;
average sales price (including the size of any discounts), total cost of ownership, and return-on-investment;
ability to introduce new solutions and updates quickly and efficiently;
ability to easily deploy and operate our solutions in our customers' existing networks;
interoperability of our solutions with other devices;
scalability of our solutions;
ability to reduce production costs;
brand awareness and reputation;
strength and scale of sales and marketing efforts, professional services and customer support;
ability to maintain and establish distribution channels in markets throughout the world;
ability to provide timely, cost-effective support and professional services;
ability to provide secure mobile access to the network;
speed of mobile connectivity offering;
ability to allow centralized management of solutions; and
ability to conform to standards and obtain domestic and foreign regulatory and other industry certifications.
Currently, we compete with a number of large and well-established public companies in the broader enterprise edge-access market (primarily in the WLAN space), including Cisco Systems, Inc., as well as smaller public and private companies and new market entrants, including those in adjacent or tangential markets. Some of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do. As a result, these competitors may be able to devote greater resources to the promotion and sale of their products and services, better initiate or withstand substantial price competition, more readily take advantage of acquisitions or other opportunities, more quickly develop and expand their product and service offerings and more quickly anticipate, influence or adapt to new or emerging technologies and customer requirements than we can.

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Competitors offering a broader range of products than we offer have in the past bundled (and may in the future continue to bundle) products in a manner that makes it challenging for us to compete based on price. Some of these competitors also may have the ability to leverage their relationships with customers based on other products or incorporate functionality into existing products to gain business in a manner that discourages customers from purchasing our solutions.
We expect competition to intensify in the future based on the following factors:
continued consolidation among our competitors;
emergence of new companies as competitors in our markets or new markets in which we may participate;
expansion by us into new geographic and product markets with new competitors (including companies outside of the traditional infrastructure market) as we broaden our offering of solutions;
introduction by other companies and us of new products in the markets we serve or may enter;
increasing pricing competition at all levels of the market, especially at the lower end of the market for value-priced products;
marketing of competitive products and services by our channel partners; and
the rapid pace of technological advancement, including potentially disruptive technologies, concepts or go-to-market strategies that compete in our markets.
Some of our competitors have made acquisitions or entered into partnerships or other strategic relationships with one another to offer more comprehensive solutions than they individually had offered. We expect this trend to continue as companies attempt to strengthen or maintain their market positions. The companies resulting from these consolidations could create more compelling product offerings and offer greater pricing flexibility, either or which would make competing on the basis of price, sales and marketing programs, technology or product functionality more difficult for us. Continued industry consolidation may adversely impact customer perception of the viability of medium-sized technology companies and, consequently, customer willingness to purchase from such companies.
In addition, we can expect competition to develop from new market entrants, which could include our channel partners and customers. If our channel partners purchase companies that compete with us or otherwise begin to market products and services that compete with our solutions, the resulting pressures could adversely affect our business, operating results and financial condition in a material way and may even result in the termination of our relationship with those channel partners. Any actual or speculated consolidation among competitors, or the acquisition of our partners and/or resellers by competitors or new market entrants, is likely to increase the competitive pressures faced by us as customers may delay spending decisions or not purchase our solutions at all. As we continue to expand globally, we may experience new competition in different geographic regions from existing companies with strong technological, marketing and sales positions in those markets. In particular, we have experienced price-focused competition from competitors in Asia, especially from China, and we anticipate this will continue. Moreover, companies with whom we have strategic alliances in some areas may be competitors in other areas, which could negatively impact our existing business relationship with these companies and harm our business. Other new market entrants may offer disruptive technologies which compete directly with our product offerings or use disruptive business models which allow them to provide competitive products for free or at extremely low prices as part of a larger plan to earn revenue on related products, services or solutions.
Competitive products may have better performance, more and/or better features, lower prices and broader acceptance than our solutions. As a result, if we do not keep pace with technology advances, there could be a material adverse effect on our competitive position, revenue and prospects for growth. Even if we keep pace with technological advances and market solutions with better performance or features than our competitors, potential customers may prefer to purchase products with lower price points or to make purchases from their existing suppliers (or a single provider) rather than a new supplier, or to use technology that better complements their existing infrastructure regardless of performance or features. Any of these competitive factors could result in increased pricing pressure, reduced profit margin, increased sales and marketing expenses and failure to increase (or the loss of) market share, any of which would likely seriously harm our business, operating results or financial condition.

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We depend upon the development of new solutions and enhancements to our existing solutions. If we fail to predict and respond to the changing needs of end-customers or to emerging technological trends and industry standards, we may not be able to remain competitive and our business, operating results, financial condition and market share could be adversely affected.
The enterprise mobility market in which we participate is characterized by quickly changing end-customer needs and rapidly evolving technological trends and industry standards, which result in the frequent introduction of new products and services. For example, changes in customer network architectures are driving a demand for, among other things, cloud-based solutions. To succeed, we must accurately anticipate and rapidly adapt to the new device purchases and application preferences of our end-user customers, quickly react to other technological advances that affect our market, and out-pace our competitors by bringing new products, features and services to market that will meet the latest customer demands, market trends and regulatory requirements. We have to prioritize development activities and balance resources across multiple solutions. The demands of new product development in one area of our business may negatively impact our ability to invest and compete in other areas. If, for any reason, we fail to successfully react to these market pressures, do not bring competitive new solutions to market in a timely fashion or otherwise fail to balance our resources effectively, then we may not be able to remain competitive and our business, operating results, financial condition and market share could be adversely affected.
Adaptability to Changing End-Customer Habits and Needs
We expend significant resources on research and development attempting to drive or otherwise anticipate and react to our customers' needs. In addition, from time to time, we acquire other companies to expedite our ability to more rapidly bring products to market and enhance our range of solutions. For example, for fiscal 2014, we spent approximately $169.3 million on R&D of new products and technologies and on enhancements to our existing solutions, as well as an additional cash payment of $3.5 million to certain former Meridian Apps, Inc. employees in connection with our fiscal 2013 acquisition of Meridian. Both R&D in the enterprise mobility industry and the process of acquiring and integrating new technologies are complex and filled with uncertainties, including:
loss of opportunities due to R&D;
delays in customer purchases due to budgetary concerns, lengthy evaluation cycles or internal decisions to rely on older technologies or defer purchases until newer technologies are available;
failure of new products or enhancements to achieve anticipated acceptance rates by our channel partners or the market, including failures resulting from accelerated obsolescence of new products due to technological or acquisition-related advances made by our competitors;
inability to sufficiently control costs or otherwise price new solutions or enhancements at levels that do not gain market acceptance or, conversely, that drive unexpected sales volumes but negatively impact gross margins; or
incompatibility of new products with our existing solutions in terms of technical integration and/or go-to-market strategy.
In addition, as wireless networks become the primary or sole access network for enterprises, the performance and reliability of those networks becomes mission-critical for our customers. If our R&D efforts do not create products that reliably ensure performance for our customers, our reputation and business will be harmed. As a result, we cannot guarantee that any of our significant research and development or acquisition expenditures will lead to the successful or timely introduction of high quality solutions that will be adopted in our market or compete successfully against the offerings of our competitors.
Response to Technological Advances and Evolving Industry Standards
We also expend significant resources on research and development so that we can rapidly respond to the latest technological advances and industry standards in the enterprise mobility market. We manufacture our products to implement certain standards established by various standards bodies, including the Institute of Electrical and Electronics Engineers, Inc., or the IEEE, to ensure that our products are designed to be compatible with industry standards for secure communications over wireless and wireline networks. If we are not able to adapt to new or changing standards that are ratified by these bodies or to de facto standards created by these bodies, our ability to sell our solutions may be adversely affected. In addition, if we adapt too quickly to an evolving standard, we face the risk that a new standard may further evolve or may not be widely adopted. For example, recently we began shipping access points that comply with the new 802.11ac amendment to the 802.11 wireless LAN standard, sometimes called the 802.11ac standard. We cannot guarantee that the IEEE will not further modify the 802.11 standard in the future or that other standard bodies will not adopt competing standards. In fact, we anticipate that there will be a migration towards an 802.11ac “Wave 2” standard, which could negatively impact the sales of our current 802.11ac products if customers were to wait for the adoption of the new standard. In addition, we remain subject to any changes adopted by various standards bodies, which would require us to modify our products to comply with the new standards, require additional time and expense and could cause a disruption in our ability to market and sell the affected solutions.

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Race to Market and Marketplace Pressures
Even if we accurately anticipate customer needs and react in a timely way to evolving industry standards and technological advances, we may not be successful in developing new solutions or new enhancements, or our competitors could beat us to market with their solutions or offer better functionality or pricing than we are able to provide. Additionally, even if we are successful in bringing a solution to market, if we do not accurately forecast the demand for that solution and there is greater demand than we anticipate, we likely would incur additional manufacturing and expedited shipping costs to meet that excess demand, which would negatively impact our cost structure and gross margins. We also face the risk that customer adoption of our new solutions may be faster or slower than our new roadmap timing. Furthermore, once a product is in the marketplace, its selling price often decreases over the life of the product, especially after a new competitive solution with additional features is publicly announced. To lessen the effect of price decreases, our product management team attempts to reduce development and manufacturing costs in order to maintain or improve our margin. However, if cost reductions do not occur in a timely manner, there could be a material adverse effect on our operating results and market share. Further, the introduction of new products with increased functionality may decrease the demand for older products currently included in our inventory balances. As a result, we may need to record incremental inventory reserves for the older products that we do not expect to sell. These new solutions also may have lower selling prices, higher costs or lower gross margins than our existing solutions, which could negatively impact our revenue and profitability. This is especially true during large product transition phases, such as the ongoing market upgrade to the new 802.11ac standard, because sales of our historically popular, high gross margin products necessarily decrease as we roll out the more technologically advanced new product line, which initially has a higher production cost. In addition, the introduction of new products and software updates may negatively affect our reputation if customers with legacy products become dissatisfied because the legacy products are unable to support and benefit from our software updates. Any of these challenges may have a material adverse effect on our operating results and market share.
If we are unable to recruit and retain employees, including members of our senior management, on a cost-effective basis, or if we fail to effectively integrate new personnel into our organization, we will not be able to compete effectively and our business would be harmed.
Our ability to compete is substantially dependent upon the performance of our employees, including members of our senior management. As a result, our success is substantially dependent upon our ability to attract and retain talented personnel for all areas of our organization, particularly in our sales, research and development, and customer service departments. Experienced management and technical, sales, marketing and support personnel in the IT industry are in high demand, and competition for their talents is intense, especially in the San Francisco Bay Area. Our globalization plan and recent compensation plan modifications may result in increased difficulty recruiting and retaining employees. Additionally, fluctuations or a sustained decrease in the trading price of our common stock or pressures on our ability to grant equity to new and existing employees, such as our plan to reduce stock-based compensation as a percentage of revenue, could affect our ability to attract and retain the best talent. In the event our competitors offer more attractive salaries, benefits or equity grants, we may not be successful in attracting and retaining such personnel on a timely basis, on competitive terms, or at all. The loss of, or the inability to recruit, talented employees would have a material adverse effect on our business.
All of our executive officers are at-will employees, and we do not maintain any key-man life insurance policies. The loss of the services of any members of our management team may significantly delay or prevent the achievement of our product development and other business objectives and could harm our business. A migration from one key executive officer with extended Company tenure to a new executive officer necessarily involves a number of transitional risks, including potentially adverse effects on our ability to retain and recruit personnel, as well as uncertainties during the new executive’s transitional period.
If the market for our solutions does not continue to grow as we expect, our sales, future operating results and financial condition would be adversely affected.
We develop and provide enterprise mobility solutions. The success of our business depends substantially on the continued growth and reliance on Wi-Fi in this market. The recent growth of the market for Wi-Fi networks is being driven by the increased use of Wi-Fi-enabled mobile devices and the use of Wi-Fi as a preferred connectivity option to support video, voice and other higher-bandwidth uses.
As one of the leading providers of enterprise mobility solutions that operate in a Wi-Fi environment, our year-over-year sales growth depends in part on the growth of the Wi-Fi market as a whole. We expect the market for Wi-Fi in general to continue to grow in the near future, but there can be no guarantee that future growth rates will be consistent with historical growth rates. Moreover, even though we have continued to grow with the Wi-Fi market, growth in the Wi-Fi market as a whole may be driven in any given year by particular segments of the market in which we have a less significant presence, in which case we would not expect to grow in lock step with the larger market. In addition, even if the Wi-Fi market continues to grow, if that growth occurs primarily in segments of the market where price sensitivity, rather than performance, is a deciding factor for consumers, we would expect to face increased competition for those transactions and the sale of a different product mix than on a premium sale, which in turn could result in increased competition for sales with lower profit margins.

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There are a number of reasons why the Wi-Fi market as a whole and the enterprise mobility market in particular may not continue to grow at the rate we expect, including: lower customer adoption rates than we forecast for our new technologies, decreases in average selling prices, increases in government regulation in the Wi-Fi market, customer use of alternative technologies (such as 4G and small cells) to address mobility requirements, the potential development of wireless technologies for use in the unlicensed spectrum that are not compatible with the 802.11 standard, increased use by enterprise customers of low-cost, consumer-grade products, or customers purchasing Wi-Fi products or managed services from partners with whom we do not have broad, or any, relationships. In the event that continued growth and reliance on Wi-Fi slows in the markets we serve, we expect that our sales, future operating results and financial condition would be negatively impacted.
The highly technical and complex nature of our solutions (including the professional services we offer) may lead to unanticipated liabilities or losses, which could cause harm to our reputation and adversely affect our business.
Our solutions (including our professional services offerings) are highly technical and complex and, when deployed, are critical to the operation of many networks. We have focused, and intend to focus in the future, on getting our new solutions to market quickly. Due to our rapid product introductions, defects and bugs that may be contained in our products may not have manifested prior to shipment. We cannot provide assurance that our pre-shipment testing programs will be adequate to detect all defects in our solutions or in the software we may incorporate into our solutions from third parties. As a result, some errors in our solutions may only be discovered after a solution has been installed and operated by end users. Any errors, bugs, defects, malware or security vulnerabilities discovered in our solutions after commercial release could result in temporary or permanent withdrawal of a product, monetary penalties, decreased customer satisfaction, loss of current or prospective customers, damage to our brand and reputation, reduced sales opportunities, loss of revenues or delay in revenue recognition, reduction in the market acceptance of our new solutions or new versions of our solutions, increased development costs, incurrence of product re-engineering expenses, contractual penalties with partners, increased inventory costs and increased service and warranty cost, any of which could adversely affect our business, operating results and financial condition. In addition, when we provide professional services, we face a number of risks associated with the implementation of our solutions, ranging from inadvertent damage to customer property during installation to improper implementation and configuration, any of which could harm our reputation, adversely affect our business and otherwise expose us to increased liabilities or losses.
We could face claims for product liability, breach of contract, tort or breach of warranty, including claims relating to changes to our solutions made by our channel partners. Our contracts with customers, channel partners and others contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management's attention and adversely affect the market's perception of us and our solutions. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, operating results and financial condition could be adversely impacted.
Risks Relating to Our Sales
Because we sell a majority of our solutions through VADs, VARs, system integrators and OEMs, if we experience problems affecting our sales with these channel partners, our revenue, cash flow and market share could be harmed.
Our future success is highly dependent upon establishing and maintaining successful relationships with a variety of VADs, VARs, and OEMs, which we refer to as our channel partners. If our channel partners do not perform their services adequately or efficiently, fail to meet their obligations to us, exit the industry, elect to replace our solutions with products of our competitors or otherwise reduce or terminate our contractual relationship, and we are not able to quickly find adequate replacements, there could be a material adverse effect on our revenue, cash flow and market share.
We have dedicated a significant amount of effort to increase the use of our VADs and VARs in each of our theatres of operations. The percentage of our total revenue fulfilled from sales through our channel partners was 91.4%, 93.4% and 92.5% for fiscal 2014, 2013 and 2012, respectively. We expect that over time, our channel partner sales will continue to constitute a significant majority of our total revenue. The table below represents the percentage of total revenue from our top channel partners:
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
ScanSource, Inc.
17.4%
 
20.3%
 
17.5%
 
20.8%
Synnex Corp.
*
 
10.9%
 
11.0%
 
12.2%
(*) Indicates less than 10%.
Because each of our top channel partners represents such a significant percentage of our overall revenue, the loss of all or substantially all sales generated by any one of these top channel partners would be harmful to our business. However, we cannot be certain that our top channel partners, or any of our other channel partners, will continue to sell our solutions and services at the same volumes, or at all, because we have no minimum purchase commitments with any of them and the

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contracts we do have generally provide that our channel partners use only reasonable commercial efforts to sell our solutions. In addition, our contracts with these channel partners do not prohibit them from offering products or services that compete with ours or from terminating our contracts on short notice. For example, our agreements with our top channel partners, ScanSource, Inc. and Synnex Corp., are for no more than one-year terms.
Existing and future channel partners will likely make decisions about whether or not to sell our solutions based on the quality of our solutions, the market acceptance of our solutions, the fact that our direct sales channel may compete with them, whether we elect to establish relationships with channel partners they perceive to be competitive threats, the discounts we offer versus those that our competitors may provide and the commercial viability of our contracts with them. If we fail to maintain the quality of our solutions or to update and enhance them, existing and future channel partners may elect to work instead with one or more of our competitors. In addition, the terms of our arrangements with our channel partners must be commercially reasonable for both parties. If we are unable to reach agreements that are beneficial to both parties, then our channel partner relationships will not succeed. Our competitors may be effective in providing incentives to existing and potential channel partners to favor their products or to prevent or reduce sales of our solutions. Furthermore, we compete with some of our channel partners, including through our direct sales, which may lead these channel partners to use other suppliers that do not directly sell their own products and services. Other channel partners, particularly some of our OEMs who already have diverse product lines, may acquire one of our competitors or internally develop competitive products and then elect to limit or stop incorporating our solutions into their product lines. For this or any other reason, our channel partners may choose not to focus primarily on the sale of our solutions or offer our solutions at all.
Some of our channel partners may have insufficient financial resources and may not be able to withstand changes in worldwide business conditions, including economic downturns, abide by our inventory and credit requirements, or have the ability to meet their financial obligations to us. The table below represents the percentage of total accounts receivable from our top channel partners:
 
January 31,
2015
 
July 31,
2014
ScanSource, Inc.
11.1%
 
17.2%
Synnex Corp.
*
 
11.8%
Avnet Logistics U.S. LP
16.6%
 
15.3%
Dell, Inc.
*
 
11.5%
(*) Indicates less than 10%.
In addition, some of our channel partners may decide to reduce or redirect their sales and support personnel, which may in turn negatively impact their ability to sell our solutions. These channel partners may also face cash flow problems that could prevent them from capitalizing on larger deals that would require them to make inventory purchases beyond their available cash or lines of credit. If the economic situation for these channel partners does not improve, we may be negatively impacted by increased bad debt or decreased sales or both.
Our reliance on our channel partners may expose us to additional risks that could harm our business.
By relying on our indirect channel partners for a significant percentage of our revenue, we may have less contact with the end users of our solutions, thereby making it more difficult for us to establish brand awareness, engage in upselling activities, ensure proper delivery and installation of our products, service ongoing customer requirements, and respond to evolving customer needs. Reduced contact with the end users of our solutions also would make it more difficult and more costly to establish direct sales relationships with these end users in the event our indirect relationships terminate. In addition, we may be exposed to import/export and other risks when our indirect channel partners make sales into restricted jurisdictions. We depend on our channel partners globally to comply with applicable regulatory requirements. To the extent that they fail to do so, that could have a material adverse effect on our business, operating results, and financial condition.
We rely primarily on our channel partners to deliver professional services associated with our solutions. If our channel partners fail to timely and efficiently deliver those services to our end customers, our end customers would become dissatisfied and our reputation and business could be harmed unless we could provide those professional services ourselves. We do not have a large professional services organization and, accordingly, we may not be able to efficiently and cost-effectively deliver the professional services our end customers expect. If we do not effectively manage our channel partners and ensure that they deliver high quality professional services or if we do not deliver those professional services ourselves, our reputation and business could be harmed.
Some of our VAD channel partners may elect to become stocking distributors. If one or more of our non-stocking VADs elects to stock a significant amount of inventory, our deferred revenue will necessarily increase. In addition, the risk of inventory obsolescence (especially during times of product transitions) would increase while our ability to forecast actual revenues would decrease.

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We may provide our indirect channel partners volume discounts off of our list prices, which could reduce our margin to the extent revenue from such channel partners increases as a proportion of our overall revenue. Historically, we have seen fluctuations in our gross margins based on changes in the balance of our distribution channels. Although variability to date has not been significant, there can be no assurance that changes in the balance of our distribution model in future periods would not have an adverse effect on our gross margins and profitability. In addition we have a complex system of volume-based rebates for certain channel partners, which in certain cases permit our partners to offset the rebate amount from other amounts they may owe to us. While we believe that we accurately accrue for the amount of these rebates based on the information that our partners provide to us, as well as based on our own internal tracking system, because our partners may inadvertently provide us with inaccurate information, we may improperly accrue for rebates, which, in turn, could cause us to over- or under-estimate our revenue for a given period.
Recruiting, retaining and supporting qualified channel partners and training them in our technology and solution offerings requires significant time and resources. Our channel partners compete with one another and, as a result, our efforts to recruit new partners may adversely impact existing partners and negatively affect their willingness to continue to distribute our solutions. In order to develop and expand our distribution channel, we must continue to scale and improve our processes and procedures that support our channel partners, including investment in systems and training, and those processes and procedures may become increasingly complex and difficult to manage. We have previously entered into OEM agreements with partners pursuant to which they rebrand and resell our products as part of their product portfolios. These types of relationships are complex and require additional processes and procedures that may be challenging and costly to implement, maintain and manage. Our failure to successfully manage and develop our distribution channel and the programs, processes and procedures that support it could adversely affect our ability to generate revenues from the sale of our solutions.
In addition, as we expand into new regions domestically and internationally, we incur substantial costs in hiring, training and retaining salespersons and system engineers in those territories to support our channel partners. If we are not successful in hiring and enabling these new sales personnel, then the revenues that we expect them to generate both directly and through our channel partners may not be sufficient to justify the expense and our business would be harmed.
Our ability to sell our solutions is highly dependent on the quality of our support and services offerings, and our failure to offer high quality support and services would have a material adverse effect on our sales and results of operations.
Our customers rely on our support and services organizations to assist them and our partners in implementing our solutions and resolving issues relating to our solutions. A high level of support is critical for the successful marketing and sale of our solutions. In some cases, our channel partners provide support directly to our end-customers. We do not have complete control over the level or quality of support provided by our channel partners. These channel partners may also provide support for other third-party products, which may potentially distract resources from support for our solutions. If we or our channel partners do not effectively assist our end customers in deploying our solutions, succeed in helping our end customers quickly resolve post-deployment issues, or provide effective ongoing support, it would adversely affect our ability to sell our solutions to existing customers and could harm our reputation with potential customers. In addition, as we expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. As a result, our failure, or the failure of our channel partners, to maintain high quality support and services would have a material adverse effect on our business, operating results and financial condition.
Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales are difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate significantly.
The timing of our revenue is difficult to predict due the length of our sales cycle, the buying habits and budgetary considerations of our customers, the amount of inventory controlled by stocking distributors, the actual or perceived condition of the economy and the impact of revenue recognition rules on our sales agreements, which can be complex as a result of various determinations used when allocating the total arrangement consideration among different sale elements. Specifically, we view the federal and public-facing enterprise verticals as well as the service provider channels as highly dependent on large or complex transactions, and therefore we have in the past and may in the future experience fluctuations from period to period in these verticals.

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The length of our sales cycle is influenced by a number of factors. First, because of the highly technical nature of our solutions, our sales efforts, particularly for our new solutions, involve educating our proposed customers about the use and benefits of our solutions, including the technical capabilities of our solutions and the potential cost savings our solutions can provide. Second, because a customer’s decision to purchase certain of our solutions, particularly new solutions, involves a significant commitment of its resources, customers often undertake an in-depth evaluation process, which may involve not only our solutions but also those of our competitors. These customer evaluations typically range from four to nine months in length, but can be longer. In particular, customers considering the design and implementation of large network deployments may engage in very lengthy procurement processes that may delay or impact expected future orders. These lengthy procurement processes are frequently influenced by budgetary considerations. For example, in December 2014, the Federal Communications Commission issued a second E-rate Modernization Order (also known as the Schools and Libraries Program of the Universal Service Fund) that raised the spending cap for the E-rate program to $3.9 billion. Certain customers may delay purchasing decisions until the new rules are implemented or until these funds become available for the 2015/2016 funding cycle. There is no guarantee that there will not be additional changes to this program that further impact the purchasing decisions of these customers.
Even after a customer makes the decision to purchase our solutions, there are a number of factors that may still impact the timing of the actual sale and recognition of revenue from that sale. For example, we may successfully complete a proof of concept with a customer and the customer’s IT department may agree to make the purchase, but because of internal customer budget constraints including spending reductions or freezes, additional required departmental approvals or unplanned administrative, processing or other delays, the actual sale and deployment may be postponed. We have experienced and may experience in the future purchase delays due to the volatile global economic environment and due to customer anticipation of new Wi-Fi or other standards, or announced releases of new solutions or enhancements by our competitors or us. In addition, depending on the terms of the sale, we have from time to time been required to delay recognition of revenue from certain purchases. If sales expected from a specific customer for a particular quarter are not realized in that quarter or at all, our business, operating results and financial condition could be adversely affected in a material way. In addition to the challenges presented by long sales cycles and risks of purchase delays by our customers, our revenue can also be difficult to predict due to customers that sporadically place large orders with short lead times. As a result, we cannot easily predict whether a sale will be completed, the particular fiscal period in which a sale will be completed or the fiscal period in which revenue from a sale will be recognized, which in turn makes our operating results difficult to forecast and may cause our operating results to vary significantly and unexpectedly from quarter to quarter.
Actions of the U.S. Government resulting in significant cuts in U.S. Government spending could adversely affect our sales and future results.
Because we depend on several large vertical markets that rely directly or indirectly on federal support, including government, health care and education, any decreased spending by the government could, as we have experienced, cause customers to delay program or contract start dates, or cause customers to issue stop work orders or terminate contracts, any of which would adversely impact our sales and future operating results. For example, on August 2, 2011, the President signed into law the Budget Control Act of 2011, or the Budget Control Act, which raised the debt ceiling and put into effect a series of actions for deficit reduction. The Budget Control Act triggered automatic reductions in discretionary and mandatory spending, known as "sequestration" starting in 2013. In December 2013, the Bipartisan Budget Act of 2013 changed the sequestration caps for our fiscal 2014 and fiscal 2015, which ameliorates some of the spending cuts otherwise required by the sequester. As a result of sequestration and other budgetary uncertainty, certain federal government customers have become more cautious with contract awards and spending, sometimes delaying purchase orders while awaiting further Congressional budget action.
Risks Related to Tax
Changes in our tax rates could adversely affect our future results.
Our provision for income taxes could be adversely affected by lower than anticipated earnings in countries that have lower tax rates, and higher than anticipated in countries that have higher tax rates. This factor can result in our effective tax rate being volatile from year to year and from quarter to quarter. Our provision for income taxes also could be adversely affected by non-deductible stock-based compensation, changes in research and development tax credit laws, transfer pricing adjustments, changes in the valuation of our deferred tax assets and liabilities, changes in actual results versus our estimates, or changes in accounting principles, tax laws, and regulations, including possible U.S. changes to the taxation of earnings of our foreign subsidiaries.
We are also subject to the periodic examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. We may underestimate the outcome of such examinations which, if significant, would have a material adverse effect on our results of operations and financial condition.

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If we do not achieve increased tax benefits as a result of our corporate structure, our financial condition and operating results could be adversely affected.
We implemented a modified structure of our corporate organization to more closely align our corporate organization with the international nature of our business activities and to reduce our overall effective tax rate. Although we anticipate achieving a reduction in our overall effective tax rate in the future as a result of these changes, it is possible that the taxing authorities of the jurisdictions in which we operate or to which we are otherwise deemed to have sufficient tax nexus will challenge the tax benefits that we expect to realize as a result of the modified structure. In addition, future changes to U.S. or non-U.S. tax laws, including proposed legislation to reform U.S. taxation of international business activities, may negatively impact the anticipated tax benefits of the structure. Any benefits to our tax rate will also depend on our ability to operate our business in a manner consistent with the structure of our corporate organization and applicable taxing provisions, including by eliminating the amount of cash distributed to us by our subsidiaries. If any of these negative effects were to occur, we might not achieve the financial efficiencies that we have anticipated, and our future operating results and financial condition could be adversely affected.
Irish tax authorities announced changes to the treatment of non-resident Irish entities, commonly used in a “double Irish” structure. The changes are not expected to impact existing non-resident Irish entities, such as ours, until after December 31, 2020. These changes may adversely impact our effective tax rate and harm our financial position and results of operations in the future.
Additionally, the Organisation for Economic Co-Operation and Development released draft guidance covering various topics, including addressing the “tax challenges of the digital economy,” country-by-country reporting, and definitional changes to permanent establishment, which could ultimately impact our tax liabilities to foreign jurisdictions and treatment of our foreign earnings from a U.S. perspective which may adversely impact our effective tax rate and harm our financial position and results of operations.
An increasing amount of our cash and cash equivalents may in the future be held outside of the U.S. and we could be subject to repatriation delays and costs, which could reduce our financial flexibility.
Under our international structure, we expect an increasing amount of our cash and cash equivalents may in the future be held outside the U.S., while many of our liabilities are payable in the U.S. Repatriation of some of the funds could be subject to delay for local country approvals and could have potentially adverse tax consequences in the U.S. and abroad. As a result of having a lower amount of future cash and cash equivalents in the U.S., our financial flexibility in the future may be reduced, particularly in the areas of acquisition and other investment activity.
Risks Relating to Our Manufacturing and Supply Chain
Because we outsource the manufacturing of most of our hardware products to third-party manufacturers, if these manufacturers do not implement adequate quality controls or suffer significant changes in their financial or business condition, our ability to supply quality products to our customers could be disrupted and our business could be harmed.
We outsource the manufacturing of our products to primarily three contract manufacturers and original design manufacturers, Accton, Sercomm and Wistron NeWeb Corporation, each of which conducts its manufacturing activities in China. Our reliance on these third-party manufacturers reduces our control over the manufacturing process and exposes us to a variety of risks, including: interruptions in steady flow of inventory at steady prices due to lack of long-term supply contracts, long lead times to qualify new third-party manufacturers, reduced control over quality assurance, product costs, and product supply and timing, increased reliance on system interoperability to ensure timely product deliveries, and the potential for infringement or misappropriation of our intellectual property.
Because these contract manufacturers are all located in Asia, we face additional risks, including supply interruption in the event of unrest, disease outbreak or other disruptions in the region. In addition, shipping products from Asia in the most cost-effective manner requires at least 22 days of travel by sea to the U.S., which in turn requires us to have significant advance notice of any inventory requirements. Any manufacturing disruption or shipping delay by these third-party manufacturers could severely impair our ability to fulfill orders, result in higher cost of fulfillment, or require us to carry additional inventory at increased cost to us.
Because we do not have long-term contracts with these manufacturers, we typically fulfill our supply requirements with individual orders. As a result, these manufacturers do not guarantee us any amount of capacity, the continuation of particular pricing terms or the extension of credit limits. This means that our third-party manufacturers are not obligated to continue to fulfill our supply requirements and could decrease or cease supplies to us or raise prices on short notice, which could result in supply shortages and negative effects on our gross margin. In addition, our orders with these manufacturers represent a relatively small percentage of the overall orders received by them from their customers. As a result, fulfilling our orders may not be considered a priority in the event our contract manufacturers are constrained in their abilities to fulfill all of their customer obligations in a timely manner.

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We provide demand forecasts to our contract manufacturers. If the demand forecast is binding and we overestimate our requirements, our contract manufacturers may assess charges, or we may have liabilities for excess inventory, each of which could negatively affect our gross margin. Conversely, because lead times for required materials and components vary significantly and depend on factors such as the specific supplier, contract terms and the demand for each component at a given time, if we underestimate our requirements (which may happen when demand for a new product exceeds our expectations), our contract manufacturers may have inadequate materials and components required to produce our products. This could result in an interruption of the manufacturing of our products, delays in shipments and deferral or loss of revenue. In addition, on occasion we have underestimated our requirements, and, as a result, we have been required to pay additional fees to our contract manufacturers in order for manufacturing to be completed and shipments to be made on a timely basis, which negatively impacts our gross margins.
If for any reason our manufacturers do not continue manufacturing our products, we will be required to identify one or more alternative manufacturers. It is time consuming, costly and often impractical to begin using new manufacturers. Also, the addition of manufacturing locations or contract manufacturers would increase the complexity of our supply chain management. In addition, changes in our third-party manufacturers may cause significant interruptions in supply if the new manufacturers have difficulty manufacturing products to our specifications or those of our OEM partners. As a result, our ability to meet our scheduled product deliveries to our customers could be adversely affected, which could cause the loss of sales to existing or potential customers, delayed revenue or an increase in our costs.
Although we perform rigorous in-house quality control inspection and testing at both of our fulfillment centers to ensure the reliability and quality of our hardware components, we do not have the ability to control the manufacturing processes of our third-party manufacturers. As a result, quality or performance failures of our products due to the internal quality controls of our third-party manufacturers could disrupt our ability to supply quality solutions to our customers and thereby have a material adverse effect on our business, revenue and financial condition.
Some of our business processes depend upon our IT systems as well as the systems and processes of third parties. If those systems fail or are interrupted, our processes may function at a diminished level or not at all. This could negatively impact our ability to ship products or otherwise operate our business, and our financial results could be harmed. In addition, as a result of current global financial market conditions, natural disasters or other causes, it is possible that any of our manufacturers could experience interruptions in production, cease operations or alter our current arrangements, in which case our ability to ship products to our customers would be delayed, sales of our solutions would be negatively affected and our business, operating results and financial condition would be harmed.
Because our third-party manufacturers purchase some components, subassemblies and products from a single supplier or a limited number of suppliers, the loss of any of these suppliers could cause us to incur additional set-up costs, result in delays in manufacturing and delivering our products, cause us to carry excess or obsolete inventory and ultimately materially adversely affect our business.
To manufacture our products, we utilize components from many suppliers. Whenever possible, we strive to have multiple sources for these components to ensure continuous supply and competitive costs. We work in conjunction with the extensive supply chain management organizations at all of our manufacturing partners to select and utilize quality suppliers. However, several of the components we source are technically unique and only available from specific suppliers. We rely on our contract manufacturers to obtain the components, subassemblies and products necessary for the manufacture of our products and we do not maintain direct contractual supply arrangements with any of these suppliers. Any reduction or interruption in these components and subassemblies or a significant increase in the price of these supplies could have a negative impact on our business, particularly if supplies of technically unique components were disrupted.
For example, the chipsets that our contract manufacturers source and incorporate into our hardware products are currently purchased only from a limited number of suppliers. The majority of our access points incorporate chips from Qualcomm and Broadcom, some of our mobility controllers incorporate chips from Broadcom and some of our switching products incorporate chips from Marvell. As a result, most of our product revenue is dependent upon the sale of products that incorporate components from Qualcomm, Broadcom or Marvell. However, neither we, nor our manufacturing partners, have entered into any long-term supply agreements with these suppliers. In the event that our contract manufacturers are unable to obtain these components from Qualcomm, Broadcom or Marvell, we would be required to redesign our hardware and software in order to incorporate components from alternative sources. The resulting stoppage or delay in selling our products and the expense of redesigning our products could result in lost sales opportunities and damage to customer relationships, which would adversely affect our reputation, business and operating results.

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We also incorporate certain generally available software programs into our architecture through license agreements with third parties. Although we do not have supply agreements with Qualcomm or Broadcom, in some cases, we have entered into license agreements that allow us to incorporate certain of their components into our products. These license agreements are only for one-year terms and each may be terminated prior to the end of the then-current term. If these agreements were to be terminated, we would be required to redesign our hardware and software in order to incorporate technology from alternative sources.
Even when we have multiple sources for certain components and subassemblies, we remain subject to potential price increases and limited availability due to increased market demand for such components and subassemblies, or for the materials that go into making such components and subassemblies, by third parties. In the past, unexpected demand for communication products caused worldwide shortages of certain electronic parts, making the predictability of component availability more limited. For example, from time to time, we have experienced component shortages that resulted in delays of product shipments. The development of alternate sources for those components is time-consuming, difficult, and costly. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules. Any future growth in our business, IT spending and the economy in general is likely to create greater pressures on us and our suppliers to accurately forecast overall component demand and to establish optimal component inventories. We carry very little to no inventory of our product components, and we and our contract manufacturers rely on our suppliers to deliver necessary components in a timely manner. As a result, even if available, we or our contract manufacturers may not be able to secure sufficient components at reasonable prices or of acceptable quality to build products in a timely manner and, therefore, may not be able to meet customer demands for our products, which would have a material adverse effect on our business, operating results and financial condition.
Our inventory management relating to our sales to our multi-tier distribution channel is complex, and excess inventory may harm our gross margins.
We must manage our inventory relating to sales to our distributors effectively because inventory held by them could affect our results of operations. Inventory management requires us to make forecasts that are based on multiple assumptions, each of which may cause our estimates to be inaccurate which, in turn, could negatively affect our ability to provide solutions to our customers. Our distributors may increase orders during periods of product shortages, cancel orders if their inventory is too high, determine to stock inventory, or delay orders in anticipation of new products. They also may adjust their orders in response to the supply of our products and the products of our competitors that are available to them, and in response to seasonal fluctuations in end-user demand. Revenue from our distributors generally is recognized based on a sell-through method using information provided by them, and they are generally given business terms that allow them to rotate a portion of inventory, receive credits for changes in selling price, and participate in various cooperative marketing programs. Particularly as more distributors elect to stock inventory, contractual requirements to rotate that inventory (especially during product transition periods) may not be sufficient to avoid us having to take write-downs for obsolete or excess inventory. Inventory management remains an area of focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements. When facing component supply-related challenges, we have increased our efforts in procuring components in order to meet customer expectations. If we ultimately determine that we have excess inventory, we may have to reduce our prices and write down inventory, which in turn could result in lower gross margins. In addition, product purchased in advance of a firm end user order and held at our VADs and OEMs appears on our balance sheet as deferred revenue, which, depending on the timing of orders can result in our deferred revenue appearing higher or lower than we, or our investors, might otherwise expect.
If we are unable to manage our supply chain and manufacturing to the actual demand for our solutions, our supply and manufacturing costs could increase, our ability to fulfill orders could be delayed, sales opportunities could be lost and our excess or obsolete inventory levels could increase, any of which could have an adverse impact on our gross margins, business and operating results.
To satisfy end customer and distribution center demand for our solutions, our product line management estimates demand on a rolling monthly basis and those forecasts drive the supply decisions that we make. Typically, we require 90 days from an initial estimate of a specified amount of product demand to actual delivery of that amount of product. If we significantly overestimate demand, an oversupply of product could result in excess or obsolete inventory level increases that could adversely affect our gross margin. Conversely, if actual demand for a specific product, such as our new 802.11ac access points, turns out to be significantly higher than our estimates, we could suffer any or all of the following adverse effects:
we might be required to request expedited manufacture or shipment of additional product to satisfy the unexpected demand, which would result in supply chain and manufacturing surcharges, expedited air freight shipping charges and a decrease to our gross margins;
we might be required to delay the sale and thereby delay recognition of revenue; or
if we are unable to deliver the product on an acceptable time frame for the customer, we may cause damage to our reputation with our customers, resellers and distributors, or may lose a sale opportunity and thereby cause a decrease to our revenue and harm to our business.

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We have experienced occasional inventory shortages in the past, including shortages caused by manufacturing process and quality control issues, that have affected our operations. These issues are particularly acute during product transition periods, such as the one we are going through now with the roll-out of our 802.11ac access points. We may in the future experience a shortage of certain products as a result of manufacturing issues at our third-party manufacturers or their downstream suppliers, capacity problems experienced by our third-party manufacturers, or strong demand in the industry for subcomponents to our products. A return to robust growth in the economy is likely to create greater pressures on us and our suppliers to accurately project overall demand and to establish optimal supply levels and manufacturing capacity, especially for labor-intensive components and highly complex products. If shortages should occur for our product components or for the resources of our third-party manufacturers, our costs are likely to increase or, in the worst case, supplies may not be available at all, in which case our revenue and gross margins could suffer until other sources can be developed.
In addition, we believe that we may be faced with the following supply chain and manufacturing challenges in the future:
new markets in which we participate may grow quickly, which may make it difficult to quickly obtain our product requirements in a timely fashion;
as we acquire companies and new technologies, we may be dependent, at least initially, on unfamiliar supply chains or relatively small supply partners that may not be reliable or cost-effective suppliers; and
we may face new competition for the subcomponents used in our products from companies both in and outside of our mobile enterprise market.
Risks Relating to Our International Operations
Our international sales and operations subject us to additional risks that may adversely affect our operating results.
Our customers, suppliers and employees are located throughout the world and in fiscal 2014, approximately 34.7% of our revenue was generated by customers outside the U.S. In addition, some product configuration and fulfillment is handled in Singapore and a portion of our engineering, support and order management efforts are currently handled by personnel located in Ireland, India and China. We expect to expand our offshore research and development efforts within India and China and, as we announced in connection with our plans to realign certain core functions to lower cost regions, we expect to continue to add personnel in additional countries.
Because we have sizeable sales and operations outside the U.S., we experience greater complexity in our operations and are exposed to a set of global risks that could negatively impact sales or profitability, including:
the difficulty and cost of managing and staffing international offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;
challenges in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;
the need to localize our solutions for international customers, including customs classifications and certifications;
tariffs, trade barriers and trade disputes, import/export regulations, governmental actions, and other regulatory or contractual limitations on our ability to sell, support or develop our products in certain foreign markets;
the difficulty and cost of managing foreign distribution centers and implementing professional services in smaller foreign markets;
changes in, and differences between, U.S. and non-U.S. rules related to trade, environmental, health and safety, technical standards, consumer protection, social responsibility and other standards and policies;
differences in protection for intellectual property rights in various countries; 
employment regulations and local labor laws, including increased cost of terminating international employees in some countries;
tax issues, such as tax law and treaty changes, variations in tax laws from country to country and as compared to the U.S., obligations under tax incentive agreements, difficulties in repatriating cash generated or held abroad in a tax-efficient manner and difficulties in securing local country approvals for cash repatriations;
increased exposure to foreign currency exchange rate risk;
foreign exchange regulations, which may limit our ability to convert or repatriate foreign currency;
cultural, business practice, legal, regulatory and language differences;
national policies or practices that favor domestic manufacturers over importers;
increased exposure to instability in economic or political conditions, including inflation, deflation, recession and actual or anticipated military or political conflicts;
the difficulty in managing sales into countries, such as Russia, that are currently subject to international economic sanctions and under the threat of additional and changing sanctions;
natural disasters, public health crises or outbreaks of disease; and
litigation in foreign court systems and foreign administrative proceedings.

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All of our hardware products are manufactured in Asia. If manufacturing in this region is disrupted, our overall capacity could be significantly reduced and sales or profitability could be negatively impacted. We have engineering resources in India that could be disrupted as a result of political conflicts in that region. We also sell our solutions throughout the Middle East and Eastern Europe, and demand for our solutions could be negatively impacted by political conflicts and hostilities in these and other regions or by the imposition of U.S. or international economic sanctions. The potential for future unrest, terrorist attacks, increased global conflicts and the escalation of existing conflicts has created worldwide uncertainties that have negatively impacted, and may continue to negatively impact, demand for our solutions.
As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, operating results and financial condition.
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.
Because we incorporate encryption technology into our products, our products are subject to U.S. export controls and may be exported outside the U.S. only with the required level of export license or through an export license exception. In addition, various countries regulate the import of certain encryption technology and radio frequency transmission equipment and have enacted laws that could limit our ability to distribute our solutions or could limit our customers' ability to implement our solutions in those countries. Changes in our products or changes in export and import regulations may increase the cost of building and selling our products, create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our solutions by, or in our decreased ability to export or sell our solutions to, existing or potential customers with international operations. In addition, because we sell through indirect channel partners, we may incur liabilities on account of actions by our channel partners, including such actions as inadvertent sales of our solutions to countries in violation of applicable import or export regulations. Any decreased use of our solutions or limitation on our ability to export or sell our solutions would harm our business, operating results and financial condition.
We may not successfully sell our solutions in certain international geographic markets or develop and manage new sales channels in accordance with our business plans.
We expect in the future to sell our solutions in certain international geographic markets where we do not have significant current business and to a broader customer base. To succeed in certain of these markets, we believe we will need to develop and manage new sales channels and distribution arrangements. Because we have limited experience in developing and managing such channels, we may not be successful in further penetrating certain geographic regions, supporting multi-national customers or reaching a broader customer base. Establishing a legal presence in these jurisdictions may be expensive and resource intensive. In addition, certain geographic markets have slower wide area networks or restrictions on our ability to transmit certain data, which negatively impact the performance of certain of our solutions. As a result, local infrastructure insufficiencies or our failure to develop or manage additional sales channels effectively may limit our ability to succeed in these markets and could adversely affect our ability to grow our customer base and revenue.
Failure to comply with the U.S. Foreign Corrupt Practices Act and similar laws associated with our activities outside the U.S. could subject us to penalties and other adverse consequences.
A significant portion of our revenue is and will be from jurisdictions outside of the U.S. As a result, we are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, which generally prohibits U.S. companies and their intermediaries from making payments to foreign officials for the purpose of directing, obtaining or keeping business, and requires companies to maintain reasonable books and records and a system of internal accounting controls. The FCPA applies to companies and individuals alike, including company directors, officers, employees and agents. Under the FCPA, we may be held liable for the corrupt actions taken by our employees, strategic or local partners or other representatives. In addition, the U.S. government may seek to rely on a theory of successor liability and hold us responsible for FCPA violations committed by companies or associated with assets that we acquire.

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In many foreign countries where we operate, particularly in countries with developing economies, local laws and customs may differ significantly from those in the U.S. For example, it may be a local custom in certain countries for businesses to engage in practices that are prohibited by our internal policies and procedures or U.S. regulations applicable to us, such as the FCPA, the U.K. Bribery Act and other similar local laws. Even though we have conducted formal FCPA compliance training, we cannot guarantee that our employees, contractors, and agents will comply with all of our policies and procedures. As a result of our rapid growth, our development of infrastructure designed to identify FCPA matters and monitor compliance is at an early stage. If we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation (whether intentionally or accidentally), governmental authorities in the U.S. and elsewhere could seek to impose civil and/or criminal fines and penalties which could have a material adverse effect on our business, operating results and financial conditions. We may also face collateral consequences such as debarment and the loss of our export privileges.
We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and operating results.
To date, substantially all of our international sales have been denominated in U.S. dollars; however, most of our expenses associated with our international operations are denominated in local currencies. Foreign currencies periodically experience rapid fluctuations in value against the U.S. dollar. Any foreign currency devaluation against the U.S. dollar increases the real cost of our solutions to our customers and partners in foreign markets where we sell in U.S. dollars, which has resulted in the past and may result in the future in delayed or cancelled purchases of our solutions and, as a result, lower revenue. In addition, this increase in cost increases the risk to us that we will be unable to collect amounts owed to us by such customers or partners, which in turn would impact our revenue and could adversely impact our business and financial results in a material way. Any devaluation may also lead us to more aggressively discount our prices in foreign markets in order to maintain competitive pricing, which would negatively impact our revenue and gross margin. Conversely, a weakened U.S. dollar could increase the cost of local operating expenses and procurement of raw materials to the extent we purchase components in foreign currencies. To date, we have not used risk management techniques to hedge the risks associated with these fluctuations. Even if we were to implement hedging strategies, not every exposure can be hedged and, where hedges are put in place based on expected foreign currency exchange exposure, they are based on forecasts that may vary or that may later prove to have been inaccurate. As a result, fluctuations in foreign currency exchange rates or our failure to successfully hedge against these fluctuations could have a material adverse effect on our operating results and financial condition.
Risks Relating to Intellectual Property and Security
Claims by others that we infringe their intellectual property rights could harm our business.
Third parties have asserted and may in the future assert claims of infringement of intellectual property rights against our company, our customers, our vendors, or our channel partners. Due to the rapid pace of technological change in our industry, much of our business and many of our solutions rely on proprietary technologies of third parties, and we may not be able to obtain, or continue to obtain, licenses from such third parties on reasonable terms. Technology companies frequently file litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. As our business expands and the number of products and competitors in our market increases, we expect that infringement claims may increase in number and significance. Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical and other issues involved, and we cannot be certain that we will be successful in defending against intellectual property claims. Furthermore, a successful claimant could secure a judgment against us or others in our supply or distribution chains that requires us to pay substantial damages or prevents us from distributing certain solutions or performing certain services. In addition, we might be required to seek a license for the use of this intellectual property, which may not be available on commercially acceptable terms or at all. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful. Any claims or proceedings against us, or others in our supply or distribution chains, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, or require us to enter into royalty or licensing agreements, or require us to pay substantial settlement amounts or judgment damages. In some circumstances, we may owe greater indemnity to our customers than that provided to us by our vendors or distributors. In an effort to avoid costly litigation or for other reasons, we may determine to settle these types of claims or proceedings at any time, and the amounts we may have to pay could be material. In light of our operating results, a large settlement or non-appealable judgment could have a material adverse effect on our financial condition.

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System security risks, data protection breaches, and cyber-attacks on our systems or solutions could compromise our proprietary information (or information of our customers or employees), disrupt our internal operations and harm public perception of our solutions, which could cause our business and reputation to suffer, create additional liabilities and adversely affect our financial results and stock price.
In the ordinary course of business, we store sensitive data that may include any of the following categories of information on our internal systems, networks and servers:
intellectual property;
our proprietary business information and that of our customers, suppliers and business partners; and
customer, employee and end-user data, which may include personally identifiable information and location-based data.
Additionally, we design and sell solutions that allow our customers to wirelessly access sensitive data on their own systems and to remotely manage and operate networks and applications that contain, transmit and store a variety of information. Our solutions incorporate complex technology and must operate and support a wide range of mobile devices that use Wi-Fi as well as the complex applications that run on those devices, which use multiple communication industry standards. In addition, the amount of data we store for our users on our servers (including personal information) has been increasing.
The secure maintenance of sensitive information on our own networks and the intrusion protection features of our solutions are both critical to our operations and business strategy. We devote significant resources to network security, data encryption, and other security measures to protect our systems and data, but these security measures cannot provide absolute security. For example, we use encryption and authentication technologies to secure the transmission and storage of data and prevent third-party access to data or accounts, but these security measures are subject to third-party security breaches, employee error, malfeasance, faulty password management, or other irregularities. If a third party were to fraudulently induce an employee or customer into disclosing user names, passwords or other sensitive information (or otherwise illicitly obtain that type of information), that information may in turn be used to access our IT systems and the data located therein.
Increasingly, companies are facing a wide variety of attacks from computer “hackers” who develop and deploy destructive software programs (such as viruses and worms) to attack networks. Due to our business model and the location of some of our development centers, we have faced and are likely to face similar threats that target both our internal systems and our solutions, which, in turn, may threaten our customers' networks, devices, applications and data. Because the techniques used by hackers to access or sabotage networks are becoming increasingly sophisticated, change frequently and generally are not recognized until launched against a target, even with the significant efforts we take to create security barriers to such attacks, it is virtually impossible for us to entirely eliminate this risk.
Although we make significant efforts to maintain the security and integrity of our systems and solutions, any destructive or intrusive breach of our internal systems could compromise our networks, creating system disruptions or slowdowns, and the information stored on our networks could be accessed, publicly disclosed, lost or stolen. Additionally, an effective attack on our solutions could disrupt the proper functioning of our solutions, allow unauthorized access to sensitive, proprietary or confidential information of ours or our customers, disrupt or temporarily interrupt customers' networking traffic, or cause other destructive outcomes, including the theft of information sufficient to engage in fraudulent financial transactions. If any of these types of security breaches were to occur and we were to be unable to protect sensitive data, our relationships with our business partners and customers could be materially damaged, our reputation and brand could be materially harmed, use of our solutions could decrease, and we could be exposed to a risk of loss or litigation and possible liability. In addition, incidents involving unauthorized access to or improper use of user information or incidents involving violation of our terms of service or policies could cause government authorities to initiate legal or regulatory actions against us in connection with such incidents, which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our business practices. The risk that these types of events could seriously harm our business is likely to increase as we expand the number of web-based solutions we offer, and operate in more countries.
Real or perceived defects or errors in our solutions (particularly in our cloud-based offerings which are sometimes perceived as being inherently less secure) could result in claims by channel partners and end-customers for losses that they sustain, including potentially losses resulting from security breaches of our systems, our end-customers' networks and/or downtime of those networks. If channel partners or end-customers make these types of claims, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem, including warranty and repair costs, process management costs and costs associated with re-manufacturing our inventory. In addition, if an actual or perceived breach of security occurs in our network or in the network of a customer of one of our solutions (particularly our cloud-based offerings), regardless of whether the breach is attributable to our solutions, the market perception of the effectiveness of our solutions could be harmed. The economic costs to us to eliminate or alleviate cyber or other security problems, viruses, worms, malicious software systems and security vulnerabilities could be significant and may be difficult to anticipate or measure because the damage may differ based on the identity and motive of the programmer or hacker, which are often difficult to identify.

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Because of the nature of information that may pass through or be stored on our systems, we are subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters and violations of these complex and dynamic laws, rules and regulations may result in claims, changes to our business practices, monetary penalties, increased costs of operations, and/or other harms to our business.
There has been a sharp increase in laws in Europe, the U.S. and elsewhere imposing requirements for the handling of personal data, including data of employees, consumers and business contacts as well as privacy-related matters. For example, the State of California has adopted legislation requiring operators of commercial websites and mobile applications that collect personal information from California residents to conspicuously post and comply with privacy policies that satisfy certain requirements. Several other U.S. states have adopted legislation requiring companies to protect the security of personal information that they collect from consumers over the Internet, and more states may adopt similar legislation in the future. Foreign data protection, privacy, and other laws and regulations can be more restrictive than those in the U.S. The European Union has adopted various directives regulating data privacy and security and the transmission of content using the Internet involving residents of the European Union, including those directives known as the Data Protection Directive, the E-Privacy Directive, and the Privacy and Electronic Communications Directive, and may adopt similar directives in the future. For example, the European Commission has adopted a data protection regulation that includes operational requirements for companies that receive personal data that are different than those currently in place in the European Union, and that can include significant penalties for non-compliance. In addition, some countries are considering legislation requiring local storage and processing of data that, if enacted, could increase the cost and complexity of selling our solutions or maintaining our business operations in those jurisdictions. The introduction of new solutions or expansion of our activities in certain jurisdictions may subject us to additional laws and regulations.
These U.S. federal and state and foreign laws and regulations, which can be enforced by private parties or government entities, are constantly evolving. In addition, the application and interpretation of these laws and regulations are often uncertain, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices and may be contradictory with each other. For example, a government entity in one jurisdiction may demand the transfer of information forbidden from transfer by a government entity in another jurisdiction. If our actions were determined to be in violation of any of these disparate laws and regulations, in addition to the possibility of fines, we could be ordered to change our data practices, which could have an adverse effect on our business and results of operations.
These existing and proposed laws and regulations can be costly to comply with and can delay or impede the development of new solutions, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to inquiries or investigations, claims or other remedies, including fines or demands that we modify or cease existing business practices. In addition, there is a risk that failures in systems designed to protect private, personal or proprietary data held by us will allow such data to be disclosed to or seen by others, resulting in application of regulatory penalties, enforcement actions, remediation obligations and/or private litigation by parties whose data were improperly disclosed. There is also a risk that we (directly or as the result of some third-party service provider we use) could be found to have failed to comply with the laws or regulations of some country regarding the collection, consent, handling, transfer, or disposal of such personal data, which could subject us to fines or other sanctions, as well as adverse reputational impact.
If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.
We depend on our ability to protect our proprietary technology. We protect our proprietary information and technology through licensing agreements, third-party nondisclosure agreements and other contractual provisions, as well as through patent, trademark, copyright and trade secret laws in the U.S. and similar laws in other countries. We cannot provide assurances that these protections will be available in all cases or will be adequate to prevent our competitors from copying, reverse engineering or otherwise obtaining and using our technology, proprietary rights or solutions. For example, the laws of certain countries in which our products are manufactured or licensed do not protect our proprietary rights to the same extent as the laws of the U.S., and mechanisms for enforcement of intellectual property rights may be inadequate. In addition, we have decided, and may in the future decide, to file for intellectual property protection only in certain countries or geographic regions and thus the intellectual property rights we obtain may not adequately protect us, or may not protect us in an equivalent way, in all locations in which we do business. Also, third parties may seek to challenge, invalidate or circumvent our patents, trademarks, copyrights and trade secrets, or applications for any of the foregoing. To prevent substantial unauthorized use of our intellectual property rights, it may be necessary to prosecute actions for infringement and/or misappropriation of our proprietary rights against third parties. Any action that we initiate could result in significant costs and diversion of our resources and management's attention, and there can be no assurance that we will be successful. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

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Our use of open source software could impose limitations on our ability to commercialize our solutions.
We incorporate open source software into our solutions. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software to the public. This could allow our competitors to create similar products with lower development effort and time, and ultimately could result in a loss of solution sales for us.
Although we monitor our use of open source closely, employees may unknowing to us incorporate open source software into our products. In addition, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our solutions. We could also be subject to similar conditions or restrictions should there be any changes in the licensing terms of the open source software incorporated into our solutions. In either event, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our solutions or to discontinue the sale of our solutions in the event re-engineering cannot be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition.
We rely on the availability of third-party licenses and could be subject to product release or shipment delays if we were unable to renew existing licenses or enter into applicable licenses for product enhancements or new products.
Many of our solutions are designed to include software or other intellectual property licensed from third parties. For example, our products incorporate certain technology that we license from Qualcomm. From time to time, we may be required to seek or renew licenses relating to various aspects of these products or to seek additional licenses for product enhancements or new products. There can be no assurance that the necessary licenses would be available on acceptable terms, if at all. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could result in delays in releases or shipments until such time, if ever, as equivalent technology could be identified, licensed or developed and integrated into our solutions and might have a material adverse effect on our business, operating results, and financial condition. Moreover, the inclusion in our solutions of software or other intellectual property licensed from third parties on a nonexclusive basis could limit our ability to protect our proprietary rights in our solutions.
Enterprises are increasingly concerned with the security of their data, and to the extent they elect to encrypt data between the end user and the server, our solutions will become less effective.
Our solutions use the ability to identify applications. Our solutions currently do not identify applications if the data is encrypted as it passes through our mobility controllers. Because most organizations currently encrypt most of their data transmissions only between sites and not on the LAN, the data is not encrypted when it passes through our mobility controllers. If more organizations elect to encrypt their data transmissions from the end user to the server, the benefits provided by our solutions will be more limited unless we have been successful in incorporating additional functionality into our solutions that address those encrypted transmissions. At the same time, if our solutions do not provide the level of network security expected by our customers, our reputation and brand would be damaged, and we would expect to experience decreased sales. Our failure to provide such additional functionality and expected level of network security could adversely affect our business, operating results and financial condition.
Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by man-made problems such as computer viruses or terrorism.
Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. A significant natural disaster, such as an earthquake, fire or a flood, occurring at our headquarters or in either China or Singapore, where our major contract manufacturers and distribution centers are located, or in any region in which our major suppliers are located, could have a material adverse impact on our business, operating results and financial condition. In addition, our support operations are largely concentrated in a single location in India. A natural catastrophe in this location might bring down our support operation. Our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. In addition, natural disasters, acts of terrorism or war could cause disruptions in our or our customers' businesses or the economy as a whole. We also rely on information technology systems to communicate among our workforce and with third parties. Any disruption to our communications, whether caused by a natural disaster or by man-made problems, such as power disruptions, could adversely affect our business. To the extent that any such disruptions result in delays or cancellations of customer orders, or the deployment of our solutions, our business, operating results and financial condition would be adversely affected.

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Risks Relating to Applicable Laws and Regulations
New regulations or changes in existing regulations related to our solutions may result in unanticipated costs or liabilities, which could place additional burdens on the operations of our business and have a material adverse effect on our future sales, business and results of operations.
Our solutions are subject to governmental regulations in a variety of jurisdictions. If any of our solutions becomes subject to new regulations or if any of our products becomes specifically regulated by additional government entities, compliance with such regulations could become more burdensome, and there could be a material adverse effect on our business and results of operations. For example, radio emissions are subject to regulation in the U.S. and in other countries in which we do business. In the U.S., various federal agencies including the Center for Devices and Radiological Health of the Food and Drug Administration, the Federal Communications Commission, the Occupational Safety and Health Administration and various state agencies have promulgated regulations that concern the use of radio/electromagnetic emissions standards. Member countries of the European Union, or EU, have enacted similar standards concerning electrical safety and electromagnetic compatibility and emissions, and chemical substances and use standards.
Our wireless communication solutions operate through the transmission of radio signals. Currently, operation of these solutions in specified frequency bands does not require licensing by regulatory authorities. Regulatory changes restricting the use of frequency bands or allocating available frequencies could become more burdensome. Furthermore, regulators could seek to enforce existing laws, rules or regulations in a manner that could expose us or our customers to liability based on the manner in which our solutions are used. If any of these were to occur, there could be a material adverse effect on our future sales, business and results of operations.
The costs of compliance with numerous U.S. and foreign laws, rules and regulations are high and are likely to increase in the future. Any failure on our part to comply with these laws and regulations can result in negative publicity and diversion of management time and effort and may subject us to significant liabilities and other penalties. Furthermore, many of these laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. The laws that do reference the Internet are being interpreted by the courts, but their applicability and scope remain uncertain. Current and new patent laws such as U.S. patent laws and European patent laws may affect the ability of companies, including us, to protect their innovations and defend against claims of patent infringement. Various U.S. and international laws restrict the distribution of materials in some circumstances, including materials considered harmful to children, and impose additional restrictions on the ability of online services to collect or distribute certain information. In the area of data protection, many states have passed laws requiring notification to users when there is a security breach for personal data, such as California's Information Practices Act. We face similar risks and costs as our solutions are offered in international markets and may be subject to additional regulations.
Compliance with environmental matters and worker health and safety laws could be costly, and noncompliance with these laws could have a material adverse effect on our results of operations, expenses and financial condition.
Some of our operations use substances regulated under various federal, state, local and international laws governing the environment and worker health and safety, including those governing the discharge of pollutants into the ground, air and water, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. Some of our solutions are subject to various federal, state, local and international laws governing chemical substances in electronic products. Some of our solutions are, or may in the future be, subject to federal, state, local or international laws governing energy efficiency. We could be subject to increased costs, fines, civil or criminal sanctions, third-party property damage or personal injury claims if we violate or become liable under environmental and/or worker health and safety laws.

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We may be unable to obtain a sufficient supply of components and parts that are verified free of DRC-sourced conflict minerals, which could result in a shortage of such components and parts, reputational damages or loss of sales if we are unable to determine that our products are free of such minerals.
In 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which included disclosure requirements regarding the use of "conflict" minerals mined from the Democratic Republic of Congo and adjoining countries (or DRC) and procedures regarding a manufacturer's efforts to prevent the sourcing of such "conflict" minerals. The final rules implementing these requirements were released in August 2012, and these rules may limit the pool of suppliers who can provide us verifiable DRC Conflict Free components and parts, and we are not certain that we will be able to obtain products in sufficient quantities that meet the DRC Conflict Free determination as required by the rules in order to declare our products DRC Conflict Free. These rules have been subject to legal challenge and at least one court has held that a portion of the rules violate the First Amendment’s free speech protections, rendering compliance with the rules more complex and uncertain. Compliance with these rules has resulted in additional cost and expense, including the cost associated with the due diligence required to determine and verify the sources of any conflict minerals used in our products, and may result in additional costs of remediation and other changes to products, processes, or sources of supply as a consequence of such verification activities. These rules may also affect the sourcing and availability of minerals used in the manufacture of our products, as there may be only a limited number of suppliers offering "conflict free" metals that can be used in our products. In addition, local states and other countries in which we do business may enact legislation that bars their departments and agencies from purchasing products from companies that are unable to certify that all product components are from conflict-free sources (whether DRC or otherwise). As a result, we may face reputational challenges and the loss of sales if we are required to publicly state that we are unable to sufficiently verify the origins for the defined "conflict" metals used in our products.
Failure of our suppliers, subcontractors, distributors, resellers and representatives to use acceptable legal or ethical business practices could negatively impact our business.
It is our policy to require our suppliers, subcontractors, distributors, resellers, and third-party sales representatives to operate in compliance with applicable laws, rules and regulations regarding working conditions, employment practices, environmental compliance, anti-corruption and intellectual property licensing. However, we do not control their labor and other business practices. If one of our suppliers, subcontractors, distributors, resellers, or other representatives violates labor or other laws or implements labor or other business practices that are illegal or regarded as unethical, the shipment of finished products to us could be interrupted, orders could be canceled, relationships could be terminated and our reputation could be damaged. Furthermore, if one of our suppliers, subcontractors, distributors, resellers or other representatives were to engage in conduct without our knowledge that materially contravened an aspect of our revenue recognition policies, we could be required to delay or reverse the recognition of revenue, which could harm our results of operations. If one of our suppliers or subcontractors fails to procure necessary intellectual property licenses, legal action could be taken against us that could impact the saleability of our solutions and expose us to financial obligations to a third-party. Any of these events could have a negative impact on our sales and results of operations.
Risks Related to Ownership of our Common Stock
Our stock price may be volatile.
The trading price of our common stock has been and may continue to be volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. Factors that could affect the trading price of our common stock could include:
variations in our operating results;
announcements of technological innovations, new solutions or enhancements, strategic alliances or significant agreements by us or by our competitors;
the gain or loss of significant customers;
recruitment or departure of key personnel;
the impact of unfavorable worldwide economic and market conditions;
variations between our actual financial results and the published expectations of analysts;
developments or disputes concerning our intellectual property or other proprietary rights;
commencement of, or our involvement in, litigation;
announcements by or about us regarding events or news adverse to our business;
the loss or bankruptcy of any of our major customers, distribution partners or suppliers;
variations in the operating results of other publicly traded corporations deemed by investors to be in our peer group;
our pending acquisition by Hewlett-Packard Company or an announced acquisition of or by a competitor;
rumors and market speculation involving us or other companies in our industry;

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providing estimates of our future operating results, or changes in these estimates, either by us or by any securities analysts who follow our common stock, or changes in recommendations by any securities analysts who follow our common stock;
significant sales, or announcement of significant sales, of our common stock by us, our executives or our other stockholders;
adoption or modification of regulations, policies, procedures or programs applicable to our business; and
other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company's securities, securities class action litigation has often been instituted against these companies, including us. This type of litigation can result in substantial costs and a diversion of our management's attention and resources. All of these factors could cause the market price of our common stock to decline, and investors may lose some or all of the value of their investment.
If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Provisions in our charter documents, Delaware law, and employment arrangements with certain of our executives could discourage a takeover that stockholders may consider favorable.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:
our Board of Directors has the right to elect directors to fill a vacancy created by the expansion of the Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors;
our stockholders may not act by written consent or call special stockholders' meetings; as a result, a holder, or holders, controlling a majority of our capital stock would not be able to take certain actions other than at annual stockholders' meetings or special stockholders' meetings called by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President;
our certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
stockholders must provide advance notice and additional disclosures in order to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders' meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer's own slate of directors or otherwise attempting to obtain control of our company; and
our Board of Directors may issue, without stockholder approval, shares of undesignated preferred stock; the ability to issue undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.
As a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the Board of Directors has approved the transaction. Our Board of Directors could rely on Delaware law to prevent or delay an acquisition of us.
Certain of our executives may be entitled to accelerated vesting of their stock awards and/or cash compensation pursuant to the terms of their employment arrangements upon a change of control of our company. In addition to the arrangements currently in place with some of our executives, we may enter into similar arrangements in the future with other executives. Such arrangements could delay or discourage a potential acquisition of our company.

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We are required to evaluate our internal control over financial reporting under the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.
The Sarbanes-Oxley Act requires us to furnish a report by our management on our internal control over financial reporting. Such report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. We must continue to monitor, enhance and assess our internal control over financial reporting. If we are unable to assert in any future reporting period that our internal control over financial reporting is effective (or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price.


68



Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
(a)
Sales of Unregistered Securities
None.
(b)
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
As of January 31, 2015, our Board of Directors had authorized a stock repurchase program for an aggregate amount of up to $500.0 million (consisting of an original $100.0 million authorization on June 13, 2012, plus subsequent authorizations of $100.0 million on July 15, 2013, $100.0 million on October 9, 2013, and $200.0 million on February 20, 2014).
We are authorized to make repurchases in the market until our Board of Directors terminates the program or until such repurchases reach the authorized amount, whichever occurs first. Any repurchases under the program will be funded either from available working capital or external financing. The number of shares repurchased and the timing of repurchases are based on the price of our common stock, general business and market conditions, and other investment considerations. Shares are retired upon repurchase. Our policy related to repurchases of our common stock is to charge any excess of cost over par value entirely to additional paid-in capital.
The following table summarizes share repurchase activity for the three months ended January 31, 2015 (in thousands, except number of shares and per share amounts):
Period
 
Total Number of
Shares Purchased
 
Average Price
Paid
Per Share
 
Total Number of
Shares Purchased As Part
of Publicly Announced Program
 
Maximum Approximate
Dollar Value of Shares
That May Yet Be Purchased
Under the Program
November 1, 2014 - November 30, 2014
 

 
$

 

 
$
105,876

December 1, 2014 - December 31, 2014
 
4,181,863

 
19.13

 
4,181,863

 
25,876

January 1, 2015 - January 31, 2015
 

 

 

 
$
25,876

Total
 
4,181,863

 
$
19.13

 
4,181,863

 
 

Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Mine Safety Disclosure
Not applicable.
Item 5.
Other Information
None.


69



Item 6.
Exhibits
The following documents are filed as Exhibits to this report:
 
 
Exhibit
Number
Description
 
 
2.1
Agreement and Plan of Merger, dated as of March 2, 2015, by and among Hewlett-Packard Company, Aspen Acquisition Sub, Inc., and Aruba Networks, Inc. (incorporated herein by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, Commission File No. 001-33347, filed on March 3, 2015).
 
 
3.1
Amendment to the Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, Commission File No. 001-33347, filed on March 3, 2015).
 
 
10.1
Amendment 9 to the Avnet Distributor Agreement, effective as of September 19, 2014, between the Company and Avnet, Inc.
 
 
31.1
Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
 
 
31.2
Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.CAL
XBRL Taxonomy Calculation Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document


70



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: March 10, 2015
 
ARUBA NETWORKS, INC.
 
 
By:
/s/ Dominic P. Orr
 
Dominic P. Orr
 
President and Chief Executive Officer
(Principal Executive Officer)
Dated: March 10, 2015
 
ARUBA NETWORKS, INC.
 
 
By:
/s/ Michael M. Galvin
 
Michael M. Galvin
 
Chief Financial Officer
(Principal Financial Officer)


71



Exhibit 3.1

AMENDMENT NO. 9 TO THE AVNET, INC. DISTRIBUTOR AGREEMENT
(SLED)

This Amendment No. 9 (“the Amendment”) to the Distributor Agreement dated June 15, 2007 between Supplier and Avnet, Inc. (“Agreement”) is made effective as of the date of the last signature below (the “Effective Date”) by and between Avnet, Inc., a New York corporation, doing business through its business group, Avnet Technology Solutions with its principal place of business at 8700 South Price Road, Tempe, Arizona 85284 (“Distributor”), and Aruba Networks, Inc. having its principal place of business at 1344 Crossman Ave., Sunnyvale, CA 94089 (“Supplier”). In addition to the requirements in the Agreement, this Amendment sets forth the terms and conditions governing Distributor’s resale of Products to the state and local government and educational institutions end users (“SLED”), through authorized resellers. All capitalized terms contained herein shall have the same meaning as the terms defined in the Agreement unless specifically modified in this Amendment.

1.
DEFINITIONS
SLED refers to the state government, local government and educational institutions (SLED) and their agencies when such entity is clearly identified in the request for quote or purchase order. Sales to the SLED include sales to SLED end users whether through resellers who are prime contractors or higher tier subcontractors.

2.
TERMS
2.1 By this Amendment, Distributor appoints Avnet Government Solutions, LLC (AGS), its wholly owned subsidiary, as the entity of Distributor that is authorized to distribute Products and Services for resale to the SLED through authorized resellers. The parties intend that all of Distributor’s orders for SLED customers will be issued to Supplier by AGS. The parties agree that all terms and conditions of the Agreement will fully apply to AGS as if AGS were expressly identified as Distributor thereunder, and AGS agrees to be bound by and fully comply with the Agreement.

2.2. Supplier is a provider of commercial goods and services under this Amendment. Supplier will provide commercial products and services for ultimate SLED end use solely in accordance with the technical data and software rights customarily provided to the public by the Supplier as defined in the Supplier’s standard technical documentation and software licenses. 

2.3 Supplier will provide country of origin for all products upon request.

2.4 In fulfillment of orders, Supplier shall supply new products, subject to Supplier’s then current standard product warranties. This does not apply to products returned under Supplier’s warranty program.

2.5 This Amendment and the Agreement constitute the entire understanding and agreement between the parties relating to the subject matter hereof and supersede any and all prior contracts, agreements or understandings – whether written or oral – relating to the subject matter hereof. Except as provided herein, all other terms and conditions of the Agreement shall remain in full force and effect.





2.6 This Amendment may be executed in any number of counterparts, each of which shall be considered an original and each counterpart signature when taken together shall constitute one and the same instrument.


IN WITNESS WHEREOF, the parties hereto have each duly executed this Amendment effective as of the Effective Date. Each party warrants and represents that its respective signatories whose signatures appear below have been and are, on the date of signature, authorized to execute this Amendment.


Aruba Networks, Inc.
Avnet, Inc. through its Avnet Technology
Solutions

By: /s/ Joshua Cash
By: /s/ Chuck Fries
Name: Joshua Cash
Name: Chuck Fries
Title: Director, Commercial Counsel
Title: VP of Material Operations, TS
Date: September 19, 2014
Date: December 5, 2014
 
 
 
Avnet Government Solutions, LLC
 
By: /s/ Raymond E. Ramey
 
Name: Raymond E. Ramey
 
Title: Vice President & General Manager
 
Date: December 5, 2014


    




Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dominic P. Orr, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Aruba Networks, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptable accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:
March 10, 2015
/s/ Dominic P. Orr
 
 
Dominic P. Orr
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)





Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael M. Galvin, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Aruba Networks, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptable accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:
March 10, 2015
/s/ Michael M. Galvin
 
 
Michael M. Galvin
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)




Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, Dominic P. Orr, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Aruba Networks, Inc., on Form 10-Q for the quarterly report period ended January 31, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Aruba Networks, Inc.
Date:
March 10, 2015
/s/ Dominic P. Orr
 
 
Dominic P. Orr
 
 
President and Chief Executive Officer
(Principal Executive Officer)

I, Michael M. Galvin, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Aruba Networks, Inc., on Form 10-Q for the quarterly report period ended January 31, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Aruba Networks, Inc.
Date:
March 10, 2015
/s/ Michael M. Galvin
 
 
Michael M. Galvin
 
 
Chief Financial Officer
(Principal Financial Officer)