Edgar Filing: Riverbed Technology, Inc.

RVBD - 6.30.2012 - 10Q

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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 June 30, 2012

o 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: 001-33023

_____________________________________________

Riverbed Technology, Inc.

(Exact name of registrant as specified in its charter)

_____________________________________________



Delaware		03-0448754
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

199 Fremont Street

San Francisco, California 94105

(Address of Principal Executive Offices including Zip Code)

(415) 247-8800

(Registrant’s Telephone Number, Including Area Code)

_____________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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. (Check one):



Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act). Yes o No x

The number of shares of the registrant’s common stock, par value $0.0001, outstanding as of July 24, 2012 was: 154,272,280.

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RIVERBED TECHNOLOGY, INC.

INDEX



		Page No.
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011	3

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011	4

	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011	5

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 6.	Exhibits	50

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Item 1.	Financial Statements

RIVERBED TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of June 30, 2012 and December 31, 2011

(in thousands, except par value)



	June 30, 2012			December 31, 2011
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	185,019		$	215,476
Short-term investments	242,493			254,753
Trade receivables, net of allowances of $1,168 and $1,586 as of June 30, 2012 and December 31, 2011, respectively	85,142			78,016
Inventory	18,230			11,437
Deferred tax assets	15,499			16,783
Prepaid expenses and other current assets	38,874			35,078
Total current assets	585,257			611,543
Long-term investments	122,674			123,134
Fixed assets, net	32,732			29,277
Goodwill	117,626			117,474
Intangibles, net	62,810			68,274
Deferred tax assets, non-current	56,485			56,708
Other assets	24,366			24,789
Total assets	$	1,001,950		$	1,031,199
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	33,667		$	35,341
Accrued compensation and benefits	29,269			61,256
Other accrued liabilities	27,319			42,959
Deferred revenue	134,010			121,131
Total current liabilities	224,265			260,687
Deferred revenue, non-current	39,308			36,248
Other long-term liabilities	24,612			23,200
Total long-term liabilities	63,920			59,448
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.0001 par value – 30,000 shares authorized, no shares outstanding	—			—
Common stock and additional paid-in capital; $0.0001 par value – 600,000 shares authorized; 154,206 and 157,454 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively	607,890			631,921
Retained earnings	108,199			83,116
Accumulated other comprehensive loss	(2,324		)	(3,973		)
Total stockholders’ equity	713,765			711,064
Total liabilities and stockholders’ equity	$	1,001,950		$	1,031,199

See Notes to Condensed Consolidated Financial Statements.

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RIVERBED TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)



	Three months ended June 30,					Six months ended June 30,
	2012			2011		2012			2011
Revenue:
Product	$	129,369		$	116,860	$	246,403		$	229,012
Support and services	69,099			53,435		134,478			104,846
Total revenue	198,468			170,295		380,881			333,858
Cost of revenue:
Cost of product	30,538			23,683		58,427			47,418
Cost of support and services	19,258			16,415		38,040			31,635
Total cost of revenue	49,796			40,098		96,467			79,053
Gross profit	148,672			130,197		284,414			254,805
Operating expenses:
Sales and marketing	77,366			63,737		151,181			124,821
Research and development	35,802			29,942		69,913			58,251
General and administrative	15,492			14,913		30,126			28,596
Acquisition-related costs (credits)	(10,196		)	1,392		(9,640		)	1,392
Total operating expenses	118,464			109,984		241,580			213,060
Operating income	30,208			20,213		42,834			41,745
Other income (expense), net	259			341		(1,246		)	839
Income before provision for income taxes	30,467			20,554		41,588			42,584
Provision for income taxes	12,333			9,271		16,505			18,256
Net income	$	18,134		$	11,283	$	25,083		$	24,328
Net income per common share:
Basic	$	0.12		$	0.07	$	0.16		$	0.16
Diluted	$	0.11		$	0.07	$	0.15		$	0.15
Shares used in computing net income per common share:
Basic	157,261			154,543		157,559			153,288
Diluted	165,253			167,270		166,381			166,865

See Notes to Condensed Consolidated Financial Statements.

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RIVERBED TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)



	Three months ended June 30,					Six months ended June 30,
	2012			2011		2012			2011
Net income	$	18,134		$	11,283	$	25,083		$	24,328
Unrealized gain (loss) on investments, net of tax	(46		)	80		(54		)	63
Foreign currency translation adjustment	(496		)	141		1,700			434
Derivative instruments gain (loss), net of tax	(19		)	—		3			—
Comprehensive income	$	17,573		$	11,504	$	26,732		$	24,825

See Notes to Condensed Consolidated Financial Statements.

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RIVERBED TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



	Six months ended June 30,
	2012			2011
Operating Activities:
Net income	$	25,083		$	24,328
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	18,455			9,718
Stock-based compensation	45,918			45,496
Deferred taxes	1,735			(3,624		)
Excess tax benefit from employee stock plans	(12,170		)	(34,221		)
Changes in operating assets and liabilities:
Trade receivables	(7,126		)	(19,717		)
Inventory	(6,682		)	201
Prepaid expenses and other assets	(838		)	(24,899		)
Accounts payable	(618		)	3,505
Accrued and other liabilities	(34,729		)	2,995
Acquisition-related contingent consideration liability	(11,682		)	—
Income taxes payable	12,125			34,807
Deferred revenue	15,939			18,131
Net cash provided by operating activities	45,410			56,720
Investing Activities:
Capital expenditures	(11,305		)	(7,010		)
Purchase of available for sale securities	(297,154		)	(351,905		)
Proceeds from maturities of available for sale securities	225,202			162,993
Proceeds from sales of available for sale securities	82,051			91,783
Acquisitions, net of cash and cash equivalents acquired	(6,458		)	—
Net cash used in investing activities	(7,664		)	(104,139		)
Financing Activities:
Proceeds from issuance of common stock under employee stock plans, net of repurchases	23,613			38,024
Taxes paid related to net shares settlement of equity awards	(4,278		)	(10,088		)
Payments for repurchases of common stock	(101,408		)	—
Excess tax benefit from employee stock plans	12,170			34,221
Net cash (used in) provided by financing activities	(69,903		)	62,157
Effect of exchange rate changes on cash and cash equivalents	1,700			434
Net (decrease) increase in cash and cash equivalents	(30,457		)	15,172
Cash and cash equivalents at beginning of period	215,476			165,726
Cash and cash equivalents at end of period	$	185,019		$	180,898

See Notes to Condensed Consolidated Financial Statements.

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RIVERBED TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization

Riverbed Technology, Inc. was founded on May 23, 2002 and has developed innovative and comprehensive solutions to the fundamental problems associated with IT performance across wide area networks (WANs). Our portfolio of IT performance products enable our customers to simply and efficiently improve the performance of their applications and access to their data over WANs, and provide global application performance, reporting and analytics, application delivery control and cloud storage.

Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated. The accompanying condensed consolidated balance sheet as of June 30, 2012, the condensed consolidated statements of operations for the three and six months ended June 30, 2012 and 2011, the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2012 and 2011, and the condensed consolidated statements of cash flows for the six months ended June 30, 2012 and 2011 are unaudited. The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

The accompanying condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). They do not include all of the financial information and footnotes required by GAAP for complete financial statements. We believe the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments necessary for the fair presentation of our balance sheet as of June 30, 2012, and our results of operations, comprehensive income and cash flows for the three and six months ended June 30, 2012 and 2011. All adjustments are of a normal recurring nature. The results for the six months ended June 30, 2012 are not necessarily indicative of the results to be expected for any subsequent quarter or for the year ending December 31, 2012.

There have been no significant changes in our accounting policies during the three and six months ended June 30, 2012, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2011.

Use of Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP. These accounting principles require us to make certain estimates and judgments that can 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. Significant estimates and assumptions made by management include the determination of the fair value of stock awards issued, inventory valuation, the accounting for income taxes, including the determination of the timing of the establishment or release of our valuation allowance related to our deferred tax asset balances and reserves for uncertain tax positions, the accounting for business combinations and the accounting for acquisition-related contingent consideration. 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 were made. To the extent there are material differences between these estimates and actual results, our condensed consolidated financial statements will be affected.

Subsequent Events

We have evaluated subsequent events through the date these condensed consolidated financial statements were issued.

Revenue Recognition

We recognize revenue when all of the following have occurred: (1) we have entered into a legally binding arrangement with a customer; (2) delivery has occurred; (3) customer payment is deemed fixed or determinable and free of contingencies and significant uncertainties; and (4) collection is reasonably assured.

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The majority of our product revenue includes hardware appliances containing software components that function together to provide the essential functionality of the product. Therefore, our hardware appliances are considered non-software deliverables. Most non-software products and services qualify as separate units of accounting because they have value to the customer on a standalone basis and our revenue arrangements generally do not include a general right of return relative to delivered products. We account for non-software arrangements with multiple deliverables, which generally include support services sold with each of our hardware appliances, using the relative selling price method under the revenue recognition guidance for multiple deliverable arrangements.

Our product revenue also includes revenue from the sale of stand-alone software products. Stand-alone software may operate on our hardware appliance, but is not considered essential to the functionality of the hardware. Stand-alone software products generally include a perpetual license to our software. Stand-alone software sales are subject to the industry specific software revenue recognition guidance.

Certain arrangements with multiple deliverables may have stand-alone software deliverables that are subject to the software revenue recognition guidance along with non-software deliverables. The revenue for these multiple deliverable arrangements is allocated to the stand-alone software deliverables as a group and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement.

The amount of product and services revenue recognized for arrangements with multiple deliverables is impacted by our valuation of relative selling prices. We apply the selling price hierarchy using vendor specific objective evidence (VSOE) when available, third-party evidence of selling price (TPE) if VSOE does not exist, and estimated selling price (ESP) if neither VSOE nor TPE is available.

VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for a deliverable when sold separately, and VSOE for support services is further measured by the renewal rate offered to the customer. In determining VSOE, we require that a substantial majority of the selling prices fall within a reasonably narrow pricing range, generally evidenced by a substantial majority of such historical stand-alone transactions falling within a reasonably narrow range of the median rates. In addition, we consider major service groups, geographies, customer classifications, and other variables in determining VSOE.

We are typically not able to determine TPE for our products or services. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis.

When we are unable to establish the estimated stand-alone value of our non-software deliverables using VSOE or TPE, we use ESP in our allocation of arrangement consideration. The objective of ESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We determine ESP for a product or service by considering multiple factors including, but not limited to, cost of products, gross margin objectives, pricing practices, geographies, customer classes and distribution channels.

For stand-alone software sales, we recognize revenue based on software revenue recognition guidance. Under the software revenue recognition guidance, we use the residual method to recognize revenue when an agreement includes one or more elements to be delivered at a future date and VSOE of the fair value of all undelivered elements exists. In the majority of our contracts, the only element that remains undelivered at the time of delivery of the product is support services. Under the residual method, the fair value of the undelivered stand-alone software which is typically support services is deferred and the remaining portion of the contract fee is recognized as product revenue. If evidence of the fair value of one or more undelivered stand-alone software elements does not exist, all revenue is generally deferred and recognized when delivery of those elements occurs or when fair value can be established. When the undelivered stand-alone software for which we do not have VSOE of fair value is support, revenue for the entire arrangement is bundled and recognized ratably over the support period.

For our non-software deliverables, we allocate the arrangement consideration based on the relative selling price of the deliverables. For our hardware appliances we use the ESP of the deliverable. For our support and services, we generally use VSOE as our relative selling price. When we are unable to establish VSOE for our support and services, we use ESP in our allocation of arrangement consideration. We regularly review VSOE and ESP. As our go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes in selling prices, including both VSOE and ESP.

For sales to direct end-users and channel partners, including value-added resellers, value-added distributors, service providers, and systems integrators, we recognize product revenue upon delivery, assuming all other revenue recognition criteria

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are met. For our hardware appliances, delivery occurs upon transfer of title and risk of loss, which is generally upon shipment. It is our practice to identify an end-user prior to shipment to a channel partner. For end-users and channel partners, we generally have no significant obligations for future performance such as rights of return or pricing credits. Shipping charges billed to customers are included in product revenue and the related shipping costs are included in cost of product revenue.

Support and services consist of support services, professional services, and training. Support services include repair and replacement of defective hardware appliances, software updates and access to technical support personnel. Software updates provide customers with rights to unspecified software product upgrades and to maintenance releases and patches released during the term of the support period. Revenue for support services is recognized on a straight-line basis over the service contract term, which is typically one to three years. Professional services are recognized upon delivery or completion of performance. Professional service arrangements are typically short term in nature and are largely completed within 90 days from the start of service. Training services are recognized upon delivery of the training.

Our fees are typically considered to be fixed or determinable at the inception of an arrangement, generally based on specific products and quantities to be delivered. Substantially all of our contracts do not include rights of return or acceptance provisions. To the extent that our agreements contain such terms, we recognize revenue once the acceptance provisions or right of return lapses. Payment terms to customers generally range from net 30 to 75 days. In the event payment terms are provided that differ from our standard business practices, the fees are deemed to not be fixed or determinable and revenue is recognized when the payments become due, provided the remaining criteria for revenue recognition have been met.

We assess the ability to collect from our customers based on a number of factors, including credit worthiness of the customer and past transaction history of the customer. If the customer is not deemed credit worthy, we defer revenue from the arrangement until payment is received and all other revenue recognition criteria have been met.

Inventory Valuation

Inventory consists of hardware and related component parts and is stated at the lower of cost (on a first-in, first-out basis) or market. A portion of our inventory relates to evaluation units located at customer locations, as some of our customers test our equipment prior to purchasing. Inventory that is obsolete or in excess of our forecasted demand is written down to its estimated realizable value based on historical usage, expected demand, and with respect to evaluation units, the historical conversion rate, the age of the units, and the estimated loss of utility. Inherent in our estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for our products, the timing of new product introductions and technological obsolescence of our products. Inventory write-downs are recognized as cost of product and amounted to $1.4 million and $1.7 million in the three months ended June 30, 2012 and 2011, respectively, and $3.2 million in each of the six months ended June 30, 2012 and 2011.

Service Inventory

We hold service inventory that is used to repair or replace defective hardware reported by our customers who purchase support services. We classify service inventory as Prepaid expenses and other current assets. At June 30, 2012 and December 31, 2011, our service inventory balance was $12.2 million and $9.3 million, respectively.

Stock-Based Compensation

Stock-based awards granted include stock options, restricted stock units (RSUs), and stock purchased under our Employee Stock Purchase Plan (the Purchase Plan). Stock-based compensation cost is measured at the grant date, based on the fair value of the awards, and is recognized as expense over the requisite service period only for those equity awards expected to vest.

The fair value of the RSUs is determined based on the stock price on the date of grant. The fair value of the RSUs is amortized on a straight-line basis over the requisite service period of the awards, which is generally three to four years. We estimated the fair value of stock options and stock purchased under our Purchase Plan, using the Black-Scholes model. This model utilizes the estimated fair value of common stock and requires that, at the date of grant, we use the expected term of the grant, the expected volatility of the price of our common stock, risk-free interest rates and expected dividend yield of our common stock. The fair value is amortized on a straight-line basis over the requisite service periods of the awards, which is generally three to four years for stock options, and six months to two years for options to purchase stock under our Purchase Plan.

Accounting for Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, income tax expenses or benefits are recognized for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for

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the expected tax consequences of temporary differences between the tax bases of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. The measurement of current and deferred tax assets and liabilities are based on provisions of currently enacted tax laws. The effects of future changes in tax laws or rates are not contemplated.

As part of the process of preparing our condensed consolidated financial statements, we are required to estimate our income tax expense and tax contingencies in each of the tax jurisdictions in which we operate. This process involves estimating current income tax expense together with assessing temporary differences in the treatment of items for tax purposes versus financial accounting purposes that may create net deferred tax assets and liabilities. We rely on estimates and assumptions in preparing our income tax provision.

We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earning experience by jurisdiction, expectations of future taxable income, and the carryforward periods available to us for tax reporting purposes, as well as other relevant factors. We may establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. Due to inherent complexities arising from the nature of our businesses, future changes in income tax law, or variances between our actual and anticipated operating results, we make certain judgments and estimates. Therefore, actual income taxes could materially vary from these estimates.

We are subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain tax positions we have taken, such as the timing and amount of deductions and allocation of taxable income to the various tax jurisdictions. The accounting for income tax contingencies may require significant management judgment in estimating final outcomes. Actual results could differ materially from these estimates and could significantly affect the effective tax rate and cash flows in future years. We have elected to record interest and penalties in the financial statements as a component of income taxes.

Goodwill, Intangible Assets and Impairment Assessments

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. Goodwill is tested for impairment at least annually (more frequently if certain indicators are present). In the event that we determine that the carrying value of our single reporting unit is less than the reporting unit’s fair value, we will incur an impairment charge for the amount of the difference during the quarter in which the determination is made.

Intangible assets that are not considered to have an indefinite life are amortized over their useful lives. On a periodic basis, we evaluate the estimated remaining useful life of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. The carrying amounts of these assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. In the event that we determine certain assets are not fully recoverable, we will incur an impairment charge for those assets or portion thereof during the quarter in which the determination is made.

Recoverability of indefinite lived intangible assets is measured by comparison of the carrying amount of the asset to the future discounted cash flow the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired assets. No material impairments of intangible assets were identified during any of the periods presented.

Business Combinations

In our business combinations, we are required to recognize all the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. Further, acquisition-related costs are recognized separately from the acquisition and expensed as incurred; restructuring costs are generally expensed in periods subsequent to the acquisition date; changes in the estimated fair value of contingent consideration after the initial measurement on the acquisition date are recognized in earnings in the period of the change in estimate; and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period are recognized as a component of provision for taxes. In addition, the fair value of in-process research and development is recorded as an indefinite-lived intangible asset until the underlying project is completed, at which time the intangible asset is amortized over its estimated useful life, or abandoned, at which time the intangible asset is expensed.

Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, estimated contingent consideration payments and pre-acquisition contingencies.

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Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired company and are inherently uncertain. Examples of critical estimates in accounting for acquisitions include but are not limited to:


•	the estimated fair value of the acquisition-related contingent consideration, which is performed using a probability-weighted discounted cash flow model based upon the forecasted achievement of post-acquisition bookings targets;


•	the future expected cost to develop the in-process research and development into commercially viable products and the estimated cash flows from the products when completed;


•	the future expected cash flows from product sales, support agreements, consulting contracts, other customer contracts and acquired developed technologies and patents; and


•	the discount rates.

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

Derivative Financial Instruments

We use derivative instruments to manage our short-term exposures to fluctuations in foreign currency exchange rates, which exist as part of ongoing business operations. Our general practice is to hedge a majority of transaction exposures denominated in British pounds, euros, and Singapore dollars. These instruments have maturities between one to three months in the future. We do not enter into any derivative instruments for trading or speculative purposes.

We account for our derivative instruments as either assets or liabilities on the balance sheet and carry them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. Derivatives that qualify for hedge accounting are initially included in Accumulated other comprehensive income (loss) and subsequently reclassified into earnings upon the occurrence of the forecasted transactions to which they hedge. Derivatives that do not qualify for hedge accounting are adjusted to fair value each period through earnings.

Concentrations of Risk

Financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities, and trade receivables. Investment policies have been implemented that limit investments to investment grade securities. The average portfolio maturity is currently less than a year. The risk with respect to trade receivables is mitigated by credit evaluations we perform on our customers and by the diversification of our customer base. One value-added distributor, Arrow Enterprise Computing Solutions, Inc. (Arrow), accounted for 11% and 14% of our trade receivable balance as of June 30, 2012 and December 31, 2011, respectively. Two value-added distributors, Arrow and Avnet, Inc., represented 17% and 10%, respectively, of our revenue for the three and six months ended June 30, 2012. One value-added distributor, Arrow, represented 15% of our revenue for the three and six months ended June 30, 2011.

We outsource the production of our inventory to third-party manufacturers. We rely on purchase orders or long-term contracts with our contract manufacturers. At June 30, 2012, we had no long-term contractual commitment with any manufacturer; however, we did have a 90 day commitment totaling $10.3 million.

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board issued Accounting Standard Update (ASU) No. 2011-11, Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities (ASU 2011-11), that requires an entity to disclose additional information about offsetting and related arrangements to enable users of the financial statements to understand the effect of those arrangements on the financial position. ASU 2011-11 will be effective for us in fiscal 2013 and any related disclosures required will be applied retrospectively. We believe that the adoption of ASU 2011-11 may impact future disclosures but will not impact our consolidated financial statements.


2.	ACQUISITIONS

Fiscal 2012 Acquisitions

On January 11, 2012, we entered into an agreement to purchase certain assets of Expand Networks Ltd. (Expand), including its intellectual property, for $6.5 million. We did not purchase the corporate entity of Expand and have not assumed any of Expand's liabilities or obligations. We did not consider this acquisition significant.

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Fiscal 2011 Acquisitions

Zeus Technology, Ltd.

In July 2011, we acquired the outstanding securities of Zeus Technology Ltd. (Zeus). The acquisition expanded our products and technology to compete in the virtual application delivery controller (ADC) market. Zeus pioneered the development of software-based highly scalable ADCs that deliver high-performance software-based load balancing and traffic management solutions for virtual and cloud environments. We have included the financial results of Zeus in our consolidated financial statements from the acquisition date.

Pursuant to the share purchase agreement with Zeus we made payments totaling $105.6 million in cash for all of the outstanding securities of Zeus on July 19, 2011. In addition, we will potentially make additional payments (acquisition-related contingent consideration) totaling up to $27.0 million in cash, based on achievement of certain bookings targets related to Zeus products for the period from July 20, 2011 through July 31, 2012 (the Zeus Earn-Out period). In addition, we may pay up to $3.0 million as an incentive bonus to former employees of Zeus, based on achievement of certain bookings targets related to Zeus products for the Zeus Earn-Out period.

Fair Value of Consideration Transferred

The total acquisition date fair value of the consideration transferred was estimated at $119.1 million, which included the initial payments totaling $105.6 million in cash and a liability of $13.5 million for the acquisition date fair value of the acquisition-related contingent consideration. Any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in our estimate of the bookings targets, will be recognized in earnings in the period the estimated fair value changes. The fair value estimate is based on the probability weighted bookings to be achieved over the Zeus Earn-Out period. Actual achievement of bookings below $25.0 million would reduce the liability to zero and achievement of bookings of $40.0 million or more would increase the liability to $27.0 million. A change in fair value of the acquisition-related contingent consideration could have a material effect on the statement of operations and financial position in the period of the change in estimate.

We estimated the fair value of the acquisition-related contingent consideration using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value. The estimated fair value of acquisition-related contingent consideration of $13.5 million included amounts to be distributed directly to shareholders, discounted at 17.5%, but excluded a fair value estimate of $1.7 million to be paid to former employees of Zeus. During the three and six months ended June 30, 2012, we reduced the contingent consideration liability by $11.3 million and $10.2 million, respectively, which was recorded in Acquisition-related costs (credits), due to changes in the fair value of acquisition-related contingent consideration to be distributed directly to former Zeus shareholders. As of June 30, 2012, the acquisition-related contingent consideration liability to Zeus shareholders is $4.2 million.

At the acquisition date, we estimated the fair value of an incentive bonus to be paid to the former employees of Zeus (Zeus incentive bonus) to be $1.7 million. This fair value was also estimated using a probability-weighted discounted cash flow model on the achievement of the bookings target. No liability for the Zeus incentive bonus was recorded as of the acquisition date, as this component is considered compensatory and is being recognized as compensation cost in operating expense ratably over the service period from July 20, 2011 to July 31, 2012. As of June 30, 2012, we estimated the fair value of the incentive bonus to be paid to the former employees of Zeus to be $0.3 million. During the three and six months ended June 30, 2012, we recorded credits to acquisition-related compensation cost of $0.6 million, and $0.4 million, respectively, for the incentive bonus to be paid to the former employees of Zeus.

In addition, we signed retention agreements for certain key employees of Zeus totaling $1.2 million, which will be recognized as compensation expense ratably over the two year period following the acquisition date.

Aptimize Ltd.

In July 2011, we acquired the outstanding securities of Aptimize Ltd. (Aptimize) to expand our product offerings. We have included the financial results of Aptimize in our consolidated results from the acquisition date. This acquisition was not significant, and therefore the pro forma results of operations have not been presented.

Pursuant to the share purchase agreement with Aptimize we made payments totaling $17.3 million in cash for all of the outstanding securities of Aptimize. In addition, we will potentially make additional payments (acquisition-related contingent consideration) totaling up to $17.0 million in cash to be paid to Aptimize shareholders, based on achievement of certain bookings targets related to Aptimize products for the period from September 1, 2011 through September 30, 2012. There was

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no change in the acquisition-related contingent consideration for Aptimize shareholders in the three months ended June 30, 2012. During the six months ended June 30, 2012, we reduced the contingent consideration liability by $1.1 million, which was recorded in Acquisition-related costs (credits), due to a change in the fair value of acquisition-related contingent consideration to be distributed directly to former Aptimize shareholders. As of June 30, 2012, the acquisition-related contingent consideration liability to Aptimize shareholders is zero.

Pre-Acquisition Contingencies

For a given acquisition, we may identify certain pre-acquisition contingencies that existed at the acquisition date and may extend our review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess whether we can reasonably determine the fair value of these contingencies by the end of the measurement period.

During the measurement period, we will recognize an asset or a liability with a corresponding adjustment to goodwill for such pre-acquisition contingency if: (i) it is probable that an asset existed or a liability had been incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated. Subsequent to the measurement period, changes in our estimates of such contingencies will affect earnings and could have a material effect on our results of operations and financial position.

Acquisition-related Costs (Credits)

Acquisition-related costs (credits) include transaction costs, integration and other acquisition-related costs and changes in the fair value of the acquisition-related contingent consideration. During the three and six months ended June 30, 2012, we recorded transaction costs and integration and other acquisition-related costs of $1.1 million and $1.6 million, respectively. We recorded a credit of $11.3 million and $10.2 million, respectively, related to change in fair value of the acquisition-related contingent consideration to be paid directly to the Zeus shareholders for the three and six months ended June 30, 2012. During the six months ended June 30, 2012, we recorded a credit of $1.1 million related to change in fair value of the acquisition-related contingent consideration to be paid directly to the Aptimize shareholders. There was no change in the fair value of the acquisition-related contingent consideration to be paid directly to the Aptimize shareholders during the three months ended June 30, 2012.


3.	NET INCOME PER COMMON SHARE

Basic net income per common share is computed by dividing net income by the weighted average number of vested common shares outstanding during the period. Diluted net income per common share is computed by giving effect to all potential dilutive common shares, including stock awards. The following table sets forth the computation of net income per share:



	Three months ended June 30,				Six months ended June 30,
(in thousands, except per share data)	2012		2011		2012		2011
Net income	$	18,134	$	11,283	$	25,083	$	24,328
Weighted average common shares outstanding - basic	157,261		154,543		157,559		153,288
Dilutive effect of employee stock plans	7,992		12,727		8,822		13,577
Weighted average common shares outstanding - diluted	165,253		167,270		166,381		166,865
Basic net income per share	$	0.12	$	0.07	$	0.16	$	0.16
Diluted net income per share	$	0.11	$	0.07	$	0.15	$	0.15

Stock options outstanding with an exercise price higher than our average stock price for the periods presented, represent out-of-the-money awards and are excluded from the calculations of the diluted net income per share since the effect would have been anti-dilutive under the treasury stock method.

The following weighted average outstanding options were excluded from the computation of diluted net income per common share for the periods presented because including them would have had an anti-dilutive effect:



	Three months ended June 30,		Six months ended June 30,
(in thousands)	2012	2011	2012	2011
Total potential anti-dilutive shares of common stock	7,775	1,548	7,508	1,267

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4.	FAIR VALUE OF ASSETS

As of June 30, 2012, the fair value measurements of our cash, cash equivalents and investments, derivative assets and acquisition-related contingent consideration consisted of the following:



(in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Corporate bonds and notes	$	45,637	$	—	$	45,637	$	—
U.S. government-sponsored enterprise obligations	29,992		—		29,992		—
Money market funds	38,791		38,791		—		—
FDIC-backed certificates of deposit	240		—		240		—
Cash	70,359		—		—		—
Total cash and cash equivalents	$	185,019	$	38,791	$	75,869	$	—
Corporate bonds and notes	$	63,781	$	—	$	63,781	$	—
U.S. government backed securities	14,015		14,015		—		—
U.S. government-sponsored enterprise obligations	277,798		—		277,798		—
FDIC-backed certificates of deposit	9,573		—		9,573		—
Total investments	$	365,167	$	14,015	$	351,152	$	—
Derivative asset	$	31	$	—	$	31	$	—
Liabilities:
Derivative liability	$	167	$	—	$	167	$	—
Acquisition-related contingent consideration	$	4,199	$	—	$	—	$	4,199

As of December 31, 2011, the fair value measurements of our cash, cash equivalents and investments and acquisition-related contingent consideration consisted of the following:



(in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Corporate bonds and notes	$	18,000	$	—	$	18,000	$	—
U.S. government-sponsored enterprise obligations	12,649		—		12,649		—
Money market funds	57,702		57,702		—		—
FDIC-backed certificates of deposit	481		—		481		—
Cash	126,644		—		—		—
Total cash and cash equivalents	$	215,476	$	57,702	$	31,130	$	—
Corporate bonds and notes	$	95,104	$	—	$	95,104	$	—
U.S. government backed securities	16,106		16,106		—		—
U.S. government-sponsored enterprise obligations	255,180		—		255,180		—
FDIC-backed certificates of deposit	11,497		—		11,497		—
Total investments	$	377,887	$	16,106	$	361,781	$	—
Liabilities:
Acquisition-related contingent consideration	$	15,898	$	—	$	—	$	15,898

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The following tables present the gross unrealized gains and gross unrealized losses as of June 30, 2012 and December 31, 2011:



(in thousands)	Fair Value		Unrealized Gains		Unrealized Losses
Corporate bonds and notes	$	28,796	$	5	$	—
Corporate bonds and notes	34,985		—		(22		)
U.S. government backed securities	11,963		6		—
U.S. government backed securities	2,052		—		(1		)
U.S. government-sponsored enterprise obligations	77,489		65		—
U.S. government-sponsored enterprise obligations	200,309		—		(72		)
FDIC-backed certificates of deposit	8,132		1		—
FDIC-backed certificates of deposit	1,441		—		(1		)
Total investments at June 30, 2012	$	365,167	$	77	$	(96	)
Corporate bonds and notes	$	60,553	$	36	$	—
Corporate bonds and notes	34,551		—		(30		)
U.S. government backed securities	15,083		21		—
U.S. government backed securities	1,023		—		(1		)
U.S. government-sponsored enterprise obligations	138,816		79		—
U.S. government-sponsored enterprise obligations	116,364		—		(49		)
FDIC-backed certificates of deposit	9,816		1		—
FDIC-backed certificates of deposit	1,681		—		(1		)
Total investments at December 31, 2011	$	377,887	$	137	$	(81	)

We have evaluated our investments as of June 30, 2012 and have determined that no investments with unrealized losses are other-than-temporarily impaired. No investments have been in a continuous loss position greater than one year.

Cash, Cash Equivalents and Investments

Cash and cash equivalents consist primarily of highly liquid investments in money market mutual funds, government-sponsored enterprise obligations, treasury bills, commercial paper and other money market securities with remaining maturities at date of purchase of 90 days or less. The carrying value of cash and cash equivalents at June 30, 2012 and December 31, 2011 was $185.0 million and $215.5 million, respectively. The carrying value approximates fair value at June 30, 2012 and December 31, 2011.

Investments, which are classified as available for sale at June 30, 2012, are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. Investments consist of government-sponsored enterprise obligations, treasury bills, FDIC-backed certificates of deposit and corporate bonds and notes. The fair value of our investments is determined as the exit price in the principal market in which we would transact. Level 1 instruments are valued based on quoted market prices in active markets and include treasury bills and money market funds. Level 2 instruments are valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency and include corporate bonds and notes, municipal bonds, government-sponsored enterprise obligations and FDIC-backed certificates of deposit. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value. As of June 30, 2012 and December 31, 2011 we had no investments valued as Level 3 instruments. As of June 30, 2012 and December 31, 2011, the investments are recorded at amortized cost, which approximates fair market value. Generally, our investments have maturity dates up to two years from our date of purchase and active markets for these investments exist.

Restricted Cash

Restricted cash primarily represents collateralized letters of credit established in connection with lease agreements for our facilities. Current restricted cash totaled $1.3 million and $1.1 million as of June 30, 2012 and December 31, 2011, respectively. Current restricted cash is included in Prepaid expenses and other current assets in the consolidated balance sheet. Long-term restricted cash totaled $7.7 million and $6.0 million at June 30, 2012 and December 31, 2011, respectively. Long-term restricted cash is included in Other assets in the consolidated balance sheets and consists primarily of funds held as collateral for letters of credit for the security deposit on the leases of our corporate headquarters.

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Fair Value of Derivative Instruments

We use derivative instruments to partially offset our market exposures to fluctuations in certain foreign currency exchange rates, which exist as part of ongoing business operations. These derivatives are considered level 2 instruments. Derivative assets are included in Prepaid expenses and other current assets in the consolidated balance sheet. Derivative liabilities are included in Other accrued liabilities in the consolidated balance sheet. Refer to Note 10 for additional derivative financial instrument disclosure.

Acquisition-related Contingent Consideration

We estimated the fair value of the acquisition-related contingent consideration using a probability-weighted discounted cash flow model. This fair value measure was based on significant inputs not observed in the market and thus represented a Level 3 instrument. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value.

The change in the acquisition-related contingent consideration liability consisted of the following:



(in thousands)
Balance as of December 31, 2011	$	15,898
Acquisition-related compensation costs	(411		)
Adjustments to fair value measurement	(11,288		)
Balance as of June 30, 2012	$	4,199


5.	INVENTORY

Inventories consist primarily of hardware and related component parts and evaluation units located at customer locations, and are stated at the lower of cost (on a first-in, first-out basis) or market. Inventory is comprised of the following:



(in thousands)	June 30, 2012		December 31, 2011
Raw materials	$	2,648	$	1,405
Finished goods	11,594		7,241
Evaluation units	3,988		2,791
Total inventory	$	18,230	$	11,437


6.	GOODWILL

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. We consider the acquired businesses additions to our product portfolio and not additional reporting units or operating segments. We record goodwill adjustments pursuant to changes to net assets acquired during the measurement period, which is generally up to one year from the date of acquisition. A portion of the goodwill associated with the acquisitions of Global Protocols, LLC, Zeus and Aptimize, will be deductible for income tax purposes.

The change in goodwill consisted of the following:



(in thousands)
Balance as of December 31, 2011	$	117,474
Additions resulting from acquisitions	152
Balance as of June 30, 2012	$	117,626

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7.	DEFERRED REVENUE

Deferred revenue consisted of the following:



(in thousands)	June 30, 2012		December 31, 2011
Product	$	4,392	$	6,888
Support and services	168,926		150,491
Total deferred revenue	$	173,318	$	157,379
Reported as:
Deferred revenue, current	$	134,010	$	121,131
Deferred revenue, non-current	39,308		36,248
Total deferred revenue	$	173,318	$	157,379

Deferred product revenue relates to arrangements where not all revenue recognition criteria have been met. Deferred support revenue represents customer payments made in advance for support contracts. Support contracts are typically billed on a per annum basis in advance and revenue is recognized ratably over the support period. Deferred revenue, non-current consists primarily of customer payments made in advance for support contracts with terms of more than 12 months.


8.	GUARANTEES

Our agreements with customers, as well as our reseller agreements, generally include certain provisions for indemnifying customers and resellers and their affiliated parties against liabilities if our products infringe a third party’s intellectual property rights. To date, we have not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in our condensed consolidated financial statements.

As permitted or required under Delaware law and to the maximum extent allowable under that law, we have certain obligations to indemnify our officers, directors and certain key employees for certain events or occurrences while the officer, director or employee is or was serving at our request in such capacity. These indemnification obligations are valid as long as the director, officer or employee acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments we could be required to make under these indemnification obligations is unlimited; however, we have a director and officer insurance policy that mitigates our exposure and enables us to recover a portion of any future amounts paid.

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9.	LEASE COMMITMENTS

We lease our facilities under non-cancelable operating lease agreements. Future minimum commitments for these operating leases in place as of June 30, 2012 with a remaining non-cancelable lease term in excess of one year are as follows:



(in thousands)
2012 (the six months ending December 31)	$	5,098
2013	10,697
2014	13,092
2015	15,038
2016	15,749
2017 and thereafter	98,451
Total	$	158,125

The terms of certain lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease period and have accrued for rent expense incurred but not paid. Rent expense under operating leases was $3.0 million and $2.9 million for the three months ended June 30, 2012 and 2011, respectively, and $6.2 million and $5.2 million for the six months ended June 30, 2012 and 2011, respectively.

On February 2, 2012, we entered into a lease agreement, pursuant to which we will lease office space for an initial term of ten years, located at 680 Folsom Street, San Francisco, California. On April 13, 2012, we signed the first amendment to the lease agreement for additional space. Following the completion of certain construction, which we anticipate to be completed by August 2014, we intend to use the leased space as our new worldwide corporate headquarters. The base annual rent for the leased space will range from approximately $8.1 million to $11.0 million, none of which is expected to be due until construction has been completed and we have occupied the leased space. In addition to the base rent, we will be responsible for payment of certain operating expenses, including utilities and real estate taxes.


10.	DERIVATIVE FINANCIAL INSTRUMENTS

We use derivative instruments to partially offset our market exposures to fluctuations in certain foreign currency exchange rates, which exist as part of ongoing business operations. Our general practice is to hedge a majority of transaction exposures denominated in British pounds, Euros, Australian dollars and Singapore dollars. These instruments have maturities between one to three months in the future. We do not enter into derivative instrument transactions for trading or speculative purposes.

Foreign currency contracts designated as cash flow hedges

We utilize foreign currency forward contracts to hedge certain forecasted foreign currency transactions relating to cost of service and operating expense. These contracts are designated and documented as cash flow hedges at their inception. All changes in time value are excluded from the cash flow hedge and recorded to Other income (expense), net in the period incurred. The effective portion of derivative's gains or losses on these hedges is initially included in Accumulated other comprehensive income (loss) and is subsequently reclassified into the cost of service or operating expense, to which the hedged transaction relates, upon the occurrence of the forecasted transaction. We record any ineffectiveness of the hedging instruments in Other income (expense), net in our condensed consolidated financial statements in the period incurred. No ineffectiveness was recorded during the three and six months ended June 30, 2012.

The notional amount of these contracts was $15.4 million at June 30, 2012 and zero at December 31, 2011. Outstanding contracts are recognized as either assets or liabilities on the balance sheet at fair value. The amount remaining in Accumulated other comprehensive loss as of June 30, 2012 was not significant and is expected to be recognized into earnings within the next three months.

Derivatives not designated as hedging instruments

We use foreign currency forward contracts to reduce the variability in gains and losses generated from the re-measurement of certain monetary assets and liabilities denominated in foreign currencies. These hedges do not qualify for hedge accounting treatment. These derivatives are carried at fair value with gains and losses recognized as Other income (expense), net. Changes in the fair value of the derivatives are largely offset within the consolidated statement of operations by

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re-measurement of the underlying assets and liabilities. We had a notional value of $4.5 million in derivative instruments that were non-designated hedges at June 30, 2012 and zero at December 31, 2011.

Fair Value of Derivative Instruments

The fair value of derivative instruments in our condensed consolidated balance sheet was as follows as of June 30, 2012:



(in thousands)	June 30, 2012
Derivative assets:
Foreign currency contracts designated as cash flow hedges	$	31
Total Derivative assets	$	31
Derivative liabilities:
Foreign currency contracts designated as cash flow hedges	$	8
Derivatives not designated as hedging instruments	159
Total Derivative liabilities	$	167

The effects of derivatives designated as hedging instruments on our condensed consolidated statements of operations were as follows for the three and six months ended June 30, 2012:



	Three months ended June 30,			Six months ended June 30,
(in thousands)	2012			2012
Amount of Gain (Loss) Recognized in Accumulated OCI on Derivatives (Effective Portion)	$	(279	)	$	120
Amount and Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Cost of support and services	17			(27		)
Sales and Marketing	231			(33		)
Research and Development	5			(11		)
General and Administrative	7			(45		)
Total	$	260		$	(116	)
Amount and Location of Gain Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Other income (expense), net	$	—		$	2

The effects of derivatives not designated as hedging instruments on our condensed consolidated statements of operations were as follows for the three and six months ended June 30, 2012:



	Three months ended June 30,			Six months ended June 30,
(in thousands)	2012			2012
Amount and Location of Gain (Loss) Recognized in Income on Derivative
Other income (expense), net	$	(138	)	$	6

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11.	COMMON STOCK

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense for stock options, RSUs and the Purchase Plan recorded in our condensed consolidated statement of operations for the three and six months ended June 30, 2012 and 2011:



	Three months ended June 30,				Six months ended June 30,
(in thousands)	2012		2011		2012		2011
Cost of product	$	227	$	266	$	442	$	486
Cost of support and services	1,762		1,745		3,345		3,266
Sales and marketing	8,586		9,581		17,837		18,154
Research and development	7,300		6,775		14,478		13,350
General and administrative	5,068		5,188		9,816		10,240
Total	$	22,943	$	23,555	$	45,918	$	45,496

Share-Based Payments Valuation Assumptions

The fair value of options granted was estimated at the date of grant using the following assumptions:



	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
Employee Stock Options
Expected life in years	4.2			4.2			4.2			4.2
Risk-free interest rate	0.7		%	1.5		%	0.7		%	1.5-1.7%
Volatility	64		%	62		%	64%-66%			62		%
Weighted average fair value of grants	$	8.81		$	16.80		$	11.25		$	18.33

The fair value of Purchase Plan shares granted was estimated at the date of grant using the following assumptions:



	Three and six months ended June 30,
	2012		2011
Purchase Plan
Expected life in years	0.5-2.0		0.5-2.0
Risk-free interest rate	0.2%-0.3%		0.1%-0.6%
Volatility	63%-74%		49%-51%
Weighted average fair value of grants	$	9.28	$	12.40

Stock Options

As of June 30, 2012, total compensation cost related to stock options granted to employees and directors but not yet recognized was $60.3 million. This cost will be recognized on a straight-line basis over the remaining weighted-average service period. Amortization in the three months ended June 30, 2012 and 2011 was $6.4 million and $8.1 million, respectively. Amortization in the six months ended June 30, 2012 and 2011 was $12.6 million and $17.3 million, respectively.

As of June 30, 2012, 7,076,000 shares were available for grant under the 2006 Equity Incentive Plan. As of June 30, 2012, 2,652,000 shares were available for grant under the 2006 Director Option Plan. As of June 30, 2012, 1,021,000 shares were available for grant under the 2009 Inducement Equity Incentive Plan.

Stock Purchase Plan

As of June 30, 2012, there was $24.4 million of total compensation cost, net of estimated forfeitures, left to be amortized under our Purchase Plan, which will be amortized over the remaining Purchase Plan offering period. Amortization in the three months ended June 30, 2012 and 2011 was $3.2 million and $2.3 million, respectively. Amortization in the six months ended June 30, 2012 and 2011 was $6.1 million and $4.2 million, respectively.

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As of June 30, 2012, 1,858,000 shares were available under the Purchase Plan.

Restricted Stock Units

As of June 30, 2012, total unrecognized compensation cost related to non-vested RSUs to employees and directors was $121.1 million. This cost will be recognized over the remaining weighted-average service period. Amortization in the three months ended June 30, 2012 and 2011 was $13.3 million and $13.2 million, respectively. Amortization in the six months ended June 30, 2012 and 2011 was $27.2 million and $24.0 million, respectively.

Share Repurchase Program

On August 19, 2011, our Board of Directors authorized a Share Repurchase Program (the Program), which authorizes us to repurchase up to $150.0 million of our outstanding common stock. On May 17, 2012, the Board of Directors approved a $150.0 million increase to the Program. The Program does not require us to purchase a minimum number of shares, and may be suspended, modified or discontinued at any time without prior notice. For the three months ended June 30, 2012, we repurchased 5,985,823 shares of common stock under this Program on the open market for an aggregate purchase price of $100.0 million, or a weighted average of $16.78 per share. For the six months ended June 30, 2012, we repurchased 6,016,159 shares of common stock under this Program on the open market for an aggregate purchase price of $101.4 million, or a weighted average of $16.86 per share. The timing and amounts of these purchases were based on market conditions and other factors, including price, regulatory requirements and capital availability. The share repurchases were financed by available cash balances and cash from operations. The maximum dollar value of shares of common stock that remain available for purchase under the Program is $163.6 million.

For the three and six months ended June 30, 2011, no shares of common stock were repurchased under a share repurchase program.


12.	INCOME TAXES

Our effective tax rate was 40.5% and 45.1% for the three months ended June 30, 2012 and 2011, respectively, and 39.7% and 42.9% for the six months ended June 30, 2012 and 2011, respectively. Our income tax provision consists of federal, foreign, and state income taxes. The provision for income taxes for the three months ended June 30, 2012 and 2011 was $12.3 million, and $9.3 million, respectively. The provision for income taxes for the six months ended June 30, 2012 and 2011 was $16.5 million and $18.3 million, respectively.

Our effective tax rate differs from the federal statutory rate due to state taxes and significant permanent differences. Significant permanent differences arise primarily from taxes in foreign jurisdictions with a tax rate different than the U.S. federal statutory rate, stock-based compensation expense, and the amortization of deferred tax charges related to our intercompany sale of intellectual property rights.


13.	SEGMENT INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer. While our Chief Executive Officer evaluates the financial information for certain of our product lines, the information for all product lines is aggregated for analysis on a consolidated level as the primary basis for the allocation of resources and assessment of financial results. Accordingly, the consolidated business is considered to be one operating segment.

Revenue by geography is based on the billing address of the customer. The following table sets forth revenue by geographic area.

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Revenue



	Three months ended June 30,				Six months ended June 30,
(in thousands)	2012		2011		2012		2011
Americas
United States	$	110,818	$	96,516	$	206,995	$	186,855
Other	6,718		9,927		14,197		20,485
Total Americas	117,536		106,443		221,192		207,340
Europe, Middle East and Africa	51,672		40,028		102,210		79,077
Asia Pacific	29,260		23,824		57,479		47,441
Total revenue	$	198,468	$	170,295	$	380,881	$	333,858


14.	LEGAL MATTERS

On June 1, 2011, we served Silver Peak Systems, Inc. with a lawsuit, filed in the United States District Court for the District of Delaware, alleging infringement of certain patents. The lawsuit seeks unspecified damages and injunctive relief. On July 22, 2011, Silver Peak Systems denied the allegations and requested declaratory judgments of invalidity and non-infringement.

On August 17, 2011, Silver Peak Systems amended its counterclaims against us, alleging infringement by Riverbed of certain patents. The lawsuit seeks unspecified damages and injunctive relief. On September 20, 2011, we denied Silver Peak Systems’ allegations and requested declaratory judgments of invalidity and non-infringement.

On December 21, 2011, we amended our lawsuit against Silver Peak Systems to allege infringement of an additional patent.

At this time we are unable to estimate any range of reasonably possible loss relating to these actions. Discovery is ongoing, and trial is currently scheduled to begin on July 29, 2013. We believe that we have meritorious defenses to the counterclaims against us, and we intend to vigorously contest these counterclaims.

From time to time, we are involved in various legal proceedings, claims and litigation arising in the ordinary course of business. There are no currently pending legal proceedings at June 30, 2012 that, in the opinion of management, would have a material adverse effect on our financial position, results of operations or cash flows.


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q. The information in this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements include statements related to: our business and strategy, trends affecting our business and financial results, international expansion plans, direct and indirect sales plans and strategies, growth of our revenue, costs and expenses (including sales and marketing expenses), gross margins, our share repurchase program, our acquisitions, and the effect of fluctuations in exchange rates and our hedging activities on our financial results. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, words such as “may,” “will,” “could,” “should,” “estimates,” “predicts,” “potential,” “continue,” “strategy,” “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed elsewhere in this Form 10-Q in the section titled “Risk Factors” and the risks discussed in our other SEC filings. We disclaim any obligation to publicly release any revisions or updates to the forward-looking statements after the date of this Form 10-Q.

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Overview

We were founded in May 2002 by experienced industry leaders with a vision to improve the performance of wide-area distributed computing. Having significant experience in caching technology, our executive management team understood that existing approaches failed to address adequately all of the root causes of this poor performance. We determined that these performance problems could be best solved by simultaneously addressing inefficiencies in software applications and wide-area networks (WANs) as well as insufficient or unavailable bandwidth. This innovative approach served as the foundation of the development of our products. We began commercial shipments of our products in May 2004 and have since sold our products to over 19,000 customers worldwide. We currently offer several product lines including Steelhead appliances directed at the WAN optimization market, Cascade products in the network performance management (NPM) market, our Stingray product line, which competes in the virtual application delivery controller (ADC) market, and our Whitewater cloud storage gateway directed at the cloud back-up and disaster recovery solution market.

We are headquartered in San Francisco, California. Our personnel are located throughout the U.S. and in more than thirty countries worldwide. We expect to continue to add personnel in the U.S. and internationally to provide additional geographic sales, research and development, general and administrative and technical support coverage.

The Riverbed Strategy

Our goal is to establish our solutions as the preeminent performance and efficiency standard for organizations relying on wide-area distributed computing. Key elements of our strategy include:

Build a unified performance platform - Riverbed is the performance company. Our vision is to give customers the tools to create the highest performing IT environment possible, enabling users everywhere to be more productive while giving IT teams greater control over their enterprises' technology resources. Our vision focuses on the intersection of applications, networks, and storage, and brings customers a single, unified view of performance in their distributed environment.

Maintain and extend our technological advantages - We believe that we offer the broadest ability to enable rapid, reliable access to applications and data for our customers. We intend to enhance our position as a leader and innovator in the WAN optimization market. We also intend to continue to sell new capabilities, such as our new cloud solutions, into our installed base. Continuing investments in research and development are critical to maintaining our technological advantage.

Enhance and extend our product lines - We plan to introduce enhancements to our product capabilities in order to address our customers’ size and application requirements. We also plan to introduce new products to extend our market and utilize our technology platform to extend our capabilities.

Extend our technology partner ecosystem - We plan to enhance our product capabilities via integration of partner technologies, in particular by increasing the selection of third-party applications on the Riverbed Services Platform and Virtual Services Platform.

Increase market awareness - To generate increased demand for our products, we will continue promoting our brand and the effectiveness of our comprehensive IT performance solutions.

Scale our sales force and distribution channels - Growth in revenue and increase in market share are key goals for us. We intend to expand our direct sales force and leverage our indirect channels to extend our geographic reach and market penetration. We sell our products directly through our sales force and indirectly through channel partners. We derived 95% of our revenue through indirect channels in the first six months of 2012. We intend to expand our direct sales force and leverage our indirect channels to extend our geographic reach and market penetration.

Enhance and extend our support and services capabilities - On an ongoing basis, we plan to enhance and extend our support and services capabilities to continue to support our growing global customer base.

Major Trends Affecting Our Financial Results

Company outlook

We believe that our current value proposition, which enables customers to improve the performance of their applications and access to their data across WANs, while also offering the ability to simplify IT infrastructure and realize significant capital and operating cost savings, should allow us to continue to grow our business. Our product revenue growth

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rate will depend significantly on continued growth in the WAN optimization, NPM and the virtual ADC markets, and our ability to continue to attract new customers in those markets and generate additional sales from existing customers. Our growth in support and services revenue is dependent upon increasing the number of products under support contracts, which is dependent on both growing our installed base of customers and renewing existing support contracts. Our future profitability and rate of growth will be directly affected by the continued acceptance of our products in the marketplace, as well as the timing and size of orders, product mix, average selling prices and costs of our products and general economic conditions. Our ability to achieve profitability in the future will also be affected by the extent to which we must incur additional expenses to expand our sales, support, marketing, development, and general and administrative capabilities to grow our business. The largest component of our expenses is personnel costs. Personnel costs consist of salaries, benefits and incentive compensation for our employees, including commissions for sales personnel and stock-based compensation.

Revenue

Our revenue has grown rapidly since we began shipping products in May 2004, increasing from $2.6 million in 2004 to $726.5 million in 2011. Revenue grew by 17% in the six months ended June 30, 2012 to $198.5 million from $170.3 million in the six months ended June 30, 2011. We believe that our revenue growth in 2010 and 2011, is a positive sign that our products have a significant value proposition to our customers and that the markets that we compete in are still expanding.

Costs and Expenses

Operating expenses consist of sales and marketing, research and development, general and administrative expenses, and acquisition-related costs. Personnel-related costs, including stock-based compensation, are the most significant component of each of these expense categories. As of June 30, 2012, we had 1,739 employees, an increase of 25% from 1,389 employees at June 30, 2011. The increase in employees is the most significant driver behind the increase in costs and operating expenses from the six months ended June 30, 2011 to the six months ended June 30, 2012. The increase in employees was required to support our increased revenue and is due, in part, by our acquisitions during the period. The timing and number of additional hires has and could materially affect our operating expenses, both in absolute dollars and as a percentage of revenue, in any particular period.

Stock-based Compensation Expense

Stock-based compensation expense and related payroll taxes were $23.7 million and $25.1 million in the three months ended June 30, 2012 and 2011, respectively, and $47.3 million and $49.2 million in the six months ended June 30, 2012 and 2011. We expect to continue to incur significant stock-based compensation expense and anticipate further growth in stock-based compensation expense as our employee base grows because we expect stock-based compensation to continue to play an important part in the overall compensation structure for our employees.

Stock-based compensation expense and related payroll tax was as follows:



(in thousands)	Three months ended June 30,				Six months ended June 30,
(in thousands)	2012		2011		2012		2011
Cost of product	$	244	$	286	$	498	$	554
Cost of support and services	1,843		1,892		3,486		3,604
Sales and marketing	8,823		10,135		18,326		19,695
Research and development	7,582		7,384		14,946		14,690
General and administrative	5,188		5,365		10,086		10,619
Total stock-based compensation expense and related payroll taxes	$	23,680	$	25,062	$	47,342	$	49,162

Acquisitions

During the first quarter of 2012, we entered into an agreement to purchase certain assets of Expand Networks Ltd. (Expand), including its intellectual property for $6.5 million.

During fiscal 2011, we acquired two companies to expand our product offerings. The results of operations of these companies are included in our condensed consolidated results for the period subsequent to the acquisition date. In the three and six months ended June 30, 2012, we recognized $6.2 million and $12.8 million, respectively, in revenue, from the sale of these acquired companies’ products and services and we recognized $11.7 million and $23.3 million, respectively, of operating

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expenses, which included $2.7 million and $5.4 million, respectively, of acquisition-related intangible amortization, $1.0 million and $1.8 million, respectively, of stock-based compensation costs.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). These accounting principles require us to make certain estimates and judgments that can 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 could be adversely affected.

The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: revenue recognition, accounting for business combinations, stock-based compensation, accounting for income taxes, inventory valuation and allowances for doubtful accounts. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our year ended December 31, 2011 for a more complete discussion of our critical accounting policies and estimates including revenue recognition, accounting for business combinations, goodwill, intangible assets and impairment assessments, stock-based compensation, accounting for income taxes, inventory valuation and allowances for doubtful accounts. Our critical accounting policies have been discussed with the Audit Committee of the Board of Directors. We believe there have been no material changes to our critical accounting policies and estimates during the three and six months ended June 30, 2012, compared to those discussed in our Form 10-K for the year ended December 31, 2011.

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Results of Operations

Revenue

We derive our revenue from sales of our appliances and software licenses and from support and services. Product revenue primarily consists of revenue from sales of our Steelhead, Cascade, Stingray and Whitewater products and is typically recognized upon delivery. Support and services revenue includes unspecified software license updates and product support. Support revenue is recognized ratably over the contractual period, which is typically one year. Service revenue includes professional services and training, which to date has not been significant, and is recognized as the services are performed.



	Three months ended June 30,						Six months ended June 30,
(in thousands)	2012			2011			2012			2011
Total Revenue	$	198,468		$	170,295		$	380,881		$	333,858
Total Revenue by Type:
Product	$	129,369		$	116,860		$	246,403		$	229,012
Support and services	$	69,099		$	53,435		$	134,478		$	104,846
% Revenue by Type:
Product	65		%	69		%	65		%	69		%
Support and services	35		%	31		%	35		%	31		%
Total Revenue by Geography:
Americas
United States	$	110,818		$	96,516		$	206,995		$	186,855
Other	$	6,718		$	9,927		$	14,197		$	20,485
Total Americas	$	117,536		$	106,443		$	221,192		$	207,340
Europe, Middle East and Africa	$	51,672		$	40,028		$	102,210		$	79,077
Asia Pacific	$	29,260		$	23,824		$	57,479		$	47,441
% Revenue by Geography:
Americas
United States	56		%	57		%	54		%	56		%
Other	3		%	6		%	4		%	6		%
Total Americas	59		%	63		%	58		%	62		%
Europe, Middle East and Africa	26		%	23		%	27		%	24		%
Asia Pacific	15		%	14		%	15		%	14		%
Total Revenue by Sales Channel:
Direct	$	9,609		$	9,705		$	20,424		$	17,960
Indirect	$	188,859		$	160,590		$	360,457		$	315,898
% Revenue by Sales Channel:
Direct	5		%	6		%	5		%	5		%
Indirect	95		%	94		%	95		%	95		%

Quarter Ended June 30, 2012 Compared to the Quarter Ended June 30, 2011: Product revenue increased by 10.7% in the three months ended June 30, 2012 as compared to the three months ended June 30, 2011, due to an increase in unit volume from increasing sales to existing customers and the addition of new customers through acquisitions. We believe the market for our products has grown due to increased market awareness of WAN optimization, NPM and ADC and an increase in distributed organizations, which increases dependence on timely access to data and applications. As of June 30, 2012, our products have been sold to over 19,000 customers, compared to 14,000 customers as of June 30, 2011. In July 2012, we entered into a software license agreement with Juniper Networks for approximately $75 million that will be recognized as revenue over a four year period. We expect revenues from this agreement to be approximately $3 million in the third quarter of 2012 with increases during the four year period to approximately $5 million per quarter.

Substantially all of our customers purchase support when they purchase our products. Support and services revenue increased 29.3% in the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. As our

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customer base grows, we expect our revenue generated from support and services to increase.

In the three months ended June 30, 2012, we derived 95% of our revenue from indirect channels compared to 94% for the three months ended June 30, 2011. We expect indirect channel revenue to continue to be a substantial majority of our revenue.

We generated 44% of our revenue in the three months ended June 30, 2012 from international locations, compared to 43% in the three months ended June 30, 2011. We continue to expand into international locations and introduce our products in new markets and expect international revenue to increase in dollar amount over time.

Six months ended June 30, 2012 Compared to the Six months ended June 30, 2011: Product revenue increased by 7.6% in the six months ended June 30, 2012 over the same period in the prior year due primarily to an increase in unit volume from sales to new customers and additional purchases by existing customers.

Support and services revenue increased by 28.3% in the six months ended June 30, 2012 over the same period in the prior year due to higher first year support sales from higher product sales and the continued renewal of support contracts by our existing customers.

Cost of Revenue and Gross Margin

Cost of product revenue consists of the costs of the appliance hardware, manufacturing, shipping and logistics costs, expenses for inventory obsolescence, warranty obligations, transportation costs and amortization of acquisition-related intangibles. We utilize third parties to assist in the design of and to manufacture our appliance hardware, embed our proprietary software and perform shipping logistics. Cost of support and service revenue consists of personnel costs of technical support and professional services personnel, spare parts and logistics services. As we expand internationally and into other sectors, we may incur additional costs to conform our products to comply with local laws or local product specifications. In addition, as we expand internationally, we will continue to hire additional technical support personnel to support our growing international customer base.

Our gross margin has been and will continue to be affected by a variety of factors, including the mix and average selling prices of our products, new product introductions and enhancements, the cost of our appliance hardware, expenses for inventory obsolescence and warranty obligations, cost of support and service personnel, and the mix of distribution channels through which our products are sold.



	Three months ended June 30,						Six months ended June 30,
(in thousands)	2012			2011			2012			2011
Revenue:
Product	$	129,369		$	116,860		$	246,403		$	229,012
Support and services	69,099			53,435			134,478			104,846
Total revenue	198,468			170,295			380,881			333,858
Cost of revenue:
Cost of product	30,538			23,683			58,427			47,418
Cost of support and services	19,258			16,415			38,040			31,635
Total cost of revenue	49,796			40,098			96,467			79,053
Gross profit:	$	148,672		$	130,197		$	284,414		$	254,805
Gross margin for product	76		%	80		%	76		%	79		%
Gross margin for support and services	72		%	69		%	72		%	70		%
Total gross margin	75		%	76		%	75		%	76		%

Quarter Ended June 30, 2012 Compared to the Quarter Ended June 30, 2011: The total cost of product revenue increased $6.9 million, or 28.9%, in the three months ended June 30, 2012 compared to the three months ended June 30, 2011, due primarily to an increase in the cost of product sold by $1.4 million, or 9.3%, an increase in the amortization of acquisition-related intangible assets of $2.0 million, increased shipping costs of $1.5 million primarily due to expedited shipments to stock new products at our logistics centers, and increased cost of hard drives of $1.1 million due to supply chain disruptions from flooding in Thailand during the latter half of 2011. We expect the increase in cost of hard drives to be lower in the second half of 2012 but still higher than the prices that existed before the flooding in Thailand. We opened a new logistics center in the Asia Pacific region in the first quarter of 2012. The new logistics center accounted for $0.2 million of the increase in cost of revenue for the three months ended June 30, 2012. We expect similar costs going forward as a result of opening this logistics center.

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Cost of support and services revenue increased $2.8 million, or 17.3%, as we added more technical support headcount domestically and abroad to support our growing customer base. Technical support and services headcount was 203 employees, as of June 30, 2012 compared to 183 employees as of June 30, 2011.

Gross margins decreased slightly to 75% in the three months ended June 30, 2012 as compared to 76% in the three months ended June 30, 2011. Product gross margins decreased to 76% in the three months ended June 30, 2012 from 80% in the three months ended June 30, 2011 as a result of an increase in amortization of acquisition-related intangible assets, increased shipping costs related to new product introductions, and increased cost of hard drives. Gross margins for support and services increased to 72% due to the elimination of certain redundant transportation and warehousing costs as we converted to a new logistics provider.

Six months ended June 30, 2012 Compared to the Six months ended June 30, 2011: The total cost of revenue increased $11.0 million, or 23.2%, in the six months ended June 30, 2012 compared to the six months ended June 30, 2011. The increase in cost of product revenue was due primarily to amortization of acquisition-related intangible assets of $4.1 million, increased expense from shipping costs of $2.7 million, primarily due to expedited shipments to stock new products at our logistics centers, and $1.7 million due to increased cost of hard drives due to supply chain disruptions from flooding in Thailand during the latter half of 2011. Cost of support and services revenue increased $6.4 million, or 20.2%, due to increased personnel related costs as a result of increased headcount.

Gross margins decreased slightly to 75% in the six months ended June 30, 2012 as compared to 76% in the six months ended June 30, 2011. Product gross margins decreased to 76% in the six months ended June 30, 2012 from 79% in the six months ended June 30, 2011 as a result of increased shipping costs, intangibles amortization and cost of hard drives and less favorable product mix. Gross margins for support and services increased slightly to 72%.

Sales and Marketing Expenses

Sales and marketing expenses represent the largest component of our operating expenses and include personnel costs, sales commissions, marketing programs and facilities costs. Marketing programs are intended to generate revenue from new and existing customers, and are expensed as incurred. We plan to continue to make investments in sales and marketing with the intent to add new customers and increase penetration within our existing customer base by increasing the number of sales personnel worldwide, expanding our domestic and international sales and marketing activities, increasing channel penetration, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to continue to increase and continue to be our most significant operating expense. Generally, sales personnel are not immediately productive and sales and marketing expenses do not immediately result in increased revenue. Hiring additional sales personnel reduces short-term operating margins until the sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance.



	Three months ended June 30,						Six months ended June 30,
($ in thousands)	2012			2011			2012			2011
Sales and marketing expenses	$	77,366		$	63,737		$	151,181		$	124,821
Percent of total revenue	39		%	37		%	40		%	37		%

Quarter Ended June 30, 2012 Compared to the Quarter Ended June 30, 2011: Sales and marketing expenses increased by $13.6 million, or 21.4%, in the three months ended June 30, 2012 compared to the three months ended June 30, 2011, primarily due to increases in personnel costs of $7.5 million. The increase in personnel costs, which include salaries, commissions, bonuses and related benefits and stock-based compensation, was primarily due to headcount increasing to 814 employees, as of June 30, 2012 from 628 employees as of June 30, 2011. The sales and marketing expense is further attributed to increased marketing-related activities and travel and entertainment expense, each of which increased $1.4 million. Intangibles amortization and acquisition-related bonuses contributed $1.2 million and $0.1 million, respectively, to the increase in sales and marketing expense.

Six months ended June 30, 2012 Compared to the Six months ended June 30, 2011: The increase in sales and marketing expenses for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 of $26.4 million, or 21.1%, is primarily due to increases in personnel costs of $13.7 million, increases in marketing costs of $3.4 million and increases in travel and entertainment expenses of $2.2 million. Intangibles amortization and acquisition-related bonuses contributed to $2.5 million and $0.8 million, respectively, of the increase in sales and marketing expense.

Research and Development Expenses

Research and development (R&D) expenses primarily include personnel costs and facilities costs. We expense R&D

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costs 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 R&D efforts because we believe they are essential to maintaining our competitive position.



	Three months ended June 30,						Six months ended June 30,
($ in thousands)	2012			2011			2012		2011
Research and development expenses	$	35,802		$	29,942		69,913		58,251
Percent of total revenue	18		%	18		%	18	%	17	%

Quarter Ended June 30, 2012 Compared to the Quarter Ended June 30, 2011: R&D expenses increased by $5.9 million, or 19.6%, in the three months ended June 30, 2012 compared to the three months ended June 30, 2011, primarily due to increases in personnel costs of $4.3 million and facilities and information technology costs of $0.7 million, offset by a decrease in acquisition-related incentive bonus of $0.9 million. The increase in personnel costs, which include salaries, bonuses and related benefits and stock-based compensation, was primarily due to headcount increasing to 493 employees, as of June 30, 2012 from 384 employees as of June 30, 2011. In addition, during the three months ended June 30, 2012, we continued to record legal fees pursuant to the Silver Peak Systems litigation to R&D expenses, which accounted for $1.0 million of the increase and may become more significant in future periods.

Six months ended June 30, 2012 Compared to the Six months ended June 30, 2011: The increase in R&D expenses for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 of $11.7 million, or 20.0%, is primarily due to an increase in personnel costs of $7.8 million, facilities and information technology costs of $1.3 million, and outside services costs of $0.7 million. Acquisition-related incentive bonuses contributed to an offsetting decrease of $0.1 million in research and development expense.

General and Administrative Expenses

General and administrative (G&A) expenses consist primarily of compensation for personnel and facilities costs related to our executive, finance, human resources, information technology and legal organizations, and fees for professional services. Professional services include legal, audit and information technology consulting costs.



	Three months ended June 30,						Six months ended June 30,
($ in thousands)	2012			2011			2012		2011
General and administrative expenses	$	15,492		$	14,913		30,126		28,596
Percent of total revenue	8		%	9		%	8	%	9	%

Quarter Ended June 30, 2012 Compared to the Quarter Ended June 30, 2011: G&A expenses increased by $0.6 million, or 3.9%, in the three months ended June 30, 2012 compared to the three months ended June 30, 2011, primarily due to a $0.2 million increase in both personnel costs and information technology costs. The increase in personnel costs, which include salaries, bonuses and related benefits and stock-based compensation, was primarily due to headcount increasing to 199 employees, as of June 30, 2012 from 166 employees as of June 30, 2011.

Six months ended June 30, 2012 Compared to the Six months ended June 30, 2011: The increase of $1.5 million, or 5.4%, in general and administrative expenses for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 is primarily due to an increase in personnel costs of $0.5 million and facilities and information technology costs of $0.6 million.

Acquisition-Related Costs

Acquisition-related costs include changes in the fair value of the acquisition-related contingent consideration, transaction costs and integration-related costs, which are summarized as follows:



	Three months ended June 30,					Six months ended June 30,
(in thousands)	2012			2011		2012			2011
Transaction costs	$	62		$	—	$	83		$	—
Integration and other acquisition-related costs	1,056			—		1,563			—
Change in fair value of acquisition-related contingent consideration	(11,314		)	—		(11,286		)	—
Total Acquisition-related costs	$	(10,196	)	$	—	$	(9,640	)	$	—

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Quarter Ended June 30, 2012 Compared to the Quarter Ended June 30, 2011: The acquisition-related costs recorded in the three months ended June 30, 2012 included a decrease of $11.3 million in the fair value of the acquisition-related contingent consideration for Zeus partially offset by an increase in transaction, integration and other acquisition-related costs of $1.1 million.

Six months ended June 30, 2012 Compared to the Six months ended June 30, 2011: The acquisition-related costs recorded in the first six months of 2012 include $1.6 million of transaction, integration and other acquisition-related costs offset by a decreases in the acquisition-related contingent consideration of $10.2 million and $1.1 million for Zeus and Aptimize, respectively.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income on our cash and investments, interest expense, and foreign currency exchange gains and losses. Cash has historically been invested in highly liquid investments such as time deposits held at major banks, commercial paper, U.S. government agency discount notes, money market mutual funds and other money market securities with average portfolio maturities at the date of purchase less than two years.



	Three months ended June 30,						Six months ended June 30,
(in thousands)	2012			2011			2012			2011
Interest income	$	373		$	427		762			869
Other	(114		)	(86		)	(2,008		)	(30		)
Total other income (expense), net	$	259		$	341		$	(1,246	)	$	839

Quarter Ended June 30, 2012 Compared to the Quarter Ended June 30, 2011: Other income (expense), remained relatively flat in the three months ended June 30, 2012 compared to the three months ended June 30, 2011. Weighted average interest rates applicable to our cash and investment balances remained at 0.3% in the three months ended June 30, 2012 and June 30, 2011.

Six months ended June 30, 2012 Compared to the Six months ended June 30, 2011: Other income (expense), net, decrease by $2.1 million in the six months ended June 30, 2012 compared to the six months ended June 30, 2011, primarily due to increased foreign exchange losses related to the revaluation of certain acquisition-related assets and liabilities. Weighted average interest rates applicable to our cash and investment balances remained at 0.3% in the six months ended June 30, 2012 and 2011. Other expense primarily represents foreign exchange losses on foreign currency denominated liabilities.

Provision for Income Taxes

The provision for income taxes for the three months ended June 30, 2012 and 2011 was $12.3 million and $9.3 million, respectively, and $16.5 million and $18.3 million for the six months ended June 30, 2012 and 2011, respectively. Our income tax provision consists of federal, foreign, and state income taxes. Our effective tax rate was 40.5% and 45.1% for the three months ended June 30, 2012 and 2011, respectively, and 39.7% and 42.9% for the six months ended June 30, 2012 and 2011, respectively.

Our effective tax rate for the three and six months ended June 30, 2012 is lower when compared to the same periods in the prior year primarily due to more of our net income in 2012 being earned in jurisdictions with lower tax rates, offset by lower R&D tax credit benefits due to the expiration of the federal R&D tax credit as of December 31, 2011, which had not been renewed as of June 30, 2012.

Our effective tax rate in 2012 and in future periods may fluctuate on a quarterly basis. The effective tax rate could be affected by the geographic distribution of our worldwide earnings or losses, our stock-based compensation expense, changes in the valuation of our deferred tax assets, changes in actual results versus our estimates, or changes in tax laws, regulations, accounting principles, or interpretations thereof.

We record a valuation allowance to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we have considered our historical levels of income and expectations

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of future taxable income. In determining future taxable income, we make assumptions to forecast federal, state and international operating income, the reversal of temporary differences, and the implementation of any feasible and prudent tax planning strategies. The assumptions require significant judgment regarding the forecasts of taxable income, and are consistent with our forecasts used to manage our business.

We are subject to income tax in the U.S. as well as numerous state and foreign jurisdictions. Generally, our U.S. and state income tax returns for all tax years since inception remain open to examination. In addition, we file tax returns in multiple foreign taxing jurisdictions. In our most significant foreign jurisdictions, the United Kingdom and Singapore, the open tax years range from 2007 to 2011.

Liquidity and Capital Resources



(in thousands)