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Aruba Networks 10-Q 2014

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1
ARUN-2015.10.31-10Q



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 October 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-33347
_________________________________________________ 
Aruba Networks, Inc.
(Exact name of registrant as specified in its charter)
 _________________________________________________
Delaware
 
02-0579097
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
1344 Crossman Ave.
Sunnyvale, California 94089-1113
(408) 227-4500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
_________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of outstanding shares of the registrant's common stock was 109,765,215 as of December 1, 2014.
 




ARUBA NETWORKS, INC.
FORM 10-Q
QUARTER ENDED OCTOBER 31, 2014

INDEX
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2




 PART I. FINANCIAL INFORMATION

Item 1.
Condensed Consolidated Financial Statements

ARUBA NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
 (in thousands, except per share amounts)
 
October 31,
2014
 
July 31,
2014
 
 
 
 
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
152,587

 
$
118,594

Short-term investments
162,709

 
166,359

Accounts receivable, less allowances of $361 and $333, respectively
107,165

 
102,256

Inventory
40,033

 
39,836

Deferred costs of revenue
13,843

 
12,721

Prepaids and other current assets
18,542

 
18,063

Deferred income tax assets, current
24,531

 
25,676

Total current assets
519,410

 
483,505

Property and equipment, net
29,074

 
27,261

Goodwill
67,242

 
67,242

Intangible assets, net
17,345

 
19,505

Deferred income tax assets, non-current
23,228

 
23,962

Other non-current assets
8,388

 
8,185

Total assets
$
664,687

 
$
629,660

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
19,860

 
$
23,763

Accrued liabilities
77,747

 
80,578

Deferred revenue, current
146,177

 
135,160

Total current liabilities
243,784

 
239,501

Deferred revenue, non-current
48,806

 
44,977

Other non-current liabilities
13,535

 
12,686

Total liabilities
306,125

 
297,164

Commitments and contingencies (Note 11)

 

Stockholders’ equity
 
 
 
Common stock: $0.0001 par value; 350,000 shares authorized; 109,414 and 107,557 shares issued and outstanding, respectively
11

 
11

Additional paid-in capital
531,719

 
508,374

Accumulated other comprehensive loss
(1,545
)
 
(1,523
)
Accumulated deficit
(171,623
)
 
(174,366
)
Total stockholders’ equity
358,562

 
332,496

Total liabilities and stockholders’ equity
$
664,687

 
$
629,660

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

3



ARUBA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
 
Three Months Ended October 31,
 
2014
 
2013
 
(in thousands, except per share amounts)
Revenue
 
 
 
Product
$
168,470

 
$
130,831

Support and professional services
39,351

 
30,096

Total revenue
207,821

 
160,927

Cost of revenue
 
 
 
Product
51,630

 
40,118

Support and professional services
9,609

 
8,433

Total cost of revenue
61,239

 
48,551

Gross profit
146,582

 
112,376

Operating expenses
 
 
 
Research and development
42,234

 
40,445

Sales and marketing
71,975

 
63,044

General and administrative
15,615

 
14,515

Restructuring charges
6,554

 

Total operating expenses
136,378

 
118,004

Operating income (loss)
10,204

 
(5,628
)
Other income (expense), net
 
 
 
Interest income
199

 
261

Other income (expense), net
(752
)
 
270

Total other income (expense), net
(553
)
 
531

Income (loss) before income taxes
9,651

 
(5,097
)
Provision for income taxes
6,908

 
2,730

Net income (loss)
$
2,743

 
$
(7,827
)
 
 
 
 
Net income (loss) per share - basic
$
0.03

 
$
(0.07
)
Net income (loss) per share - diluted
$
0.02

 
$
(0.07
)
Shares used in per share calculation - basic
108,374

 
112,011

Shares used in per share calculation - diluted
115,589

 
112,011

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

4


ARUBA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
 
 
Three Months Ended October 31,
 
2014
 
2013
 
(in thousands)
 
 
 
 
Net income (loss)
$
2,743

 
$
(7,827
)
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
Short-term investments:
 
 
 
Unrealized gains (losses), net
22

 
(88
)
Realized gains reclassified into earnings

 
(30
)
Net change in unrealized gains (losses) on short-term investments
22

 
(118
)
Other comprehensive income (loss)
22

 
(118
)
 
 
 
 
Comprehensive income (loss)
$
2,765

 
$
(7,945
)
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


5



ARUBA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Three Months Ended October 31,
 
2014
 
2013
 
(in thousands)
Cash flows from operating activities
 
 
 
Net income (loss)
$
2,743

 
$
(7,827
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
7,283

 
7,032

Change in provision for doubtful accounts
28

 
(85
)
Inventory reserves for excess, obsolescence and other
2,973

 
1,853

Stock-based compensation expense
24,826

 
27,419

Amortization of discounts and premiums on short-term investments
370

 
609

Loss on disposal or write-off of property and equipment
36

 
109

Deferred income taxes
1,817

 
(351
)
Excess tax benefit associated with stock-based compensation
(2,813
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(4,937
)
 
25,018

Inventory
(2,136
)
 
(7,322
)
Deferred costs of revenue
(1,122
)
 
(1,121
)
Prepaids and other current assets
(959
)
 
(763
)
Other non-current assets
347

 
(351
)
Accounts payable, accrued liabilities and other non-current liabilities
3,253

 
(38,405
)
Deferred revenue
14,846

 
15,433

Net cash provided by operating activities
46,555

 
21,248

Cash flows from investing activities
 
 
 
Purchases of short-term investments
(30,860
)
 
(62,362
)
Proceeds from sales of short-term investments
11,000

 
48,080

Proceeds from maturities of short-term investments
23,105

 
40,645

Purchases of property and equipment
(5,959
)
 
(4,604
)
Investment in a privately-held company
(550
)
 

Net cash provided by (used in) investing activities
(3,264
)
 
21,759

Cash flows from financing activities
 
 
 
Proceeds from issuance of common stock
12,889

 
7,449

Repurchases of common stock under stock repurchase program
(25,000
)
 
(113,462
)
Excess tax benefit associated with stock-based compensation
2,813

 

Net cash used in financing activities
(9,298
)
 
(106,013
)
Net increase (decrease) in cash and cash equivalents
33,993

 
(63,006
)
Cash and cash equivalents, beginning of period
118,594

 
144,919

Cash and cash equivalents, end of period
$
152,587

 
$
81,913

 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
Income taxes paid
$
1,954

 
$
2,099

Non-cash investing and financing activities
 
 
 
Net change in accounts payable and accrued liabilities related to purchases of property and equipment
$
1,013

 
$
228

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

6

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


1.
The Company and its Significant Accounting Policies
The Company
Aruba Networks, Inc. (the “Company”) is a leading global provider of enterprise mobility solutions. The Company develops, markets and sells products and services that help solve its customers’ secure mobility requirements through its Mobility-Defined Networks, a network architecture designed to automatically optimize infrastructure-wide performance and trigger security actions that previously required manual intervention by information technology (“IT”) departments. Aruba Mobility-Defined Networks are comprised of the following three major components: Aruba's mobility-centric network infrastructure, Aruba's ClearPass Access Management System, and Aruba's mobility applications. The Company’s goal is to provide simplified, dependable solutions that enable IT departments to quickly, securely and cost-effectively meet their mobility and bring-your-own-device (“BYOD”) needs. The Company’s Mobility-Defined Networks are designed for the all-wireless workplace and an increasingly mobile universe of end-users, who the Company refers to as GenMobile, who rely on mobile devices for nearly every aspect of their work life and personal communication. The Company derives its revenue primarily from sales of Mobility Controllers with ArubaOS operating system software, controller-less and controller-managed wireless access points, value-added security software modules, access management system solutions, multi-vendor management software, mobility management solutions and other software, Mobility Access Switches, and support and professional services. The Company has offices in the Americas, Europe, the Middle East and the Asia Pacific regions and employs staff around the world.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States of America ("U.S.") generally accepted accounting principles ("GAAP") for interim financial information, pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances, transactions and cash flows have been eliminated. The July 31, 2014 Condensed Consolidated Balance Sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
The unaudited Condensed Consolidated Financial Statements have been prepared on the same basis as the Company's audited financial statements as of and for the year ended July 31, 2014 and include all adjustments necessary for the fair statement of the Company’s financial position as of October 31, 2014; the results of operations and statements of comprehensive income (loss) for the three months ended October 31, 2014 and 2013; and the statements of cash flows for the three months ended October 31, 2014 and 2013. The results of operations for the three months ended October 31, 2014 are not necessarily indicative of the operating results for any subsequent quarter, for the fiscal year ending July 31, 2015 or any future periods.
The accompanying statements are unaudited and should be read in conjunction with the audited Consolidated Financial Statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended July 31, 2014, filed with the SEC on September 24, 2014.
Significant Accounting Policies
There have been no significant changes in the Company’s accounting policies for the first quarter of fiscal 2015, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended July 31, 2014.

7


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

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

8


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


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

Changes in goodwill

Balance at July 31, 2014
$
67,242

Changes in goodwill

Balance at October 31, 2014
$
67,242


The following table presents details of the Company’s intangible assets:
 
Estimated
Useful Lives
 
Gross
Value
 
Accumulated
Amortization
 
Net
Value
 
(in thousands, except estimated useful lives)
Balance at October 31, 2014
 
 
 
 
 
 
 
Existing technology
3 to 7 years
 
$
41,383

 
$
(30,878
)
 
$
10,505

Patents
2 to 13 years
 
11,796

 
(6,209
)
 
5,587

Customer contracts
4 to 7 years
 
7,533

 
(6,647
)
 
886

Support agreements
5 to 6 years
 
2,917

 
(2,847
)
 
70

Tradenames and trademarks
1 to 5 years
 
1,150

 
(892
)
 
258

Non-compete agreements
 2 to 4 years
 
912

 
(873
)
 
39

Total
 
 
$
65,691

 
$
(48,346
)
 
$
17,345


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

 
$
(29,196
)
 
$
12,187

Patents
2 to 13 years
 
11,796

 
(5,881
)
 
5,915

Customer contracts
4 to 7 years
 
7,533

 
(6,536
)
 
997

Support agreements
5 to 6 years
 
2,917

 
(2,839
)
 
78

Tradenames and trademarks
1 to 5 years
 
1,150

 
(867
)
 
283

Non-compete agreements
 2 to 4 years
 
912

 
(867
)
 
45

Total
 
 
$
65,691

 
$
(46,186
)
 
$
19,505


Amortization expense related to intangible assets is recorded in the Condensed Consolidated Statements of Operations as follows:
 
Three Months Ended October 31,
 
2014
 
2013
 
(in thousands)
Cost of product revenue
$
1,995

 
$
2,005

Sales and marketing
144

 
353

Research and development
6

 
6

General and administrative
15

 

Total amortization expense
$
2,160

 
$
2,364


9


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


The following table presents the estimated future amortization expense of intangible assets as of October 31, 2014:
 
Amount
 
(in thousands)
Fiscal Year
 
2015 (remaining nine months)
$
6,263

2016
4,585

2017
1,774

2018
1,521

2019
787

Thereafter
2,415

Total
$
17,345

3.
Net Income (Loss) Per Common Share
Basic and diluted net income (loss) per common share is calculated by dividing net income (loss) by the weighted-average shares of common stock outstanding during the reporting period. The Company's dilutive potential common shares are not included when their effect is antidilutive.
Potentially dilutive common shares consist of common shares issuable upon exercise of stock options, issuances of Employee Stock Purchase Plan ("ESPP") shares, vesting of Restricted Stock Units ("RSUs"), and vesting of Market Stock Units ("MSUs"). The Company includes the common shares underlying MSUs in the calculation of diluted net income per share when they become contingently issuable and excludes such shares when they are not contingently issuable.
The dilutive effect of potentially dilutive common shares is calculated based on the average share price for each fiscal reporting period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are collectively assumed to be used to repurchase shares.
The following table sets forth the computation of basic and diluted net income (loss) per share:
 
Three Months Ended October 31,
 
2014
 
2013
 
(in thousands, except per share data)
Net income (loss)
$
2,743

 
$
(7,827
)
Weighted-average shares outstanding - basic
108,374

 
112,011

Dilutive effect of potential shares
7,215

 

Weighted-average shares outstanding - diluted
115,589

 
112,011

Net income (loss) per share - basic
$
0.03

 
$
(0.07
)
Net income (loss) per share - diluted
$
0.02

 
$
(0.07
)

The following table presents the potentially dilutive common shares that were excluded from the computation of the diluted net income (loss) per share for the periods presented, because including them would have had an anti-dilutive effect:
 
Three Months Ended October 31,
 
2014
 
2013
 
(in thousands)
Options to purchase common stock
1,027

 
1,250

Restricted stock awards
1,015

 
2,787

Market stock units
303

 



10


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

4.
Short-Term Investments
Short-term investments consisted of the following:
 
Cost Basis
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
Balance at October 31, 2014
 
 
 
 
 
 
 
Corporate bonds
$
55,816

 
$
52

 
$
(23
)
 
$
55,845

U.S. government agency securities
86,604

 
15

 
(47
)
 
86,572

U.S. treasury bills
10,988

 
9

 

 
10,997

Commercial paper
7,792

 
3

 

 
7,795

Municipal notes and bonds
1,500

 

 

 
1,500

Total short-term investments
$
162,700

 
$
79

 
$
(70
)
 
$
162,709


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

 
$
79

 
$
(15
)
 
$
55,033

U.S. government agency securities
90,681

 
17

 
(58
)
 
90,640

U.S. treasury bills
14,560

 
17

 

 
14,577

Commercial paper
4,587

 
4

 

 
4,591

Municipal notes and bonds
1,518

 

 

 
1,518

Total short-term investments
$
166,315

 
$
117

 
$
(73
)
 
$
166,359


The cost basis and fair value of the short-term investments by contractual maturity are presented below:
 
Cost
Basis
 
Fair
Value
 
(in thousands)
Balance at October 31, 2014
 
 
 
One year or less
$
104,655

 
$
104,715

Over one year and less than two years
58,045

 
57,994

Total short-term investments
$
162,700

 
$
162,709


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

 
$
110,280

Over one year and less than two years
56,131

 
56,079

Total short-term investments
$
166,315

 
$
166,359

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

11


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

The following table summarizes the fair value and gross unrealized losses of the Company’s investments with unrealized losses aggregated by type of investment instrument and the length of time that individual securities have been in a continuous unrealized loss position:
 
Less than 12 Months
 
Fair
Value
 
Unrealized
Loss
 
(in thousands)
Balance at October 31, 2014
 
 
 
Corporate bonds
$
16,510

 
$
(23
)
U.S. government agency securities
53,905

 
(47
)
Total
$
70,415

 
$
(70
)

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

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

 
(58
)
Total
$
71,667

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

12


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

The fair value measurements of the Company’s cash, cash equivalents and short-term investments consisted of the following:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Balance at October 31, 2014
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash deposits with third-party financial institutions
$
143,444

 
$

 
$

 
$
143,444

Money market funds
7,643

 

 

 
7,643

Commercial paper

 
1,500

 

 
1,500

Short-term investments:
 
 
 
 
 
 
 
Corporate bonds

 
55,845

 

 
55,845

U.S. government agency securities

 
86,572

 

 
86,572

U.S. treasury bills

 
10,997

 

 
10,997

Commercial paper

 
7,795

 

 
7,795

Municipal notes and bonds

 
1,500

 

 
1,500

Total assets measured and recorded at fair value
$
151,087

 
$
164,209

 
$

 
$
315,296


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

 
$

 
$

 
$
113,303

Money market funds
2,291

 

 

 
2,291

Commercial paper

 
3,000

 

 
3,000

Short-term investments:
 
 
 
 
 
 
 
Corporate bonds

 
55,033

 

 
55,033

U.S. government agency securities

 
90,640

 

 
90,640

U.S. treasury bills

 
14,577

 

 
14,577

Commercial paper

 
4,591

 

 
4,591

Municipal notes and bonds

 
1,518

 

 
1,518

Total assets measured and recorded at fair value
$
115,594

 
$
169,359

 
$

 
$
284,953


Other Investments
As of October 31, 2014 and July 31, 2014, the Company had investments in privately-held companies of $2.3 million and $1.8 million, respectively, which are included in other non-current assets in the accompanying Condensed Consolidated Balance Sheets. These investments are recorded at cost and are adjusted to fair value in the event that they become other-than-temporarily impaired. There have been no impairments of these investments recorded in any of the periods presented.

13


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

6.
Condensed Consolidated Balance Sheet Components
The following tables provide details of selected Condensed Consolidated Balance Sheet items:
 
October 31,
2014
 
July 31,
2014
 
(in thousands)
Inventory
 
 
 
Raw materials
$
371

 
$
348

Finished goods
39,662

 
39,488

Total
$
40,033

 
$
39,836


 
Estimated
Useful Lives
 
October 31,
2014
 
July 31,
2014
 
(in thousands, except estimated useful lives)
 Property and Equipment, net
 
Computer equipment
2 to 5 years
 
$
26,672

 
$
25,779

Computer software
2 to 5 years
 
18,197

 
16,675

Machinery and equipment
2 to 5 years
 
39,478

 
36,500

Furniture and fixtures
2 to 5 years
 
4,987

 
4,756

Leasehold improvements
1 to 6 years
 
9,432

 
8,128

Total property and equipment, gross
 
 
98,766

 
91,838

Less: accumulated depreciation and amortization
 
 
(69,692
)
 
(64,577
)
Total property and equipment, net
 
 
$
29,074

 
$
27,261

Depreciation and amortization expense for property and equipment for the first quarter of fiscal 2015 and 2014 was $5.1 million and $4.7 million, respectively.
 
October 31,
2014
 
July 31,
2014
 
(in thousands)
Accrued Liabilities
 
 
 
Compensation and benefits
$
31,116

 
$
37,737

Marketing
23,458

 
24,782

Litigation reserves

 
250

Other
23,173

 
17,809

Total accrued liabilities
$
77,747

 
$
80,578


14


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

 
October 31,
2014
 
July 31,
2014
 
(in thousands)
 Deferred Revenue
 
Product
$
57,491

 
$
50,678

Support and professional services
88,686

 
84,482

Total deferred revenue, current
146,177

 
135,160

Product, non-current
3,298

 
3,497

Support and professional services, non-current
45,508

 
41,480

Total deferred revenue, non-current
48,806

 
44,977

Total deferred revenue
$
194,983

 
$
180,137

Deferred product revenue relates to arrangements where not all revenue recognition criteria have been met. Deferred support and professional services revenue primarily represents customer payments made in advance for support and professional services contracts. Support contracts are typically billed on an annual basis in advance and revenue is recognized ratably over the support period, typically one to five years. Non-current product deferred revenue relates to software products sold as part of a multiple-element arrangement for which Vendor Specific Objective Evidence ("VSOE") had not been established. Revenue for these software products is recognized ratably over the related support period. The primary changes in the deferred revenue balances are due to quarter-end inventory stocking orders of our value-added distributors, growth of annual maintenance contracts from customers, and transactions which have certain acceptance or deployment provisions that will be recognized as revenue when revenue recognition criteria are met.
7.
Income Taxes
The effective tax rate in all periods is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. Future effective tax rates could be adversely affected if earnings are lower than anticipated in countries that have lower statutory tax rates or by unfavorable changes in tax laws and regulations or their interpretation. The Company’s effective tax rates were 71.6% and 53.6% for the first quarter of fiscal 2015 and 2014, respectively.
For the first quarter of fiscal 2015, the effective tax rate differs from the tax computed at the U.S. federal statutory income tax rate due primarily to state taxes, non-deductible stock-based compensation and the mix of earnings among jurisdictions with different tax rates. For the first quarter of fiscal 2015, the Company computed the provision for income taxes based on the projected annual effective tax rate, as the Company determined that small changes in the estimated income or loss between tax jurisdictions would not result in significant fluctuations in the estimated annual effective tax rate.
For the first quarter of fiscal 2014, the Company computed the quarterly provision for income taxes based on the actual tax rate for that period, as the Company determined that small changes in the estimated income or loss between tax jurisdictions would result in significant changes in the estimated annual effective tax rate. For the first quarter of fiscal 2014, the Company’s effective tax rate differs from the tax computed at the U.S. federal statutory income tax rate due primarily to non-deductible stock-based compensation and fixed amortization of deferred tax charges related to the fiscal 2012 intercompany sale of intellectual property ("IP") rights.
The difference in the effective tax rates between the first quarter of fiscal 2015 and 2014 is primarily due to a difference in the mix of earnings among jurisdictions with different tax rates, offset by a reduction in deferred tax charges in the first quarter of fiscal 2015.
In fiscal 2012, the Company implemented a new corporate organization structure to more closely align its corporate organization with the international nature of its business activities and to reduce its overall effective tax rate through changes in how it develops and uses its intellectual property and the structure of its international procurement and sales, including transfer-price arrangements for intercompany transactions. Therefore, the Company incurred and recorded IP structure charges starting in fiscal 2012. The Company also records deferred charges on other intra-entity transfers of intangible properties as they occur.

15


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

IP structure charges consist primarily of non-recurring gains recognized in the U.S. related to the international restructuring of the Company’s corporate organization during fiscal 2012, including the transfer of certain IP and inventory overseas. The “Amortization of deferred tax charge on IP restructuring” consists of taxes paid that resulted from intra-entity transfers and that are deferred and amortized for financial reporting purposes under Accounting Standards Codification (“ASC”) 740-10-25-3(e), Income Taxes, and ASC 810-10-45-8, Consolidation. For fiscal 2014, 2013 and 2012, the corporate reorganization resulted in an increase to the effective tax rate due to a non-recurring gain triggered in the U.S. related to the reorganization as described above. As of July 31, 2014, the Company had largely amortized the deferred charges from its fiscal 2012 international restructuring of the Company’s corporate organization. The Company continues to record amortization of deferred tax charges on other similar intra-entity transfers that occurred after fiscal 2012. As of October 31, 2014, the balance in prepaids and other assets and other non-current assets was $1.0 million and $1.7 million, respectively. The deferred charge is amortized on a straight-line basis as a component of income tax expense over three to eleven years, based on the economic life of the intellectual property, and will increase the Company's effective tax rate during the amortization period. The deferred charges resulted in a 1.3 point increase to the effective tax rate for the first three months of fiscal 2015, from 70.3% to 71.6%.
Each fiscal quarter, the Company assesses the likelihood that it will be able to recover its deferred tax assets. The Company will reduce a deferred tax asset by a valuation allowance if it is "more likely than not" that some portion or all of the deferred tax asset will not be realized. A deferred tax asset is recorded when there is a future deductible amount, but a valuation allowance is needed if taxable income is anticipated to be insufficient to realize the future deductible amount. The Company considers available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. The Company believes that its California tax research credit carryforwards are not more likely than not to be realized. As a result, in fiscal 2013, the Company recorded a partial valuation allowance on certain California tax research credit carryforwards generated in fiscal years before 2013. A full valuation allowance was recorded on credits earned in fiscal 2014 and 2013. In the first quarter of fiscal 2015, the Company recorded an increase in the valuation allowance of $0.5 million relating to California tax research credits earned during the first three months of fiscal 2015. It is reasonably possible that a material increase in the valuation allowance could occur in the future depending on changes, if any, in the mix of earnings in the jurisdictions in which the Company operates, the percentage of revenue from California customers, the Company's evaluation of prudent and feasible tax planning strategies, the Company's expectation of exercising elections available under the applicable tax laws, and the Company's projections of the future growth and forecasted earnings. An increase to the valuation allowance would have the effect of increasing the income tax provision in the Condensed Consolidated Statements of Operations.
The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state and local jurisdictions, and in various foreign jurisdictions. Due to the Company's net operating loss and credit carryforwards, substantially all years are subject to examination. There are no material income tax audits currently in progress as of October 31, 2014, with the exception of India. The Company is currently under examination in India, however it believes that its reserves are adequate for any potential settlement payment.

16


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

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

 
10,047,569

 
$
6.29

 
2.9
 
$
121,227

Shares reserved for issuance
5,670,469

 


 
 
 
 
 
 
Restricted stock awards granted
(4,350,155
)
 


 
 
 
 
 
 
Restricted stock awards forfeited
1,238,196

 


 
 
 
 
 
 
Options exercised

 
(2,778,312
)
 
3.73

 
 
 
42,871

Options cancelled
131,142

 
(131,142
)
 
19.98

 
 
 
 
Balance at July 31, 2014
3,247,237

 
7,138,115

 
7.03

 
2.0
 
82,533

Shares reserved for issuance
5,377,830

 


 
 
 
 
 
 
Restricted stock awards granted
(2,181,683
)
 


 
 
 
 
 
 
Restricted stock awards forfeited
673,818

 


 
 
 
 
 
 
Market stock units granted
(595,000
)
 


 
 
 
 
 
 
Market stock units forfeited
10,000

 
 
 
 
 
 
 
 
Options exercised

 
(1,157,461
)
 
3.98

 
 
 
19,037

Options cancelled
3,434

 
(3,434
)
 
20.82

 
 
 
 
Balance at October 31, 2014
6,535,636

 
5,977,220

 
$
7.62

 
1.8
 
$
85,124

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

 
$
18.87

Awards granted
4,350,155

 
18.67

Awards vested
(5,009,273
)
 
19.07

Awards forfeited
(1,238,196
)
 
19.28

Balance at July 31, 2014
8,890,440

 
18.61

Awards granted
2,181,683

 
23.32

Awards vested
(1,262,500
)
 
20.63

Awards forfeited
(673,818
)
 
19.21

Balance at October 31, 2014
9,135,805

 
$
19.41

Fair Value Disclosures
The fair value of each option is estimated on the date of grant using the Black-Scholes model.

17


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

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

 
432,749

Weighted average purchase price per share
$
14.64

 
$
14.12

Market Stock Units
In September 2014, the Compensation Committee of the Company's Board of Directors approved the grant of 595,000 Market Stock Units ("MSUs") with 100% of the shares to be earned upon the achievement of an objective relative total stockholder return measured over a three-year performance period. MSU awards are granted under the Company's 2007 Equity Incentive Plan (the "2007 Plan"). The purpose of the MSU program is to align key management and senior leadership with stockholders' interests over the long-term and to retain key employees.
Each MSU award granted in the first quarter of fiscal 2015 contains three separate tranches of an equal number of shares, with 100% of the shares of Tranche 1, Tranche 2, and Tranche 3 to be earned based on the achievement of an objective total stockholder return measure over one-year, two-year and three-year performance periods, respectively. MSUs will be awarded and fully vested upon the Compensation Committee's certification of the level of achievement following the performance period of each tranche. MSU participants have the ability to receive up to 150% of the target number of shares initially granted.
The fair value of each MSU award is determined by multiplying the fair value per share by the underlying number of shares. The fair value per share was determined on the grant date using the Monte Carlo valuation methodology and the assumptions described in the table below. The fair value per share for Tranche 1, Tranche 2, and Tranche 3 is $28.10, $26.90 and $26.74 per share, respectively. The Company amortizes the fair value of each MSU award using the graded-vesting method, adjusted for estimated forfeitures. Stock-based compensation expense associated with participants who fulfill their requisite service period is not reversed even if the performance market conditions are not met. However, stock-based compensation expense is reversed for participants who forfeit their MSU awards prior to fulfilling their requisite service period.
There were no MSU awards granted during the first quarter of fiscal 2014. The fair value of the MSUs granted during the first quarter of fiscal 2015 was estimated using the following weighted-average assumptions:
 
Three Months Ended October 31,
 
2014
 
2013
Risk-free interest rates
1.03%
 
-
Expected term (in years)
2.87
 
-
Dividend yield
—%
 
-
Volatility
50.73%
 
-

18


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

As of October 31, 2014, the shares awarded under the MSU program have yet to be earned. The following table summarizes the information about the MSU awards granted in the first quarter of fiscal 2015:
 
Target
Shares
Granted
 
Maximum
Shares Eligible
to Receive
Balance at July 31, 2014

 

Awarded
595,000

 
892,500

Forfeited
(10,000
)
 

Earned

 

Balance at October 31, 2014
585,000

 
892,500

The following table summarizes the information about the outstanding MSUs at October 31, 2014:
 
Number of
Shares
 
Weighted
Average Remaining Contractual Life
 
Aggregate
Intrinsic
Value (*)
 
 
 
(years)
 
(in thousands)
MSUs outstanding
585,000

 
2.8
 
$
12,624

MSUs vested and expected to vest
550,597

 
2.8
 
$
11,882

(*) The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market value at October 31, 2014 was $21.58.
Stock-based Compensation Expense
Stock-based compensation expense consists primarily of expenses for stock options, restricted stock awards, market stock units, and employee stock purchase rights granted to employees. The following table summarizes stock-based compensation expense:
 
Three Months Ended October 31,
 
2014
 
2013
 
(in thousands)
Cost of revenue
$
1,699

 
$
2,158

Research and development
9,563

 
10,808

Sales and marketing
9,576

 
10,311

General and administrative
3,715

 
4,142

Restructuring charges
273

 

Total
$
24,826

 
$
27,419

The following table presents stock-based compensation expense by award-type:
 
Three Months Ended October 31,
 
2014
 
2013
 
(in thousands)
Stock options
$
683

 
$
1,699

Stock awards
20,807

 
23,834

Employee stock purchase plan
2,123

 
1,886

Market stock units
1,213

 

Total
$
24,826

 
$
27,419

Stock Repurchase Program
As of October 31, 2014, the Company's Board of Directors had authorized a stock repurchase program for an aggregate amount of up to $500.0 million (consisting of an original $100.0 million authorization on June 13, 2012, plus subsequent authorizations of $100.0 million on July 15, 2013, $100.0 million on October 9, 2013, and $200.0 million on February 20, 2014).

19


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

The Company is authorized to make repurchases in the market until the Board of Directors terminates the program or until such repurchases reach the authorized amount, whichever occurs first. Any repurchases under the program will be funded either from available working capital or external financing. The number of shares repurchased and the timing of repurchases are based on the price of the Company's common stock, general business and market conditions, and other investment considerations. Shares are retired upon repurchase. The Company's policy related to repurchases of its common stock is to charge any excess of cost over par value entirely to additional paid-in capital.
During the first quarter of fiscal 2015, the Company repurchased a total of 1,127,607 shares for a total purchase price of $25.0 million. During the first quarter of fiscal 2014, the Company repurchased a total of 6,363,780 shares for a total purchase price of $113.5 million. As of October 31, 2014, $105.9 million remains authorized for repurchase under the stock repurchase program.
9.
Restructuring Charges
In August 2014, the Company announced a restructuring plan to optimize its administrative and operational costs by realigning its workforce to better reflect the Company's operations and scaling the Company with a global infrastructure. While the Company's workforce will be reduced in the near term and certain personnel functions will be relocated to lower cost regions, the Company expects to continue hiring to support the expansion of its go-to-market strategy as well as to support continued product innovation. At the time of the restructuring, the Company expected this cost reduction would result in the reduction of up to 66 positions, or 3.7% of its global workforce, and the relocation of up to 75 positions, or 4.2% of its global workforce, to the Company’s facilities located in Portland, Oregon, Bangalore, India, and Cork, Ireland.
The Company estimated that it would recognize pre-tax restructuring charges of between approximately $6.0 million and $8.0 million, consisting primarily of severance and other one-time termination benefits and other associated costs. These charges are primarily cash-based.
In the first quarter of fiscal 2015, the Company recognized restructuring charges of $6.6 million, which consisted primarily of severance and other one-time termination benefits and other charges directly associated with the restructuring. The Company continues to expect that total pre-tax charges will not exceed $8.0 million, with the majority of the remaining charges expected to be recognized during the second quarter of fiscal 2015.
The following table summarizes the restructuring activities for the first quarter of fiscal 2015:
 
Employee Severance and Benefits
 
Other
 
Total
 
(in thousands)
Balance at July 31, 2014
$

 
$

 
$

Gross restructuring charges
6,203

 
351

 
6,554

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

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

 
$

 
$
3,187

The balance of restructuring charges accrued at October 31, 2014 of $3.2 million is included in accrued liabilities in the Condensed Consolidated Balance Sheet as of October 31, 2014.

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

20


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

The following presents total revenue by geographic region:
 
Three Months Ended October 31,
 
2014
 
2013
 
(in thousands)
United States
$
132,765

 
$
108,315

Europe, Middle East and Africa
44,857

 
25,996

Asia Pacific
26,006

 
22,994

Rest of World
4,193

 
3,622

Total
$
207,821

 
$
160,927

The following table presents significant channel partners contributing 10% or more of total revenue:
 
Three Months Ended October 31,
 
2014
 
2013
ScanSource, Inc.
17.6%
 
21.3%
Synnex Corp.
12.3%
 
13.6%
The following table presents significant channel partners accounting for 10% or more of total net accounts receivable: 
 
October 31,
2014
 
July 31,
2014
ScanSource, Inc.
12.7%
 
17.2%
Synnex Corp.
13.1%
 
11.8%
Avnet Logistics U.S. LP
13.3%
 
15.3%
Dell, Inc.
*
 
11.5%
(*) Indicates less than 10%.
The following table sets forth the Company's long-lived assets (property and equipment) by geographic region based on the location of the asset:
 
October 31,
2014
 
July 31,
2014
 
(in thousands)
United States
$
19,273

 
$
18,242

All other countries
9,801

 
9,019

Total
$
29,074

 
$
27,261

11.
Commitments and Contingencies
Legal Matters
The Company is involved in disputes, claims, litigation, investigations, proceedings and other legal actions, consisting of intellectual property, commercial, securities, and employment matters from time to time that arise in the ordinary course of business, including the legal matters identified below.
U.S. Federal Court Class Action Litigation. On May 23, 2013, a purported stockholder class action lawsuit captioned Mazzafero v. Aruba Networks, Inc., et al., was filed in the United States District Court for the Northern District of California against the Company and certain of its officers. The purported class action alleges claims for violations of the federal securities laws, and seeks unspecified compensatory damages and other relief. On August 1, 2014, the Court dismissed the case but granted leave to amend. On September 26, 2014, the purported class filed an amended complaint which made allegations similar in nature to those in the original complaint. On October 27, 2014, the Company filed a motion to dismiss the amended complaint. The Company believes that it has meritorious defenses to these claims and intends to defend the litigation vigorously. Based on information currently available, the Company has determined that the amount of any possible loss or range of possible loss is not reasonably estimable.

21


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

The Company reviews all legal matters at least quarterly and assesses whether an accrual for loss contingencies needs to be recorded. The assessment reflects the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. The Company records an accrual for loss contingencies when management believes that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal matters are subject to uncertainties and are inherently unpredictable; however, the Company believes that it has valid defenses with respect to its pending legal matters. Actual liability in any such matters may be materially different from the Company's estimates, which could result in the need to adjust the liability and record additional expenses. Patent litigation in particular is subject to significant postural shifts over short time frames, making the Company’s ability to assess probable liability particularly speculative in any given fiscal quarter even though the matter may be resolved in the next fiscal quarter. If an unfavorable resolution were to occur, there exists the possibility of a material adverse impact on the Company's consolidated financial condition, results of operations or cash flows for the period in which the resolution occurs or on future periods.
In addition, these actions or other third-party claims against the Company may cause the Company to incur costly litigation and/or substantial settlement charges. Furthermore, the outcome of any patent related litigation may require the Company to make ongoing royalty payments, which could adversely affect gross margins in future periods. If any of those events were to occur, the Company's business, financial condition, results of operations, and cash flows could be adversely affected in any particular period by an unfavorable resolution of one or more of these contingencies.
Lease Obligations
The Company leases office space under non-cancelable operating leases with various expiration dates through June 2018. Future minimum lease payments under non-cancelable operating leases are as follows:
 
Amount
Fiscal Year
(in thousands)
2015 (remaining nine months)
$
6,059

2016
8,265

2017
3,134

2018
1,354

Total minimum payments
$
18,812

Employee Agreements
The Company has signed various employment agreements with certain executives pursuant to which if their employment is terminated without cause, the executives are entitled to receive certain benefits, including, but not limited to, accelerated stock vesting.
Non-cancelable Purchase Commitments
The Company outsources the production of its hardware to third-party contract manufacturers, and enters into various inventory-related purchase commitments with these contract manufacturers and other suppliers. In addition, from time to time, the Company also enters into significant information technology and marketing agreements with its vendors, which are non-cancelable. The Company had $52.6 million and $45.4 million in non-cancelable purchase commitments as of October 31, 2014 and July 31, 2014, respectively. During the first quarter of fiscal 2015, the Company recognized a reserve for excess inventory of $1.0 million associated with a non-cancelable purchase order, which was included in product cost of revenue in the Condensed Consolidated Statement of Operations.

22


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

Product Warranty
The Company’s liability for estimated future product warranty costs is included as a component of accrued liabilities in the Condensed Consolidated Balance Sheets. The following table summarizes the activity related to the Company’s accrued liability for estimated future warranty costs:
 
Product Warranty
First quarter of fiscal 2015:
(in thousands)
Balance at July 31, 2014
$
943

Changes to the provision
60

Obligations fulfilled during period
(130
)
Balance at October 31, 2014
$
873

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

Changes to the provision
170

Obligations fulfilled during period
(148
)
Balance at October 31, 2013
$
799

Indemnification
In its sales agreements, the Company may agree to indemnify its indirect sales channels and end user customers for certain expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification provisions are generally perpetual any time after execution of the agreement. The agreements generally limit the scope of the available remedies in a variety of industry-standard methods, including, but not limited to, product usage and geography-based limitations, a right to control the defense or settlement of any claim, and a right to replace or modify the infringing products to make them non-infringing. In certain circumstances, the Company may be subject to uncapped indemnity obligations. To date the Company has not paid any amounts to settle claims or defend lawsuits pursuant to such indemnification provisions. The Company believes the likelihood of such claims is remote. Accordingly, the Company has no liabilities recorded for these agreements as of October 31, 2014 and July 31, 2014. In addition, the Company indemnifies its officers, directors, and certain key employees while they are serving in good faith in their company capacities.
12.
Subsequent Events
In November 2014, the Company entered into a non-cancelable lease agreement for office space in Portland, Oregon, expiring in March 2022. Total future minimum payments under this agreement is approximately $6.8 million to be paid over the term of the agreement.

23



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

24



Overview
Aruba Networks, Inc. is a leading global provider of enterprise mobility solutions. We develop, market and sell solutions that help solve our customers' secure mobility requirements through our Mobility-Defined Networks™, a fundamentally new network architecture designed to automatically optimize infrastructure-wide performance and trigger security actions that previously required manual intervention by information technology (“IT”) departments. Mobility-Defined Networks gather and correlate contextual data about user roles, device types, application flows and location, which is critical in dynamic, ever-changing mobility environments where end-users roam. This self-healing, self-optimizing approach to mobility can greatly reduce IT helpdesk tickets and offer stronger data protection.
We believe the market for mobility solutions is changing and that the explosive growth of mobile devices, in part as a result of the bring-your-own-device (“BYOD”) phenomenon, is forcing IT departments to radically revise the way they approach provisioning and supporting these devices. Our goal is to provide simplified, dependable solutions that enable our customers to quickly, securely and cost-effectively meet their mobility and BYOD needs. Our Aruba Mobility-Defined Networks are designed for the all-wireless workplace and an increasingly mobile universe of end-users, whom we refer to as GenMobile, who rely on mobile devices for nearly every aspect of worklife and personal communication and demand to stay connected to everything virtually all the time, no matter where they are.
Aruba Mobility-Defined Networks are comprised of three major components. The first component consists of our mobility-centric network infrastructure, including Mobility Controllers with ArubaOS™ operating system software, value-added security software modules, controller-less and controller-managed wireless access points, Remote Access Points, virtual private network (“VPN”) client software, and our AirWave™ and cloud-based Aruba Central® management solutions, and Mobility Access Switches. The second component is our Aruba ClearPass Access Management System™, our next-generation access management system, which is designed to simplify and automate policy management, guest network access, mobile device onboarding, and mobile device health checks. The third component consists of our mobility applications, including application programming interfaces (“APIs”) for location and analytics applications as well as our Meridian™-powered mobile applications, which engage visitors through their mobile devices by providing indoor way-finding with turn-by-turn directions and targeted location-aware push notifications.
We conduct business in three primary geographic regions: Americas, Europe, Middle East and Africa ("EMEA"), and Asia Pacific ("APAC"). Our solutions have been sold to more than 40,000 customers worldwide, including some of the largest and most complex global organizations. Our customer base spans major industries and verticals, including general enterprise, high tech enterprise, industrial enterprise, higher education, K-12 education, health care, retail, federal/state/local government, financial services and hospitality. We typically sell to and support these customers through a two-tier distribution model in most areas of the world, including the U.S. Our Value Added Distributors ("VADs") and Original Equipment Manufacturers ("OEMs") sell our portfolio of products, including a variety of our support services, to a diverse number of Value Added Resellers ("VARs"), systems integrators and service providers. Also, certain of our OEMs sell directly to end customers.
Headquartered in Sunnyvale, California and founded in 2002, Aruba is led by Dominic Orr, President and Chief Executive Officer and Keerti Melkote, Founder and Chief Technology Officer. Our website address is www.arubanetworks.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC website at www.sec.gov.
Major Trends Affecting Our Financial Results
Revenue
Our ability to increase our revenue will depend significantly on, among other things, continued growth in the market for enterprise mobility and remote networking solutions, continued acceptance of our products in the marketplace, our ability to continue to attract and retain new customers and distribution partners, our ability to compete, the willingness of customers to displace wired networks with wireless LANs, and our ability to continue to sell into our installed base of existing customers. We believe that our Aruba Mobility-Defined Networks, including our 802.11ac WLAN, ClearPass and Aruba Instant offerings, and software as a service solutions, will enable broader networking initiatives by both our current and potential customers. Our growth in support revenue is tied to increasing the number of products under support contracts, which is dependent on growing our installed base of customers, maintaining or improving the attach rate of support offerings to product sales and renewing existing support contracts. While we rely primarily on our partners to deliver professional services associated with our products, we sometimes deliver professional services directly to end customers, especially as we introduce new products. Our future profitability and rate of growth, if any, will also be directly affected by the timing and size of orders, product and channel mix, relative amount of professional services, seasonality of demand and sales patterns, average selling prices, costs of our products, our ability to effectively manage our multi-tier distribution model, general economic conditions, timing and impact of product transitions, and the extent to which we invest in our sales and marketing, research and development, and general and administrative resources.

25



The revenue growth that we have experienced has been driven primarily by an expansion of our customer base coupled with increased purchases from existing customers, which we believe reflects the need of business enterprises and other organizations to provide secure mobility to their users in a manner that is more cost effective than the traditional approach of using port-centric networks. Our revenue grew 29.1% in the first quarter of fiscal 2015 as compared to the first quarter of fiscal 2014.
Our ability to meet our product revenue expectations is dependent upon (1) new bookings received, shipped, and recognized in a given quarter, (2) the amount of bookings from prior quarters not shipped that are shipped and recognized in the current quarter, and (3) the amount of deferred revenue entering a given quarter that is recognized as revenue in the quarter. We typically ship products within 10 days after the receipt of an order.
Our product deferred revenue is comprised of:
product orders that have shipped but where the terms of the agreement, typically with our large customers, contain acceptance terms and conditions or other terms that require that the revenue be deferred until all revenue recognition criteria are met; and
product orders shipped to our VADs and OEMs for which we have not yet received persuasive evidence of sell-through from the VADs or OEMs.
Backlog
In our experience, the actual amount of product backlog at any particular time is not a meaningful indication of our future business prospects. Because we allow customers to cancel or change their bookings with limited advance notice prior to shipment or performance and because some bookings remain in backlog due to concerns about the credit worthiness of the partner or customer, we do not consider backlog to be firm and do not believe our backlog information is a reliable indicator of our ability to achieve any particular level of revenue or financial performance.
Product Transitions
We started in fiscal 2014 and continue to be in the midst of an access point product transition cycle from the 802.11n standard to the new 802.11ac standard. These types of product transitions present both an opportunity to increase our market share (as occurred during the last transition from 802.11abg to 802.11n) as well as opposing risks. Our new 802.11ac access points are among the fastest ramping access points in our history. We often introduce new premium products, such as our AP-225 802.11ac access point, for early adopter segments, and subsequently follow with the introduction of value-priced products for larger market segments, such as our AP-205 802.11ac access point, which was introduced last fiscal quarter, and our AP-215 802.11ac access point, which was introduced to the market towards the end of our first quarter of fiscal 2015.
Early premium products generally require higher initial production costs than both existing products and subsequently introduced value-priced products. Although we expect production costs to decrease over time, we have experienced, and may experience in the future, pressures on our gross margins when our customers adopt the new standard earlier than we expect and purchase the new higher cost products at a rate faster than we forecast, before we are able to lower our production costs. Product transitions may offer opportunities to capture market share, which can compound these early market pressures. In addition, we have faced and we may face in the future competition on pricing that could impact our ability to capture market share at this standard-changing inflection point or otherwise continue to pressure our gross margins.
Costs and Expenses
The substantial majority of our cost of product revenue consists of payments to third parties to manufacture our products, including Wistron NeWeb Corporation ("WNC"), Sercomm and Accton Technology Corporation ("Accton"), which were our largest contract manufacturers in the first quarter of fiscal 2015.
Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. The largest component of our operating expenses in each of these categories is personnel costs. Personnel costs consist of salaries, benefits and incentive compensation for our employees, including commissions for sales personnel and stock-based compensation expense for employees. As we continue our transition to a higher mix of cash-based compensation relative to stock-based compensation, in fiscal 2015 we expect our stock-based compensation expense will decrease on an absolute dollar basis and decrease as a percentage of revenue compared with fiscal 2014, with continued reductions expected as a percentage of revenue in fiscal 2016 and fiscal 2017.
As of October 31, 2014 and October 31, 2013, we had 1,708 employees and 1,567 employees worldwide, respectively, representing an increase of 141 employees. This increase in employees is the most significant driver behind the increase in costs and operating expenses in the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014. Even though we have recently adopted a restructuring plan described below that will reduce certain positions and shift other positions to lower-cost, talent-rich locations, we expect to continue hiring additional employees as we scale our business and optimize our global structure.

26



Restructuring Plan
In August 2014, we announced a restructuring plan to right-size our administrative and operations costs by lowering overall headcount in certain areas and realigning our workforce in other areas to lower-cost centers of excellence in several geographies. While our workforce will be reduced in the near term and certain personnel functions will be relocated to lower cost regions, we expect to continue hiring to support the expansion of our go-to-market strategy as well as to support continued product innovation.
At the time of the restructuring, we expected the restructuring plan would result in the reduction of up to 66 positions, or 3.7% of our global workforce, and the relocation of up to 75 positions, or 4.2% of our global workforce, to our facilities located in Portland, Oregon, Bangalore, India, and Cork, Ireland.
We also estimated that we would recognize pre-tax restructuring charges of between approximately $6.0 million to $8.0 million, consisting primarily of severance and other one-time termination benefits and other associated costs. These charges are primarily cash-based. We expected that these pre-tax charges would be expensed over the first three quarters of fiscal 2015, with the majority of the charges expected to be recognized during the first half of fiscal 2015.
Restructuring charges totaled $6.6 million in the first quarter of fiscal 2015, which consisted primarily of severance and other one-time termination benefits and other charges directly associated with the restructuring. We continue to expect that total pre-tax charges will not exceed $8.0 million, with the majority the remaining charges expected to be recognized during the second quarter of fiscal 2015.
For further information, refer to Note 9, Restructuring Charges, of the Notes to Condensed Consolidated Financial Statements.
Stock Repurchase Program
As of October 31, 2014, our Board of Directors had authorized a stock repurchase program for an aggregate amount of up to $500.0 million (consisting of an original $100.0 million authorization on June 13, 2012, plus subsequent authorizations of $100.0 million on July 15, 2013, $100.0 million on October 9, 2013, and $200.0 million on February 20, 2014).
We are authorized to make repurchases in the market until our Board of Directors terminates the program or until such repurchases reach the authorized amount, whichever occurs first. Any repurchases under the program will be funded either from available working capital or external financing. The number of shares repurchased and the timing of repurchases are based on the price of our common stock, general business and market conditions, and other investment considerations. Shares are retired upon repurchase. Our policy related to repurchases of our common stock is to charge any excess of cost over par value entirely to additional paid-in capital.
During the first quarter of fiscal 2015, we repurchased a total of 1,127,607 shares of common stock for a total purchase price of $25.0 million. During the first quarter of fiscal 2014, we repurchased a total of 6,363,780 shares of common stock for a total purchase price of $113.5 million. As of October 31, 2014, $105.9 million remains authorized for repurchase under the stock repurchase program.
Revenue, Cost of Revenue and Operating Expenses
Revenue
We derive our revenue primarily from sales of our ArubaOS operating system, controllers and gateways, wireless access points, application software modules, access management solution, multi-vendor management software, switches, and support and professional services.
We sell our products to channel partners and end customers located in the U.S., EMEA, APAC, and other parts of the world. We continue to expand into international locations and introduce our products in new markets. For fiscal 2015, we expect international revenue to increase in absolute dollars and remain in the approximate percentage range of recent years. For more information about our international revenue, see Note 10, Segment Information and Significant Customers, of the Notes to Condensed Consolidated Financial Statements.
Support services consist of software updates, on a when-and-if available basis, and telephone and Internet access to technical support personnel and hardware support. We provide customers with rights to unspecified software product upgrades and to maintenance releases and patches released during the term of the support period. Professional services consist of consulting and training services. Consulting services primarily consist of design as well as onsite and remote support services. Training services are typically instructor-led or online courses on the use of our products.

27



Cost of Revenue
Cost of product revenue consists primarily of manufacturing costs for our products, shipping and logistics costs, charges for inventory obsolescence, amortization of existing technology and warranty obligations. We utilize third parties to manufacture our products and perform shipping logistics. We have outsourced the substantial majority of our manufacturing, repair and supply chain operations. Accordingly, the substantial majority of our cost of product revenue consists of payments to our contract manufacturers. Our contract manufacturers produce our products in Asia using quality assurance programs and standards that we jointly established. Cost of product revenue also includes amortization expense from purchased intangible assets.
Cost of support and professional services revenue is primarily comprised of personnel costs, including stock-based compensation expense, for providing technical support. In addition, we engage third-party support vendors to complement our internal support resources, the costs of which are included within costs of support and professional services revenue.
Gross Margin
Our gross margin has been, and will continue to be, affected by a variety of factors, including:
changes in the mix of products and services sold or manner in which products are sold in our channel;
the percentage of revenue from international regions;
changes in price competition and discounting pressures;
changes in material, labor or other manufacturing-related costs;
excess product component or obsolescence charges from our contract manufacturers;
write-downs for obsolete or excess inventory;
changes in costs due to changes in component pricing or charges incurred due to component holding periods if our forecasts do not accurately anticipate product demand;
timing of revenue recognition and revenue deferrals;
warranty-related issues;
freight charges;
timing and pricing with regard to the introduction of new products or new product platforms and the related transition from older products to newer products;
entry into new markets with different pricing and cost structures;
amortization expense from our intangible assets which is mainly existing technology;
amortization of capitalized software development costs;
support attach rates and customer renewal rate; and
timing of investments in headcount and resources to support our professional service offerings.
Due to higher net effective discounts for products sold through our indirect channels, our overall gross margin for indirect channel sales are typically lower than those associated with direct sales. We expect product revenue from our indirect channels to continue to be a significant majority of our future revenue. Further, we expect that within our indirect channels, sales through our VADs and OEMs will continue to be significant, which will negatively impact our gross margins as VADs and OEMs generally experience a larger net effective discount than our other channel partners.
Research and Development Expenses
Research and development expenses primarily consist of personnel costs and facilities costs. We expense research and development expenses as incurred. We are devoting substantial resources to the continued development of additional functionality for existing products and the development of new products. We intend to continue to invest significantly in our research and development efforts because we believe it is essential to maintaining our competitive position. For fiscal 2015, we expect research and development expenses to increase on an absolute dollar basis and decrease as a percentage of revenue compared to fiscal 2014.

28



Sales and Marketing Expenses
Sales and marketing expenses represent the largest component of our operating expenses and primarily consist of personnel costs, sales commissions, marketing programs and facilities costs. A portion of the amortization expense related to our intangible assets is also included in sales and marketing expenses. Marketing programs are intended to generate revenue from new and existing customers and are expensed as incurred. We plan to continue to invest strategically in sales and marketing with the intent to add new customers and increase penetration within our existing customer base, expand our domestic and international sales and marketing activities, build brand awareness and sponsor additional marketing events. We expect sales and marketing expenses will continue to be our most significant operating expense. Generally, new sales personnel are not as productive as existing personnel, and thus, the increase in sales and marketing expenses that we experience as we hire additional sales personnel is not expected to immediately result in increased revenue. Some of our sales personnel may never become as productive as anticipated or may not become as productive in the time frame originally expected. As a result, these expenses will reduce our operating margin unless and until the new sales personnel become equally productive and generate the amount of revenue expected. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance. For fiscal 2015, we expect sales and marketing expenses will continue to be our most significant operating expense and will increase on an absolute dollar basis as we continue to invest strategically in this area and will decrease as a percentage of revenue compared to fiscal 2014.
General and Administrative Expenses
General and administrative expenses primarily consist of personnel and facilities costs related to our executive, finance, human resources, information technology and legal organizations, as well as insurance, investor relations, and IT infrastructure costs related to our enterprise resource planning ("ERP") and other systems. Further, our general and administrative expenses include professional services consisting of outside legal, audit, tax, Sarbanes-Oxley and IT consulting costs, and non-income tax reserves. We have incurred in the past, and may continue to incur, significant legal costs defending ourselves against claims made by third parties. These expenses are expected to continue as part of our ongoing operations and, depending on the timing and outcome of lawsuits and the legal process, legal costs and any resulting damages or settlements could have a significant impact on our financial statements. For fiscal 2015, we expect general and administrative expenses will increase in absolute dollars and will decrease as a percentage of revenue compared to fiscal 2014. However, third-party professional services are subject to material fluctuations given the needs of the business, which may cause our expected expenditures in absolute dollars and as a percentage of revenue to differ from our forecasted expectations.
Other Income (Expense), net
Other income (expense), net includes interest income primarily from cash equivalents and short-term investments, accretion of discount or amortization of premium on short-term investments, and losses or gains from foreign exchange rate changes.
Critical Accounting Policies
Our Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make estimates and judgments that affect the reported amounts of assets and liabilities as of the date of the Condensed Consolidated Financial Statements, as well as the reported amounts of revenue and expenses during the periods presented. We believe that the estimates and judgments upon which we rely are reasonable based upon information available to us at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, our Condensed Consolidated Financial Statements will be affected. The accounting policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include revenue recognition, stock-based compensation, inventory valuation, allowance for doubtful accounts, impairment of goodwill and intangible assets, and accounting for income taxes.
Our critical accounting policies are disclosed in our Annual Report on Form 10-K for our fiscal year ended July 31, 2014, filed with the SEC on September 24, 2014. There have been no material changes in the matters for which we make critical accounting estimates in the preparation of our Condensed Consolidated Financial Statements during the first quarter of fiscal 2015, as compared to those disclosed in our Annual Report for fiscal 2014.
Recent Accounting Pronouncements
Refer to Recent Accounting Pronouncements under Note 1, The Company and its Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements for recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, that the pronouncements could have on us.

29



Results of Operations
The following table presents our historical operating results as a percentage of total revenue for the periods indicated:
 
Three Months Ended October 31,
 
2014
 
2013
Revenue:
 
 
 
Product
81.1
 %
 
81.3
 %
Support and professional services
18.9
 %
 
18.7
 %
Total revenue
100.0
 %
 
100.0
 %
Cost of revenue:
 
 
 
Product
24.9
 %
 
25.0
 %
Support and professional services
4.6
 %
 
5.2
 %
Total cost of revenue
29.5
 %
 
30.2
 %
Gross margin
70.5
 %
 
69.8
 %
Operating expenses:
 
 
 
Research and development
20.3
 %
 
25.1
 %
Sales and marketing
34.6
 %
 
39.2
 %
General and administrative
7.5
 %
 
9.0
 %
Restructuring charges
3.2
 %
 
 %
Total operating expenses
65.6
 %
 
73.3
 %
Operating income (loss)
4.9
 %
 
(3.5
)%
Other income (expense), net:
 
 
 
Interest income
0.1
 %
 
0.1
 %
Other income (expense), net
(0.4
)%
 
0.2
 %
Income (loss) before income taxes
4.6
 %
 
(3.2
)%
Provision for income taxes
3.3
 %
 
1.7
 %
Net income (loss)
1.3
 %
 
(4.9
)%


30



Revenue
 
Three Months Ended October 31,
 
2014
 
2013
 
(in thousands)
Total revenue
$
207,821

 
$
160,927

Type of revenue:
 
 
 
Product
$
168,470

 
$
130,831

Support and professional services
39,351

 
30,096

Total revenue
$
207,821

 
$
160,927

Percent revenue by type:
 
 
 
Product
81.1
%
 
81.3
%
Support and professional services
18.9
%
 
18.7
%
Revenue by geography:
 
 
 
United States
$
132,765

 
$
108,315

Europe, the Middle East and Africa
44,857

 
25,996

Asia Pacific
26,006

 
22,994

Rest of World
4,193

 
3,622

Total revenue
$
207,821

 
$
160,927

Percent revenue by geography:
 
 
 
United States
63.9
%
 
67.2
%
Europe, the Middle East and Africa
21.6
%
 
16.2
%
Asia Pacific
12.5
%
 
14.3
%
Rest of World
2.0
%
 
2.3
%
Total revenue by sales channel:
 
 
 
Indirect
$
195,020

 
$
149,201

Direct
12,801

 
11,726

Total revenue
$
207,821

 
$
160,927

Percent revenue by sales channel:
 
 
 
Indirect
93.8
%
 
92.7
%
Direct
6.2
%
 
7.3
%
For the first quarter of fiscal 2015, total revenue increased $46.9 million, or 29.1%, compared to the first quarter of fiscal 2014. The revenue growth was driven primarily by an expansion of our customer base coupled with incremental purchases from existing customers as a result of ongoing strength in the enterprise mobility market, which continues to benefit from BYOD initiatives and strong uptake of our 802.11ac access point products, as well as positive results from our investments in expanding our sales force.
Product revenue increased $37.6 million, or 28.8%, during the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014. The increase in product revenue was primarily driven by strong demand for our access point products, particularly our 802.11ac and Instant access point products, and our ClearPass software product. Sales of our switching products also increased.
We believe the rapid proliferation of Wi-Fi enabled mobile devices, the increase in demand for multimedia-rich mobility applications, and the rise of both server and desktop virtualization are driving the increase in demand for our solutions, allowing us to add new customers every fiscal quarter. Our mobility solutions, further enhanced by our ClearPass and our 802.11ac and Instant access point solutions, continue to gain momentum as companies move toward a next generation Mobility-Defined Network.
Support and professional services revenue increased $9.3 million, or 30.8%, during the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014, primarily due to an increase in post-contract support (PCS) revenue. The increase in PCS revenue was primarily a result of increased initial sales and renewals of PCS agreements boosted by higher product sales. Additionally, in the first quarter of fiscal 2015, we recognized an incremental $1.2 million of services revenue associated with a single PCS renewal related to services previously provided, which we do not expect to recur.

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U.S. revenue increased $24.5 million, or 22.6%, during the first quarter of fiscal 2015, compared to the first quarter of fiscal 2014. Revenue from shipments to locations outside the U.S. increased $22.4 million, or 42.7%, during the first quarter of fiscal 2015, compared to the first quarter of fiscal 2014. The increase in revenue in the U.S. and locations outside the U.S. was primarily due to overall market growth and increased market penetration led by a larger sales organization in the first quarter of fiscal 2015.
Revenue from our indirect sales channels increased $45.8 million, or 30.7%, during the first quarter of fiscal 2015, compared to the first quarter of fiscal 2014. The increase in revenue from our indirect sales channels was primarily due to overall market growth and increased market penetration.
Going forward, we expect to continue to derive a significant majority of our total revenue from indirect channels as we continue to focus on expanding our channels and improving the efficiency of marketing and selling our products through these channels.
Cost of Revenue and Gross Margin
 
Three Months Ended October 31,
 
2014
 
2013
 
(in thousands)
Total revenue
$
207,821

 
$
160,927

 
 
 
 
Cost of product revenue
51,630