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GIGAMON INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, as filed with the Securities and Exchange Commission. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect" and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Unless expressly indicated or the context requires otherwise, the terms "Gigamon," "company," "we," "us" and "our" in this document refer to Gigamon Inc., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries. The term "Gigamon" may also refer to our products, regardless of the manner in which they are accessed. Overview We have developed an innovative solution that delivers pervasive and dynamic intelligent visibility of traffic across networks. Our solution, which we refer to as our Traffic Visibility Fabric, consists of distributed network appliances that enable an advanced level of visibility, modification and control of network traffic. Our Traffic Visibility Fabric enables IT organizations to forward traffic from network and server infrastructure to management, analysis, compliance and security tools in a manner that is optimized for specific uses or functions. We generate product revenue primarily from sales of perpetual software licenses installed on physical appliances for our Traffic Visibility Fabric solutions to channel partners, including distributors and resellers, as well as directly to end-user customers. We market and sell our products through a hybrid sales model, which combines a high-touch sales organization and an overlay channel sales team that actively assists our extensive network of channel partners throughout the sales process. We also provide our channel partners with marketing assistance, technical training and support. We generate services revenue primarily from the sale of maintenance and support services for our products. A one-year contract for our maintenance and support services is bundled with the initial contract to purchase our products. Following expiration of this one-year contract, our end-user customers typically purchase maintenance and support contracts that generally have one-year terms. In fiscal 2014, we launched NetFlow Generation, a new GigaSMART application, as well as GigaVUE-HC2, our latest Visibility Fabric platform, which offers increased agility and versatility when combined with our GigaSMART applications. 23 -------------------------------------------------------------------------------- Our revenue increased from $25.8 million in the three months ended March 30, 2013 to $31.8 million in the three months ended March 29, 2014, representing 23% growth. Net loss attributable to common stockholders was $8.2 million in the three months ended March 29, 2014, compared to $1.2 million in the three months ended March 30, 2013. We generated positive net operating cash flows of $1.8 million and $10.3 million in the three months ended March 29, 2014 and March 30, 2013, respectively. Key Performance Indicators of Our Business We monitor a variety of key performance indicators to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. These key performance indicators include the following (dollars in thousands): Three Months Ended March 29, March 30, 2014 2013 Key Performance Indicators: Revenue $ 31,760 $ 25,813 Gross margin 73 % 79 % Loss from operations $ (11,938 ) $ (1,165 ) Deferred revenue $ 49,518 $ 35,207 Revenue. We monitor our revenue to assess the acceptance of our products by our end-user customers and growth in the markets we serve. Gross margin. We monitor our gross margin to assess the impact on our current and forecasted financial results from any changes to the pricing and mix of products we are selling to our end-user customers. Loss from operations. We monitor our operating results to assess how effectively we are conducting our operations as well as controlling our operating expenses, which are primarily driven by headcount. Deferred revenue. Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue. The majority of our deferred revenue balance consists of the unamortized portion of services revenue from maintenance and support contracts. We also defer revenue, and the related costs of product revenue, on sales of products to distributors who stock inventory until the distributors report to us that they have sold the products to end-user customers. We monitor our deferred revenue balance because it represents a significant portion of the revenue that we will recognize in future periods. We assess the change in our deferred revenue balance which, taken together with revenue, is an indication of sales activity in a given period. Financial Overview Revenue We generate revenue from the sale of products and related services, including maintenance and support. We present revenue net of discounts, rebates and sales taxes. Our revenue is comprised of the following: Product revenue. We generate product revenue primarily from sales of perpetual software licenses installed on physical appliances for our Traffic Visibility Fabric solutions. We generally recognize product revenue at the time of product delivery, provided that all other revenue recognition criteria have been met. As a percentage of revenue, we expect our product revenue to vary from quarter-to-quarter based on, among other things, the timing of orders and delivery of products and seasonal and cyclical factors discussed under the section titled "-Results of Operations." We expect our product revenue to increase in absolute dollars as we continue to add new end-user customers, expand the volume of shipments to our current end-user customers and introduce new products. We have experienced seasonality in the sale of our products. The first quarter of each year is usually our lowest revenue quarter during the year and product revenue typically declines sequentially from the prior fourth quarter. We generally expect an increase in sales in the second half of the year, primarily due to the buying habits of many of our end-user customers as budgets for annual capital purchases are being fully utilized. 24 -------------------------------------------------------------------------------- Services revenue. We generate service revenue from sales of maintenance and support contracts, which are bundled with sales of products, and from subsequent renewals of those contracts. We offer tiered maintenance and support services under our renewable, fee-based maintenance and support contracts, which includes technical support, hardware repair and replacement parts, bug fixes, patches and unspecified upgrades on a when-and-if-available basis. We recognize services revenue ratably over the duration of the contract, which is typically one year and can be up to five years; as a result, the impact on services revenue will lag any shift in product revenue because product revenue is recognized when a product is sold and revenue criteria are satisfied, whereas services revenue is recognized ratably over the contract term. We expect our services revenue to increase in absolute dollars as we increase our installed base by selling more products and adding more end-user customers. Cost of revenue Our cost of revenue is comprised of the following: Cost of product revenue. Cost of product revenue is comprised primarily of the costs associated with manufacturing our products, including third-party hardware manufacturing costs; personnel costs for salary, benefits, bonuses and stock-based compensation expense; shipping costs; allocated costs of facilities and information technology; any excess inventory write-downs; and warranty costs and other related expenses. We expect cost of product revenue to increase in absolute dollars in connection with the anticipated increase in product revenue. Cost of services revenue. Cost of services revenue is comprised primarily of personnel costs for salary, benefits, bonuses and stock-based compensation expense related to our customer support organization, as well as allocated costs of facilities and information technology. We expect cost of services revenue to increase in absolute dollars in connection with the anticipated increase in services revenue. Gross profit and gross margin Gross profit has been and will continue to be affected by a variety of factors including shipment volumes, changes in the mix of products and services sold, changes in our product costs including any excess inventory write-downs, new product introductions and upgrades to existing products, changes in customer mix, changes in pricing and the extent of customer rebates and incentive programs. We expect our gross margin to fluctuate over time depending on a variety of factors, including those described above, and may decrease over the longer-term in the event that we experience additional competitive pricing pressure. Operating expenses Operating expenses consist of research and development, sales and marketing and general and administrative expenses. Personnel costs comprise a significant component of our operating expenses, and consist of salary, benefits, bonuses and stock-based compensation expense; and with respect to our sales organization, personnel costs also include sales commissions. From December 28, 2013 through March 29, 2014, we increased headcount attributable to our operating expenses from 326 to 361. We expect operating expenses to increase in absolute dollars, for the remainder of 2014, in line with our anticipated revenue growth. Research and development. Our research and development efforts are focused on new product development and on developing additional functionality for our existing products. Research and development expenses primarily consist of personnel costs, and to a lesser extent, prototype materials, allocated costs of facilities and information technology and product certification. We expense research and development costs as incurred. We expect our research and development expenses to increase in absolute dollars as we continue to develop new products and enhance our existing products. Sales and marketing. Sales and marketing expenses are the largest component of our operating expenses and primarily consist of personnel costs, as well as travel expenses, trade shows, marketing and promotional activities, and allocated costs of facilities and information technology. We sell our products through our global sales organization, which is divided into three geographic regions: North America, Europe and Asia Pacific. We expect our sales and marketing expenses to increase in absolute dollars as we expand our sales and marketing efforts domestically and internationally to help drive increased revenue. General and administrative. General and administrative expenses primarily consist of personnel costs and allocated costs of facilities and information technology related to our executive, finance, human resources and legal functions, as well as professional services costs. Professional services costs primarily consist of outside legal and accounting services. We have incurred and expect to continue to incur expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange and costs related to compliance and reporting obligations. 25 --------------------------------------------------------------------------------Interest income and other expense, net Interest income consists primarily of income earned on our invested cash, cash equivalents and short-term investments. We expect interest income to increase modestly depending on our average invested balances during the period and market interest rates. Other expense, net consists primarily of foreign currency exchange losses related to transactions denominated in currencies other than the U.S. dollar, which have not been material to date. Income tax benefit (provision) On May 31, 2013, we converted from a Delaware limited liability company (a pass through entity not subject to U.S. federal and state income taxes) to a Delaware corporation. Accordingly, following such conversion, we elected to be treated as a corporation under Subchapter C of Chapter 1 of the United States Internal Revenue Code, as amended, and, therefore, have become subject to both federal and state income taxes. As a corporation, we record deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carry forwards. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized. Accordingly, we consider all positive and negative evidence related to the realization of the deferred tax assets based on a more-likely-than-not realization threshold criterion. Based on our evaluation, the weight of positive evidence currently supports the realization of the deferred tax assets on a more-likely-than-not basis. We will make this determination each quarter and if the results in the future do not support the realizability on a more-likely-than-not basis, a valuation allowance could be recorded in the near term. Significant judgment was required to determine whether a valuation allowance was necessary and the amount of such valuation allowance, if appropriate. We are also subject to state taxes in certain states that may assess capital taxes or taxes based on gross receipts. We also have a subsidiary in a foreign jurisdiction, which is subject to income taxes in the jurisdictions in which it operates. Stock-based compensation expense and other charges Prior to our IPO, we granted restricted stock units ("RSUs") and stock option awards (together, the "IPO Awards") that were subject to the completion of our IPO. In addition, upon the completion of our IPO in June 2013, we began offering eligible employees the opportunity to purchase shares under our 2013 Employee Stock Purchase Plan (the "ESPP"). Accordingly, prior to the second quarter of fiscal 2013, we did not record any stock-based compensation associated with the IPO Awards and the ESPP purchase rights. Total stock-based compensation expense, net of estimated forfeitures, was $7.9 million and $1.6 million in the three months ended March 29, 2014 and March 30, 2013, respectively. In addition, payroll taxes related to stock-based compensation were $0.8 million in the three months ended March 29, 2014. As of March 29, 2014, unrecognized stock-based compensation expense, net of estimated forfeitures, was $38.3 million. 26 --------------------------------------------------------------------------------Results of Operations The following tables set forth our results of operations in dollars and as a percentage of revenue (in thousands, except percentages): Three Months Ended March 29, March 30, 2014 2013 Consolidated Statement of Operations Data: Revenue: Product $ 20,080 $ 17,519 Services 11,680 8,294 Total revenue 31,760 25,813 Cost of revenue: Product 7,005 4,724 Services 1,580 653 Total cost of revenue 8,585 5,377 Gross profit 23,175 20,436 Operating expenses: Research and development 10,938 5,671 Sales and marketing 18,170 12,421 General and administrative 6,005 3,509 Total operating expenses 35,113 21,601 Loss from operations (11,938 ) (1,165 ) Interest income 61 2 Other expense, net (41 ) (7 ) Loss before provision for income taxes (11,918 ) (1,170 ) Income tax benefit (provision) 3,700 (29 ) Net loss $ (8,218 ) $ (1,199 ) Net loss includes stock-based compensation expense allocated as follows: Stock-based compensation expense: Cost of revenue $ 448 $ 18 Research and development 2,599 309 Sales and marketing 2,773 429 General and administrative 2,038 837 Total stock-based compensation expense $ 7,858 $ 1,593 Percentage of Total Revenue: Revenue: Product 63 % 68 % Services 37 % 32 % Total revenue: 100 % 100 % Cost of revenue 27 % 21 % Gross margin 73 % 79 % Operating expenses: Research and development 34 % 22 % Sales and marketing 57 % 48 % General and administrative 20 % 14% % Total operating expenses 111 % 84% % Loss from operations (38 )% (5 )% Interest income 0 % 0 % Other expense, net (0 )% (0 )% Loss before income tax benefit (provision) (38 )% (5 )% Income tax benefit (provision) 12 % (0 )% Net loss (26 )% (5 )% 27 --------------------------------------------------------------------------------Comparison of the three months ended March 29, 2014 and March 30, 2013 Revenue Three Months Ended March 29, March 30, 2014 2013 Increase % Increase (dollars in thousands) Revenue: Product $ 20,080 $ 17,519 $ 2,561 15 % Services 11,680 8,294 3,386 41 % Total revenue $ 31,760 $ 25,813 $ 5,947 23 % Product revenue increased $2.6 million in the three months ended March 29, 2014 compared to the three months ended March 30, 2013, primarily due to an increase in the volume of sales from our high-density products, or H-Series products. Revenue from our H-Series products was $13.4 million in the three months ended March 29, 2014, compared to $9.3 million in the three months ended March 30, 2013, partially offset by a decrease in revenue from our G-Series products. Services revenue increased $3.4 million in the three months ended March 29, 2014 compared to the three months ended March 30, 2013, primarily due to the growth in our installed base at our existing end-user customers and also due to an increase in the total number of end-user customers under maintenance and support contracts, which was driven by higher product sales. Cost of revenue and gross margin Three Months Ended March 29, 2014 March 30, 2013 Increase % Increase (dollars in thousands) Cost of revenue: Product $ 7,005 $ 4,724 $ 2,281 48 % Services 1,580 653 927 142 % Total cost of revenue $ 8,585 $ 5,377 $ 3,208 60 % Gross margin: Product 65 % 73 % Services 86 % 92 % Total gross margin 73 % 79 % Total gross margin decreased to 73% in the three months ended March 29, 2014, compared to 79% in the three months ended March 30, 2013, primarily due to a $1.8 million inventory write-down in the three months ended March 29, 2014. Product gross margin decreased to 65% in the three months ended March 29, 2014 from 73% in the three months ended March 30, 2013, primarily attributable to a $1.8 million inventory write-down, as determined based on expected forecast, partially offset by a $0.4 million benefit from the sale of previously written-down inventory, in the three months ended March 29, 2014. In the three months ended March 30, 2013, we recorded a $0.3 million inventory write-down, offset by a $0.3 million benefit from the sale of previously written-down inventory. Services gross margin decreased to 86% in the three months ended March 29, 2014 from 92% in the three months ended March 30, 2013, primarily due to a $0.6 million increase in personnel costs and allocated costs to support the higher number of maintenance and support contracts and a $0.2 million increase in stock-based compensation. 28 -------------------------------------------------------------------------------- Operating expenses Three Months Ended March 29, 2014 March 30, 2013 Increase % Increase (dollars in thousands) Operating expenses: Research and development $ 10,938 $ 5,671 $ 5,267 93 % Sales and marketing 18,170 12,421 5,749 46 % General and administrative 6,005 3,509 2,496 71 % Total operating expenses $ 35,113 $ 21,601 $ 13,512 63 % Research and development expenses increased $5.3 million in the three months ended March 29, 2014 compared to the three months ended March 30, 2013. The increase in research and development expenses was primarily due to a $2.7 million increase in stock-based compensation and related payroll tax expenses, a $2.3 million increase in personnel costs and allocated costs primarily driven by increased headcount, a $0.1 million increase in development costs and a $0.1 million increase in depreciation expense. Sales and marketing expenses increased $5.7 million in the three months ended March 29, 2014 compared to the three months ended March 30, 2013. The increase in sales and marketing expenses was primarily due to a $2.6 million increase in stock-based compensation and related payroll tax expenses, a $2.2 million increase in personnel costs and allocated costs, primarily driven by increased headcount, a $0.4 million increase in promotional expenses and a $0.3 million increase in employee programs. General and administrative expenses increased $2.5 million in the three months ended March 29, 2014 compared to the three months ended March 30, 2013. The increase in general and administrative expenses was primarily due to a $1.3 million increase in stock-based compensation and related payroll expenses, a $0.5 million increase in personnel costs and allocated costs primarily driven by increased headcount, a $0.4 million increase in office expenses and a $0.1 million increase in professional service. Income Tax Benefit (Provision) Three Months Ended March 29, 2014 March 30, 2013 Increase % Increase (dollars in thousands)Income tax benefit (provision) $ 3,700 $ (29) $ 3,729 * * Not meaningful Income tax benefit increased $3.7 million in the three months ended March 29, 2014, compared to the income tax provision recorded in the three months ended March 30, 2013, primarily due to the Company being a taxable entity in the three months ended March 29, 2014 compared to being a pass-through entity for tax purposes, in the three months ended March 30, 2013. The effective tax rate of 31.0% in the three months ended March 29, 2014 primarily represents the impact of the year-to-date pre-tax net loss, adjusted for permanent differences and foreign income taxed at local statutory rates. Non-GAAP Financial Measures We report all financial information required in accordance with U.S. generally accepted accounting principles ("GAAP"), but we believe that evaluating our ongoing operating results may be difficult to understand if limited to reviewing only GAAP financial measures. Many of our investors have requested that we disclose non-GAAP information because it is useful in understanding our performance as it excludes amounts, primarily non-cash charges that many investors feel may obscure our true operating results. Likewise, management uses non-GAAP measures to manage and assess the profitability of our business going forward and does not consider stock-based compensation expense and related payroll taxes in managing our operations. Specifically, management does not consider these expenses or benefits when developing and monitoring our budgets and spending. As a result, we use calculations of non-GAAP net (loss) income and non-GAAP net (loss) income per share, which exclude these expenses when evaluating our ongoing operations and allocating resources within the organization. 29 --------------------------------------------------------------------------------Reconciliations of our GAAP and non-GAAP financial measures were as follows (in thousands, except per share amounts): Three Months Ended March 29, March 30, 2014 2013 GAAP net loss attributable to common stockholders $ (8,218 ) $ (1,215 ) Stock-based compensation expense 7,858 1,593 Stock-based compensation related payroll taxes 777 - Accretion of preferred stock to redemption value and issuance costs - 585 Loss distributable to preferred stockholders - (569 ) Income tax effect of non-GAAP adjustments (2,649 ) - Non-GAAP net (loss) income $ (2,232 ) $ 394 Basic and diluted GAAP net loss per share attributable to common stockholders $ (0.26 ) $ (0.07 ) Basic and diluted Non-GAAP net (loss) income per share $ (0.07 ) $ 0.02 Liquidity and Capital Resources As of March 29, 2014, our principal sources of liquidity were our cash, cash equivalents and short-term investments of $142.7 million, the majority of which was held in the United States. Our liquidity requirements are primarily to fund our working capital and operating expenses. As of March 29, 2014, we had no material commitments for capital expenditures. We intend to retain any future earnings to finance the operations and expansion of our business, and we do not currently anticipate paying any cash dividends on our common stock. Our future capital requirements will depend on many factors, including our results of operations and the expansion of our research and development, sales and marketing and general and administrative functions. Based on our current operating plan, we believe our existing cash, cash equivalents and short-term investments, combined with cash generated from operations, will be sufficient to fund our working capital and operating expenses for at least the next 12 months. If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity, or raise funds through debt financing or other sources. Cash flows The following table summarizes our cash flows for the periods indicated (in thousands): Three Months Ended March 29, March 30, 2014 2013 Cash provided by operating activities $ 1,800 $ 10,253 Cash used in investing activities $ (30,624 ) $ (949 ) Cash provided by (used in) financing activities $ 4,628 $ (4,855 ) Cash flows from operating activities Our cash provided by operating activities is generated from sales of our products and, to a lesser extent, by upfront payments from customers under maintenance and support contracts. Our primary uses of cash from operating activities have been for personnel related expenses, manufacturing costs, expenses related to marketing and promotional activities and costs related to our facilities. Our cash flows from operating activities will continue to be affected principally by our working capital requirements and increased spending on personnel, facilities and sales and marketing activities to meet our anticipated business growth. 30 -------------------------------------------------------------------------------- In the three months ended March 29, 2014, our operating activities generated $1.8 million due to customer receipts of $42.2 million, partially offset by payments of $34.5 million to employees and to other vendors and $5.8 million for inventories. The net loss of $8.2 million in the same period included non-cash charges of $6.9 million. These non-cash charges primarily comprised of stock-based compensation expense of $7.9 million and inventory write-downs of $1.8 million, partially offset by a $3.7 million increase in deferred income taxes. Net changes in operating assets and liabilities was $3.1 million in the three months ended March 29, 2014 primarily due to a $8.2 million decrease in accounts receivable and a $2.0 million increase in deferred revenue primarily driven by the growth of our deferred product revenue, partially offset by a $6.2 million decrease in accrued and other liabilities. Our days sales outstanding ("DSO") decreased to 47 days as of March 29, 2014 from 52 days as of December 28, 2013, due to the improved shipment linearity. In the three months ended March 30, 2013, our operating activities generated $10.3 million primarily due to customer receipts of $37.1 million, partially offset by payments of $22.5 million to employees and to other vendors and payments of $4.3 million for inventories. The net loss of $1.2 million included non-cash charges of $2.4 million. These non-cash charges primarily comprised of stock-based compensation of $1.6 million as well as depreciation and amortization expense of $0.5 million. Net changes in operating assets and liabilities was $9.1 million primarily due to a $6.7 million reduction in accounts receivable attributable to the collection of such accounts receivable, which resulted in a reduction of our DSO to 48 days as of March 30, 2013 from 60 days as of December 31, 2012; a $4.4 million increase in deferred revenue due to higher service and product billings as a result of the increase in our installed base; and a $1.2 million decrease in inventories due to higher inventory turnover, partially offset by a $1.6 million decrease in accounts payable and a $0.9 million decrease in accrued liabilities and other liabilities, due to timing of payments. Cash flows from investing activities In the three months ended March 29, 2014, cash used in investing activities was $30.6 million attributable to purchases of marketable securities of $34.4 million and $2.3 million used for capital expenditures, offset in part by cash proceeds of $6.1 million from the maturities and the sales of short-term investments. In the three months ended March 30, 2013, cash used in investing activities was $0.9 million primarily attributable to capital expenditures for property and equipment to support the growth of our business. Cash flows from financing activities In the three months ended March 29, 2014, cash generated from financing activities was $4.6 million primarily due to net proceeds of $3.9 million from the issuance of common stock pursuant to our ESPP and $2.9 million from stock option exercises, partially offset by $1.6 million in shares repurchased primarily due to tax withholdings upon vesting of RSUs. We also distributed the final payout of $0.5 million to our Gigamon LLC members pursuant to the LLC agreement. In the three months ended March 30, 2013, cash used in investing activities was $4.9 million primarily due to a $4.8 million distribution to our Gigamon LLC members pursuant to the LLC agreement. Contractual Obligations The following summarizes our contractual obligations as of March 29, 2014: Payments Due by Period Less More than 1 1 to 3 4 to 5 than 5 year years years years Total (in thousands) Operating lease obligations (1) $ 2,028 $ 6,405 $ 3,470 $ 31 $ 11,934 Purchase commitments (2) 6,379 - - - 6,379 Total $ 8,407 $ 6,405 $ 3,470 $ 31 $ 18,313 (1) Operating lease obligations represent our obligations to make payments under the lease agreements for our facilities and office equipment leases. (2) Purchase commitments primarily represent our purchase orders issued to suppliers to purchase inventories and related components. We record a liability for firm, non-cancelable and unconditional purchase commitments for quantities in excess of our future demand forecasts consistent with the valuation of our excess and obsolete inventory. 31 --------------------------------------------------------------------------------Off-Balance Sheet Arrangements We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Recent Accounting Pronouncements See Note 2, Significant Accounting Policies, in Notes to the Condensed Consolidated Financial Statements in Item 1 of Part I of this Report, for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on financial condition and results of operations, which is incorporated herein by reference. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, operating expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows would be affected. An accounting policy is considered to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the effect of the estimates and assumptions on financial condition or operating performance is material. The accounting policies we believe to reflect our more significant estimates, judgments, and assumptions and are most critical to understanding and evaluating our reported financial results are as follows: · Revenue Recognition; · Stock-Based Compensation; · Inventory Valuation; · Warranty Reserves; and · Income Taxes. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013. |