Add
SNWL to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| SNWL > SEC Filings for SNWL > Form 10-K on 6-Mar-2009 | All Recent SEC Filings |
6-Mar-2009
Annual Report
This Form 10-K contains forward-looking statements which relate to future events or our future financial performance. In many cases you can identify forward-looking statements by terminology such as "may", "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "intend" or "continue," or the negative of such terms and other comparable terminology. In addition, forward-looking statements in this document include, but are not limited to, those regarding the dedication of resources to develop new products and services and marketing those products and services to channel partners and customers; the introduction of more service offerings on our platforms as a vehicle to generate additional revenue from our installed base of products; our ability to deliver comprehensive and profitable solutions to our channel partners; the growth opportunity associated with sales through our indirect channel to larger distributed enterprises; weakening economic conditions that could lead to decreases in IT spending that could adversely impact operating results; the level of comfort of our channel partners in offering our solutions to their customers; the growth of the Network Security, Secure Content Management and Business Continuity markets, the impact of a failure to achieve greater international sale; our ability to maintain and enhance current product lines, develop new products, maintain technological competitiveness and meet the expanding range of customer requirements; the market opportunity for license and service revenue growth; our ability to deliver comprehensive solutions to channel partners, the positive characteristics of our software license and service revenue model on future revenue growth and the predictability of our revenue stream; expected growth in license and subscription service revenue; the impact on revenue of the combination of subscription services sold in conjunction with new product offerings; expected competition in the Internet security market and our ability to compete in markets in which we participate; impact of service renewal rates on lowering selling and marketing expense; our ability to achieve increased incremental revenue per transaction through success of our software license and service revenue model; the impact of IT spending on demand for our products and services; the current and likely future impact of share based compensation expense as required by SFAS 123R on reported operating results, anticipated revenue contributions of new products including continuous data protection, email security and SSL-VPN products and related services; the impact of growth in international operations on our exposure to foreign currency fluctuations; the possible impact of uncertainties in the auction rate and asset backed securities markets on the Company's financial performance; our ability to access funds held as auction rate securities in our investment portfolio, pricing pressures on our solution based offerings; anticipated higher gross margins associated with our license and service offerings; the probability of realization of all deferred tax assets; assessment of future effective tax rates and the continued need for a partial tax valuation allowance; the potential for product gross margins to erode based upon changes in product mix; downward pressure on product pricing or upward pressure on production costs; the impact of product mix on product gross profits; the impact of the completion of "in sourcing" certain technical support functions on period over period comparisons of cost of license and service revenue and gross margin; our ability to maintain investment in current and future product development and enhancement efforts; the introduction of new products and the broadening of existing product offerings; planned investments and expenses in current and future product development, production costs and sales volume comparisons between the NSA and SSL-VPN products and other hardware appliances; the rate of change of general and administrative expenses, the impact of geopolitical and macro-economic conditions on demand for our offerings; the ability of our contract manufacturers to meet our requirements; the belief that existing cash, cash equivalents and short-term investments will be sufficient to meet our cash requirements at least through the next twelve months; factors potentially impacting operating cash flows in future periods; and expected fluctuations in day sales outstanding. These statements are only predictions, and they are subject to risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including, but not limited to, those set forth herein under the heading "Risk Factors" and also under the heading "Risk Factors". References to "we," "our," and "us" refer to SonicWALL, Inc. and its subsidiaries.
Overview
SonicWALL provides network security, content security, and business continuity solutions for businesses of all sizes. Our solutions are typically deployed at the edges of networks. These networks are often aggregated into broader distributed deployments to support companies that do business in multiple physical locations, interconnect their networks with trading partners, or support a mobile or remote workforce. Our solutions are sold in over 50 countries worldwide.
The Company groups revenue into the following primary product categories of similar products:
(1) Unified Threat Management (UTM) including Network Security Appliance (NSA), PRO, and TZ products; subscription services such as Comprehensive Gateway Security Suite (CGSS), integrated Gateway Anti-Virus, and Intrusion Prevention; software licenses such as our enhanced "SonicOS" operating system, node upgrades, and other services such
as extended warranty and service contracts, training, consulting and engineering services.
(2) SSL VPN Secure Remote Access (SSL) including SSL-VPN appliances, add-on software licenses and other services such as extended warranty and service contracts, training, consulting and engineering services.
(3) Secure Content Management (SCM) including CSM and email security appliances, subscription services such as internet filtering and email protection term and perpetual licenses, and other services such as extended warranty and service contracts, training, consulting and engineering services.
(4) Continuous Data Protection (CDP) including the CDP appliances, off-site data backup subscription services, site-to-site back-up licenses, and other services such as extended warranty and service contracts, training, consulting and engineering services.
We generate revenue within these product categories primarily from the sale of:
(1) products, (2) software licenses, (3) subscriptions for services such as
content filtering, anti-virus protection and intrusion prevention, offsite data
backup, email protection, and (4) other services such as extended warranty and
service contracts, training, consulting and engineering services.
We currently outsource our hardware manufacturing and assembly to third party contract manufacturers and some of the key components in the Company's products come from single or limited number of suppliers. Outsourcing our manufacturing and assembly enables us to reduce fixed overhead and personnel costs and to provide flexibility in meeting market demand.
We design and develop the key components for the majority of our products. In addition, we generally determine the components that are incorporated in our products and select the appropriate suppliers of these components. Product testing and burn-in are performed by our contract manufacturers using tests that we typically specify.
We sell our solutions primarily through distributors and value-added resellers, who in turn sell our products to end-users. Some of our resellers are carriers or service providers who provide solutions to the end-user customers as managed services. Channel sales accounted for approximately 99%, 98%, and 98% of total revenue in 2008, 2007, and 2006, respectively. Alternative Technology, Tech Data, and Ingram Micro, all of whom are technology product distributors, collectively accounted for approximately 49%, 50%, and 53% of our revenue during 2008, 2007, and 2006, respectively.
We seek to provide our channel partners and customers with differentiated solutions that are innovative, easy to use, reliable, and provide good value. To support this commitment, we dedicate significant resources to develop new products and market our products to our channel partners and customers.
Key Success Factors of our Business
We believe that there are several key success factors of our business, and that we create value in our business by focusing on our execution in these areas.
Channel
Our distributors and authorized resellers provide a valuable service in assisting end-users in the design, implementation, and service of our network security, content security, and business continuity solutions. We support our distribution and channel partners with sales, marketing, and technical support to help them create and fulfill demand for our offerings. We also focus on helping our channel partners succeed with our solutions by concentrating on comprehensive reseller training and certification, and support for our channel's sales activities.
Product and Service Platform
Our products serve as a platform for revenue generation for both us and our channel partners. Most product sales can result in additional revenue through the simultaneous or subsequent acquisition of software licenses, such as our Global Management System, or through the sale of additional value-added subscription services, such as Content Filtering; client Anti-Virus and
integrated Gateway Anti-Virus; Anti-Spyware and Intrusion Prevention Services; email protection and off-site data backup.
Distributed Architecture
Our security solutions are based on a distributed architecture, which we believe allows our offerings to be deployed and managed at the most efficient location in the network. We are providing our customers and their service providers with mechanisms to enforce the networking and security policies they have defined for their business. We also use the flexibility of a distributed architecture to allow us to enable new functionality in already-deployed platforms through the provisioning of an electronic key, which may be distributed through the Internet.
Market Acceptance
We began offering integrated security appliances in 1997, and since that time we have shipped over 1.3 million revenue units. When measured by units shipped, we are typically among the top three suppliers in the markets in which we compete. Our experience in serving a broad market and our installed base of customers provides us with opportunities to sell our new network security, content security, and business continuity solutions as they become available. The market acceptance of our current solutions provides our current and prospective channel partners with an increased level of comfort when deciding to offer our new solutions to their customers.
Integrated Design
Our platforms utilize a highly integrated design in order to improve ease-of-use, lower acquisition and operational costs for our customers, and enhance performance. Various models also integrate functionality to support different internet connection alternatives. Every appliance also ships with pre-loaded firmware to provide for rapid set up and easy installation. Each of these tasks can be managed through a simple web-browser session.
Our Opportunities, Challenges, and Risks
We serve substantial markets for network security, content security, and business continuity. Our goal is to deliver comprehensive and profitable solutions to our channel partners which address their customers' needs. We pursue the creation of these solutions through a blend of organic and inorganic growth strategies including internal development efforts, licensing and OEM opportunities, and acquisition of other companies. To the extent that these efforts result in solutions which fit well with our channel and end-users, we would expect to generate increasing sales. To the extent that these efforts are not successful, we would expect to see loss of sales and/or increased expenses without commensurate return.
International Growth
We expect that international revenue will continue to represent a substantial portion of our total revenue in the foreseeable future. Our percentage of sales from international territories does not represent the same degree of penetration of those markets as we have achieved domestically. We believe that a significant opportunity exists to grow our revenue by increasing our international penetration rate to match our penetration rate in the domestic market.
If we fail to structure our distribution relationships in a manner consistent with marketplace requirements and on favorable terms, the percentage of sales from international territories will decline and the revenue from our international operations may decrease.
Growth in Enterprises
We believe that sales through our indirect channel to larger end-customers represent a growth opportunity for the Company. Our percentage of revenues from such customers does not represent the same degree of penetration of that segment as we have achieved with small to medium sized businesses. We believe that a significant opportunity exists to grow our revenue by increasing our penetration rate with this segment by leveraging the company's technological and channel strengths.
If we fail to establish competitive products and services for this segment, or
fail to develop the correct channel partners and resources, the percentage of
our revenue derived from larger end-customers will not increase, and may, in
fact, decrease.
License and Services Revenue
We believe that the software license and services component of our revenue has several characteristics that are positive for our business as a whole: our license and services revenue is associated with a higher gross profit than our product revenue; the subscription services component of license and services revenue is recognized ratably over the services period, and thus provides, in the aggregate, a more predictable revenue stream than product or license revenue, which are generally recognized at the time of the sale; and to the extent that we are able to achieve good renewal rates, we have the opportunity to lower our selling and marketing expenses attributable to that segment. We have been successfully increasing the rate at which we have been able to sell our services to both our installed base and in conjunction with our new solution sales. As a result, we have been able to generate incremental revenue out of each product transaction. We expect the percentage of our total revenue from software licenses and services to continue to grow. However, should we not achieve reasonable rates of selling our products and services to our installed base or as part of new solution sales, or realize lower subscription service renewal rates, we risk having our revenue concentrated in more unpredictable product and license sales.
Macro-Economic Factors Affecting IT Spending
We believe that our products and services are subject to the macro-economic factors that affect much of the information technology ("IT") market. Growing IT budgets and an increased funding for projects to provide security, mobility, data protection, and productivity could drive product upgrade cycles and/or create demand for new applications of our solutions. Contractions in IT spending can affect our revenue by causing projects incorporating our products and services to be delayed and/or canceled. We believe that demand for our solutions correlate with increases or decreases in global IT spending and we believe that current economic uncertainties, including fluctuating energy prices, difficulties in the financial sector, the availability of credit, softness in the housing market, underlying market liquidity, and geopolitical uncertainties may continue to have an adverse impact on IT spending in the markets in which we do business.
Critical Accounting Policies and Critical Accounting Estimates
The preparation of our financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires us to make judgments, assumptions, and estimates that affect the
amounts reported in our consolidated financial statements and accompanying
notes. We believe that the judgments, assumptions and estimates upon which we
rely are reasonable based upon information available to us at the time that
these judgments, assumptions and estimates are made. However, any differences
between these judgments, assumptions and estimates and actual results could have
a material impact on our statement of operations and financial condition. The
current volatility in the financial markets and associated general economic
uncertainty increase the risk that such differences may be realized. The
accounting policies that reflect our most significant judgments, assumptions and
estimates and which we believe are critical in understanding and evaluating our
reported financial results include: (1) revenue recognition; (2) sales returns
and other allowances, allowance for doubtful accounts and warranty reserve; (3)
valuation of inventory; (4) accounting for income taxes; (5) valuation of
long-lived and intangible assets and goodwill, (6) share-based compensation, and
(7) fair value of investments.
Revenue Recognition
The Company derives its revenue primarily from the sale of: (1) products, (2) software licenses, (3) subscriptions for services; and (4) other services such as extended warranty and service contracts, training, consulting and engineering services. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. The Company may experience material differences in the amount and timing of its revenue for any period if management makes different judgments or utilizes different estimates.
The Company recognizes product and service revenues in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition, and all related amendments and interpretations. The Company applies provisions of Statement of Position 97-2, Software Revenue Recognition (SOP No. 97-2), and all related amendments and interpretations, to all transactions involving the sale of hardware products that include software solutions.
The Company recognizes revenue for products when persuasive evidence of an
arrangement exists, the product has been delivered, title and risk of loss have
been transferred to the customer, the fee is fixed or determinable, and
collection of the resulting receivable is reasonably assured. While the
Company's sales agreements contain standard terms and conditions, there are
agreements that contain non-standard terms and conditions. In these cases,
interpretation of non-standard provisions is required to determine the
appropriate accounting for the transaction.
Retroactive price protection rights resulting from price reductions on products previously sold to customers are contractually offered to the Company's channel partners. The Company evaluates the revenue impact of these rights carefully based on stock on hand in the channels and records a provision for estimated future price protection credit. Revenue from Ingram Micro and Tech Data is not recognized until these distributors sell the product to their customers. As a consequence, there is no provision required for sales to these distributors. In general, retroactive price adjustments are not significant. At December 31, 2008, 2007, and 2006, the Company recorded a provision for price protection on sales to the Company's channel partners in the amounts of $200,000, $985,000, and $42,000, respectively.
Delivery to customers is generally deemed to occur when we deliver the product to a common carrier. Certain distributor agreements provide customers with rights of return for stock rotation. These stock rotation rights are generally limited to 15% to 25% of the distributor's purchases for the immediately prior 3 to 6 months period or contain other measurable restrictions, and we estimate reserves for these return rights as discussed below. Two of our largest distributors, Ingram Micro and Tech Data, have rights of return under certain circumstances that are not limited, therefore, we do not deem delivery to have occurred for any sales to Ingram Micro and Tech Data until they sell the product to their customers.
Evidence of an arrangement is manifested by a master distribution or OEM (Original Equipment Manufacturer) agreement, an individual binding purchase order, or a signed license agreement. In most cases, sales through our distributors and OEM partners are governed by a master agreement against which individual binding purchase orders are placed on a transaction-by-transaction basis.
At the time of the transaction, the Company assesses whether the fee associated with the transaction is fixed or determinable, and whether or not collection is reasonably assured. The Company assesses whether the fee is fixed or determinable based upon the terms of the binding purchase order, including the payment terms associated with the transaction. If a significant portion of a fee is due beyond the Company's normal payment terms, typically 30 to 90 days from invoice date, the Company accounts for the fee as not being fixed or determinable and recognizes revenue as the fees become due.
The Company assesses probability of collection based on a number of factors, including past transaction history with and the credit-worthiness of the customer. The Company does not request collateral from its customers. If the Company determines that collection of a fee is not reasonably assured, it defers the fee and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.
For arrangements with multiple obligations (for example, the sale of an appliance which includes a year of maintenance or a subscription based product), the Company allocates revenue first to undelivered components of the arrangement based on the vendor specific objective evidence of fair value of the undelivered elements, which is generally the average selling price of each element when sold separately. This allocation process means that the Company defers revenue from the arrangement equal to the fair value of the undelivered elements and recognizes such amounts as revenue when the elements are delivered.
The Company's arrangements do not generally include acceptance clauses. However, if an arrangement includes an acceptance provision, recognition of revenue occurs upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period.
The Company recognizes revenue for subscriptions and services such as content filtering, anti-virus protection and intrusion prevention, and extended warranty and service contracts, ratably over the contract term. The Company's training, consulting and engineering services are generally billed and recognized as revenue as these services are performed.
The Company collects and remits sales taxes on products and services that it purchases and sells under its contracts with customers, and reports such amounts under the net method in its consolidated statements of operations. Accordingly, there are no sales taxes included in revenue.
Sales Returns and Other Allowances, Allowance for Doubtful Accounts, and Warranty Reserve
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported
period. Specifically, we must make estimates of potential future product returns
and price changes related to current
period product revenue. We analyze historical returns, current economic trends, and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. We may experience material differences in the amount and timing of our revenue for any period if management makes different judgments or utilizes different estimates.
In addition, we must make estimates based upon a combination of factors to ensure that our accounts receivable balances are not overstated due to uncollectibility. We specifically analyze accounts receivable and historical bad debts, the length of time receivables are past due, macroeconomic conditions including liquidity and the availability of credit facilities, deterioration in customer's operating results or financial position, customer concentrations, and customer credit-worthiness, when evaluating the adequacy of the allowance for doubtful accounts.
Our appliance products are generally covered by a warranty period of one or two years. We accrue a warranty reserve for estimated costs to provide warranty services, including the cost of technical support, product repairs, and product replacement for units that cannot be repaired. Our estimate of costs to fulfill our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty accrual will increase, resulting in decreased gross profit.
Valuation of Inventory
We continually assess the valuation of our inventory and periodically write-down the value for estimated excess and obsolete inventory based upon assumptions about future demand and market conditions. Such estimates are difficult to make since they are based, in part, on estimates of current and future economic conditions. Reviews for excess inventory are done on a quarterly basis and required reserve levels are calculated with reference to our projected ultimate usage of that inventory. In order to determine the ultimate usage, we take into account forecasted demand, rapid technological changes, product life cycles, projected obsolescence, current inventory levels, and purchase commitments. The excess balance determined by this analysis becomes the basis for our excess inventory charge. If actual demand is lower than our forecasted demand, and we fail to reduce manufacturing output accordingly, we could be required to record additional inventory write-downs, which would have a negative effect on our gross profit and earnings.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements we are required to estimate our taxes in each of the jurisdictions in which we operate. We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation . . .
|
|