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PROCERA NETWORKS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
The following is a discussion of our results of operations and current financial
position. This discussion should be read in conjunction with our unaudited
condensed consolidated financial statements and related notes included elsewhere
in this report and the audited consolidated financial statements and related
notes included in our Annual Report on Form 10-K for the year ended December 31,
2011, filed with the SEC on March 15, 2012, and as amended by Form 10-K/A, filed
with the SEC on April 6, 2012.
As used in this Quarterly Report on Form 10-Q, references to the "Company,"
"we," "us," "our" or similar terms include Procera Networks, Inc. and its
consolidated subsidiaries.
Cautionary Note Regarding Forward-Looking Statements
Our disclosure and analysis in this Quarterly Report on Form 10-Q contain
certain "forward-looking statements," as such term is defined in Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These
statements set forth anticipated results based on management's plans and
assumptions. From time to time, we also provide forward-looking statements in
other materials we release to the public as well as oral forward-looking
statements. Such statements give our current expectations or forecasts of future
events; they do not relate strictly to historical or current facts. We have
attempted to identify such statements by using words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe," "will," "could,"
"initial," "future," "may," "predict," "potential," "should" and similar
expressions in connection with any discussion of future events or future
operating or financial performance or strategies. Such forward-looking
statements include, but are not limited to, statements regarding:
our estimates and expenctions for revenue for full fiscal year 2012 and for
cost of sales and operating expenses for the fourth fiscal quarter of 2012, as
well as our future gross margin rates;
our services, including the development and deployment of products and services and strategies to expand our targeted customer base and broaden our
sales channels;
the operation of our company with respect to the development of products and
services;
our liquidity and financial resources, including anticipated capital
expenditures, funding of capital expenditures and anticipated levels of
indebtedness;
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Index
trends related to and management's expectations regarding results of
operations, required capital expenditures, revenues from existing and new
products and sales channels, and cash flows, including but not limited to
those statements set forth below in this Item 2; and
sales efforts, expenses, interest rates, foreign exchange rates, and the
outcome of contingencies, such as legal proceedings.
We cannot guarantee that any forward-looking statement will be realized.
Achievement of future results is subject to risks, uncertainties and potentially
inaccurate assumptions. Should known or unknown risks or uncertainties
materialize, or should underlying assumptions prove inaccurate, actual results
could vary materially from past results and those anticipated, estimated or
projected. Investors should bear this in mind as they consider forward-looking
statements.
We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our annual reports on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K. We also provide the following cautionary discussion of
risks and uncertainties related to our businesses. These are factors that we
believe, individually or in the aggregate, could cause our actual results to
differ materially from expected and historical results. We note these factors
for investors as permitted by Section 21E of the Exchange Act. You should
understand that it is not possible to predict or identify all such factors.
Consequently, you should not consider the following to be a complete discussion
of all potential risks or uncertainties.
Our forward-looking statements are subject to a variety of factors that could
cause actual results to differ significantly from current beliefs and
expectations, identified under the caption "Risk Factors" and elsewhere in this
Quarterly Report on Form 10-Q, as well as general risks and uncertainties such
as those relating to general economic conditions and demand for our products and
services.
Overview
We are a leading provider of Intelligent Policy Enforcement ("IPE") solutions
that enable mobile and broadband network operators and entities managing private
networks including higher education institutions, businesses and government
entities (collectively referred to as network operators), to gain enhanced
visibility into, and control of, their networks. Our solutions provide granular
network intelligence intended to enable network operators to improve the quality
and longevity of their networks, better monetize their network infrastructure
investments, control security hazards and create and deploy new services for
their users. We believe that the intelligence we provide about users and their
usage enables qualified business decisions. Our network operator customers
include mobile service providers, broadband service providers, cable multiple
system operators ("MSOs"), Internet Service Providers ("ISPs"), educational
institutions, enterprises and government agencies.
Our IPE products are part of the market for mobile packet and broadband core
products. According to Infonetics Research, the market for IPE products is
expected to grow from $344 million in 2010 to just under $2.0 billion in 2016, a
compound annual growth rate of 34%. We have also entered the Application
Delivery Networking market, which was a $2.6 billion addressable market in 2011,
with our announcement of Carrier Grade NAT and Advanced Traffic Steering. Our
solutions deliver a key element of the mobile packet and broadband core
ecosystems by creating a policy enforcement layer in the network. Our solutions
are often integrated with additional elements in the mobile packet and broadband
core including Policy Management, Charging and Network Monitoring, Optimization
and Assurance functions and are compliant with the widely adopted 3rd Generation
Partnership Program ("3GPP") standard. In order to respond to rapidly increasing
demand for network capacity due to increasing subscribers and usage, network
operators are seeking higher degrees of intelligence, optimization, network
management, service creation and delivery in order to differentiate their
offerings and deliver a high quality of experience to their subscribers. We
believe the need to create more intelligent and innovative mobile and broadband
networks will continue to drive demand for our products.
Our products are marketed under the PacketLogic brand name. We have a broad
spectrum of products delivering IPE at the access, edge and core layers of the
network. Our products are designed to offer maximum flexibility to our customers
and enable differentiated services and revenue-enhancing applications, all while
delivering a high quality of service for subscribers.
We face competition from suppliers of standalone IPE and deep packet inspection
("DPI") products, including Allot Communications Ltd., Arbor Networks (a
subsidiary of Tektronix), Blue Coat Systems, Inc., Brocade Communications
Systems, Inc., Cisco Systems, Inc., Cloudshield Technologies, Inc. (a subsidiary
of SAIC, Inc.), Ericsson, Huawei Technologies Company, Ltd., Juniper Networks,
Inc. and Sandvine Corporation. Some of our competitors supply platform products
with different degrees of DPI functionality, such as switch/routers, routers,
session border controllers and VoIP switches.
Most of our competitors are larger and more established enterprises with
substantially greater financial and other resources. Some competitors may be
willing to reduce prices and accept lower profit margins to compete with us. As
a result of such competition, we could lose market share and sales, or be forced
to reduce our prices to meet competition. However, we do not believe there is a
dominant supplier in our market. Based on our belief in the superiority of our
technology, we believe that we have an opportunity to capture meaningful market
share and benefit from what we believe will be growth in the DPI market.
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Our Company is headquartered in Fremont, California and we have regional
headquarters in Varberg, Sweden and Singapore. We sell our products through our
direct sales force, resellers, distributors and systems integrators in the
Americas, Asia Pacific and Europe.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon financial statements which have been prepared in accordance with
Generally Accepted Accounting Principles in the United States ("U.S. GAAP"). The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate these estimates. We base our estimates on historical
experience and on assumptions that are believed to be reasonable. These
estimates and assumptions provide a basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions, and these differences may be material.
We believe the following critical accounting policies reflect our most
significant estimates, judgments and assumptions used in the preparation of our
consolidated financial statements:
Revenue Recognition;
Valuation of Goodwill, Intangible and Long-Lived Assets;
Allowance for Doubtful Accounts;
Stock-Based Compensation; and
Accounting for Income Taxes.
These critical accounting policies and related disclosures appear in our Annual
Report on Form 10-K for the year ended December 31, 2011.
Results of Operations
Comparison of Three and Nine Months Ended September 30, 2012 and 2011
Revenue
Revenue for the three and nine months ended September 30, 2012 and 2011 was as
follows (in thousands, except percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 Increase 2012 2011 Increase
Net product revenue $ 12,948 $ 10,128 28 % $ 34,640 $ 24,007 44 %
Net support revenue 3,113 2,065 51 % 8,418 4,765 77 %
Total revenue $ 16,061 $ 12,193 32 % $ 43,058 $ 28,772 50 %
Total revenue for the three and nine months ended September 30, 2012 was $16.1
million and $43.1 million, an increase of 32% and 50%, respectively, from the
comparable periods in the prior year. Product revenue in the three and nine
months ended September 30, 2012 was $12.9 million and $34.6 million, an increase
of 28% and 44%, respectively. Support revenue in the three and nine months ended
September 30, 2012 was $3.1 million and $8.4 million, an increase of 51% and
77%, respectively. The increase in product revenue in the three and nine months
ended September 30, 2012 compared to the same periods in 2011 reflected
increased sales of our mid-range PL8000 series products and PacketLogic
Subscriber Management software to wireline, wireless and cable service provider
customers. The increase in the support revenue in 2012 compared to the first
nine months of 2011 reflected the continued expansion of the installed base of
our products to which we have sold ongoing support services. For the three
months ended September 30, 2012, revenues from Shaw Communications, Inc. and one
additional customer represented 16%, and 24% of net revenues, respectively, with
no other single customer accounting for more than 10% of net revenues. For the
nine months ended September 30, 2012, revenues from Shaw Communications, Inc.
and one additional customer represented 17% and 10% of net revenues,
respectively, with no other single customer accounting for more than 10% of net
revenues. For the three months ended September 30, 2011, revenues from two
customers represented 41% and 22% of net revenues, respectively, and for the
nine months ended September 30, 2011, revenue from one customer represented 28%
of net revenues, with no other single customer accounting for more than 10% of
net revenue.
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Sales to customers located in the United States as a percentage of total
revenues were 47% and 55% for the three and nine months ended September 30,
2012, respectively. Sales to customers located in the United States as a
percentage of total revenues were 58% and 51% for the three and nine months
ended September 30, 2011, respectively.
For the year ending December 31, 2012, we expect total revenue to increase by
approximately 40% compared with the total revenue reported for the year ended
December 31, 2011.
Cost of Sales
Cost of sales includes direct labor and material costs for products sold, costs
expected to be incurred for warranty, adjustments to inventory values, including
the write-down of slow moving or obsolete inventory and costs for support
personnel.
The following table presents the breakdown of cost of sales by category for the
three and nine months ended September 30, 2012 and 2011 (in thousands, except
percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 Increase/(Decrease) 2012 2011 Increase
Product costs $ 4,053 $ 4,473 (9) % $ 12,671 $ 10,620 19 %
Percent of net
product revenue 31 % 44 % 37 % 44 %
Support costs 487 256 90 % 956 516 85 %
Percent of net
support revenue 16 % 12 % 11 % 11 %
Total cost of
sales $ 4,540 $ 4,729 (4) % $ 13,627 $ 11,136 22 %
Percent of total
net revenue 28 % 39 % 32 % 39 %
Total cost of sales in the three months ended September 30, 2012 decreased by
$0.2 million while total cost of sales in the nine months ended September 30,
2012 increased by $2.5 million compared to the three and nine month periods in
2011. Cost of sales as a percentage of revenue decreased by 11 and 7 percentage
points for the three and nine months ended September 30, 2012, respectively,
from the comparable periods in the prior year. The decrease in cost of sales in
the three months ended September 30, 2012 primarily reflected an increased
proportion of software license sales compared to hardware products. The increase
in cost of sales in the nine months ended September 30, 2012 reflected higher
material costs associated with increased product sales. The decrease in cost of
sales as a percentage of revenue for the three and nine months ended September
30, 2012 primarily reflected increased sales of our appliance-based PL8000
series products, which have lower material costs compared with our other
products, and an increased proportion of license revenue. Support cost of sales
increased by $231,000 and $440,000 for the three and nine months ending
September 30, 2012, reflecting increased customer support and professional
services headcount. We expect support cost of sales to further increase in the
three months ending December 31, 2012, as compared with the three months ended
September 30, 2012 because of additional hiring of customer support and
professional services headcount and greater use of outside support
services. Stock-based compensation recorded to cost of sales in the three and
nine months ended September 30, 2012 was $34,000 and $98,000, respectively,
compared to $26,000 and $77,000, respectively, in the corresponding periods of
2011.
Gross Profit
Gross profit for the three and nine months ended September 30, 2012 and 2011 was
as follows (in thousands, except percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 Increase 2012 2011 Increase
Gross profit $ 11,521 $ 7,464 55 % $ 29,431 $ 17,636 67 %
Percent of total net
revenue 72 % 61 % 68 % 61 %
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Our gross profit margin for the three and nine months ended September 30, 2012
increased by 11% and 7%, respectively, from the comparable periods in the prior
year. The improvement in margins for the three and nine months ended September
30, 2012 was a result of a favorable product mix, which included increased sales
of our PacketLogic Subscriber Manager software license resulting in a higher
proportion of software license revenue, and increased sales of our
appliance-based hardware, which has higher margins compared to our chassis based
products. We have experienced significant variability in our gross profit rate
in the past. For example, our gross profit rate was 56%, 70%, 63% and 72% for
the three-months ended December 31, 2011, March 31, 2012, June 30, 2012 and
September 30, 2012. This variability results from many factors, including the
mix of hardware and software in revenue as well as the degree of competitive
pricing impacting our revenue. We expect this variability in our gross margin
rate to continue in the future.
Operating Expense
Operating expenses for the three and nine months ended September 30, 2012 and
2011 were as follows (in thousands, except percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 Change 2012 2011 Change
Research and development $ 1,931 $ 1,024 89 % $ 5,414 $ 3,304 64 %
Sales and marketing 4,573 2,976 54 % 13,053 8,184 59 %
General and administrative 2,386 1,394 71 % 6,823 3,982 71 %
Total $ 8,890 $ 5,394 65 % $ 25,290 $ 15,470 63 %
In 2012, our total operating expenses have steadily increased because we have
been hiring additional employees in each function of our company, invested in
testing equipment for the development of our products and have increased the use
of outside services, including legal and accounting services. We anticipate that
this trend will continue in subsequent quarters and that total operating
expenses for the fourth quarter of 2012 will exceed those incurred in the
quarter ended September 30, 2012.
Research and Development
Research and development expenses include costs associated with personnel
focused on the development or improvement of our products, prototype materials,
initial product certifications and equipment costs. Research and development
costs include sustaining and enhancement efforts for products already released
and development costs associated with planned new products. Research and
development expenses for the three and nine months ended September 30, 2012 were
as follows (in thousands, except percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 Increase 2012 2011 Increase
Research and
development $ 1,931 $ 1,024 89 % $ 5,413 $ 3,304 64 %
As a percentage of
net revenue 12 % 8 % 13 % 11 %
Research and development expenses for the three and nine months ended September
30, 2012 increased by $0.9 million and $2.1 million, respectively, compared to
the three and nine months ended September 30, 2011 as a result of hiring
additional research and development personnel and the corresponding additional
employee compensation costs, and costs for testing and testing equipment for new
product introductions. Additional personnel are expected to allow us to enhance
our core product features and functionality in order to support new sales and to
achieve follow-on sales to our current customers. Stock-based compensation
recorded to research and development expenses in the three and nine months ended
September 30, 2012 was $0.1 million and $0.3 million, respectively, compared to
$31,000 and $96,000, respectively, in the corresponding periods in 2011.
Sales and Marketing
Sales and marketing expenses primarily include personnel costs, sales
commissions and marketing expenses, such as trade shows, channel development and
literature. Sales and marketing expenses for the three and nine months ended
September 30, 2012 were as follows (in thousands, except percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 Change 2012 2011 Change
Sales and marketing $ 4,573 $ 2,976 54 % $ 13,053 $ 8,184 59 %
As a percentage of net revenue 28 % 24 % 30 % 28 %
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Sales and marketing expenses for the three and nine months ended September 30,
2012 increased by $1.6 million and $4.9 million, respectively, compared to the
three and nine months ended September 30, 2011. The increase reflected the
hiring of additional sales and marketing personnel in 2012 and the corresponding
higher compensation costs, and higher commission costs as a result of the
increase in revenue. Stock-based compensation recorded to sales and marketing
expenses in the three and nine months ended September 30, 2012 was $0.3 million
and $0.9 million, respectively, compared to $0.1 million and $0.3 million,
respectively, in the corresponding periods in 2011.
General and Administrative
General and administrative expenses consist primarily of personnel and
facilities costs related to our executive, finance functions and service fees
for professional services. Professional services include costs for legal advice
and services, accounting and tax professionals, independent auditors and
investor relations. General and administrative expenses for the three and nine
months ended September 30, 2012 were as follows (in thousands, except
percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 Change 2012 2011 Change
General and administrative $ 2,386 $ 1,393 71 % $ 6,823 $ 3,982 71 %
As a percentage of net revenue 15 % 11 %
16 % 14 %
General and administrative expenses for the three and nine months ended
September 30, 2012 increased by $1.0 million and $2.8 million, respectively,
compared to the three and nine months ended September 30, 2011, reflecting
higher accrued bonus costs associated with exceeding revenue targets, business
development expenses of $0.6 million, higher legal and audit fees and increased
use of contractors and professionals as our business has grown. Stock-based
compensation recorded to general and administrative expense in each of the three
and nine months ended September 30, 2012 was $0.4 million and $0.9 million,
respectively, compared to $0.3 million and $0.7 million, respectively, in the
corresponding periods in 2011.
Interest and Other Income (Expense), Net
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 Change 2012 2011 Change
($ in thousands) ($ in thousands)
Interest and other
income (expense), net $ 161 $ (26 ) 719 % $ 108 $ (91 ) 221 %
Interest and other income (expense), net in the three months ended September 30,
2012, reflected interest income earned on our cash and investment balances and
foreign exchange gains. Interest and other income (expense), net in the nine
months ended September 30, 2012, reflected interest income earned on our cash
and investment balances, partially offset by foreign exchange losses. Interest
and other income (expense), net in the three and nine months ended September 30,
2011 primarily reflected interest expense associated with our credit
facility. Interest expense in the three and nine months ended September 30, 2012
decreased from the prior year comparable periods, reflecting no borrowings under
our credit facility in 2012.
Provision for Income Taxes
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 Change 2012 2011 Change
($ in thousands) ($ in thousands)
Provision for income taxes $ 29 $ - 100 % $ 141 $ 79 78 %
We are subject to taxation primarily in the U.S., Australia, Japan, Singapore
and Sweden as well as in a number of U.S. states, including California. The
increase in the tax provision for the three and nine months ended September 30,
2012 compared to the three and nine months ended September 30, 2011 reflects
higher state and foreign taxes as a result of the increase in taxable income.
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We have established a valuation allowance for substantially all of our deferred
tax assets. We calculated the valuation allowance in accordance with the
provisions of FASB Accounting Standards Codification Topic 740, which requires
that a valuation allowance be established or maintained when it is "more likely
than not" that all or a portion of deferred tax assets will not be realized. We
will continue to reserve for substantially all net deferred tax assets until
there is sufficient evidence to warrant reversal.
Liquidity and Capital Resources
Cash and Cash Equivalents and Investments
The following table summarizes the changes in our cash balance for the periods
indicated:
Nine Months Ended
September 30,
2012 2011
($ in thousands) Net cash provided by operating activities $ 7,587 $ 2,352
Net cash used in investing activities (80,445 ) (16,263 )
Net cash provided by financing activities 91,050 25,110
Effect of exchange rate changes on cash and cash
equivalents 55 (160 )
Net increase in cash and cash equivalents $ 18,247 $ 11,039
During the nine months ended September 30, 2012, we generated $7.6 million in
cash from operating activities compared to $2.4 million for the nine months
ended September 30, 2011. Cash provided by operating activities during the nine
months ended September 30, 2012 primarily consisted of our net income of $4.1
million, non-cash charges of $3.9 million and net working capital sources of
cash of $0.4 million. Non-cash charges consisted primarily of stock-based
compensation of $2.2 million and depreciation expense of $0.6 million. Working
capital sources of cash consisted primarily of an increase in deferred revenue
of $3.4 million, reflecting sales of support contracts to both new and existing
customers, and an increase in accounts payable of $1.6 million due to an
increase in inventory purchases. Working capital uses of cash consisted
primarily of an increase in accounts receivable of $4.9 million due to higher
credit sales.
Net cash used in investing activities of $80.0 million during the nine months
ended September 30, 2012 mainly consisted of purchases of short-term investments
of $92.2 million and purchases of lab and testing equipment for use in research
and development of $2.6 million, partially offset by proceeds from sales and
maturities of short-term investments of $14.3 million. Net cash used in
investing activities during the nine months ended September 30, 2011 of $16.3
million included purchases of short-term investments of $15.5 million and
purchases of lab and testing equipment of $0.8 million.
Net cash provided by financing activities of $91.1 million during the nine
months ended September 30, 2012 reflected the net proceeds from the issuance of
our common stock of $88.0 million and proceeds from the exercise of stock
options and warrants of $3.0 million. Net cash provided by financing activities
during the nine months ended September 30, 2011 of $25.1 million included net
proceeds from the issuance of common stock of $26.5 million and proceeds from
the exercise of stock options and warrants of $0.4 million, partially offset by
net repayment of borrowings on our credit line of $1.7 million.
Our cash, cash equivalents and short-term investments at September 30, 2012
consisted of bank deposits with third party financial institutions, money market
funds, U.S. agency securities, certificates of deposit, commercial paper and
corporate bonds. Our investments are intended to establish a high-quality
portfolio that preserves principal, meets liquidity needs, avoids inappropriate
concentrations and delivers an appropriate yield in relationship to our
investment guidelines and market conditions. Cash equivalents consist of highly
liquid investments with remaining maturities of three months or less at the date
of purchase. Short-term investments have a remaining maturity of greater than
three months at the date of purchase and an effective maturity of less than one
year. All investments are classified as available for sale.
On April 25, 2012, we completed a registered offering of 4.5 million shares of
common stock. The shares were sold to the public at $21.00 per share for an
aggregate gross sales price of $94.5 million. We received net proceeds of
approximately $88.0 million after deducting underwriting commissions and other
offering expenses. We intend to use the net proceeds for general working capital
and corporate purposes, including potential acquisitions.
On February 3, 2012, we amended and restated our two-year loan and security
agreement with Silicon Valley Bank to increase the credit facility from $2.0
million to $10.0 million for an additional two-year period beginning on that
date. Borrowings under the amended credit facility bear interest at the prime
rate plus 1%, but not less than 4.25% on an annual basis. At September 30, 2012
and December 31, 2011, we had no borrowings outstanding under this credit
facility.
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Based on our current cash, cash equivalents and short-term investment balances,
and anticipated cash flow from operations, we believe that our working capital
will be sufficient to meet the cash needs of our business for at least the next
twelve months. Our future capital requirements will depend on many factors,
including our rate of growth, the expansion of our sales and marketing
activities, development of additional channel partners and sales territories,
the infrastructure costs associated with supporting a growing business and
greater installed base of customers, introduction of new products, enhancement
of existing products, and the continued acceptance of our products. We may also
enter into arrangements that require investment such as entering into
complementary businesses, service expansion, technology partnerships or
acquisitions.
Off-Balance Sheet Arrangements
As of September 30, 2012, we had no off-balance sheet items as described by Item
303(a)(4) of Regulation S-K. We have not entered into any transactions with
unconsolidated entities whereby we have financial guarantees, subordinated
retained interests, derivative instruments or other contingent arrangements that
expose us to material continuing risks, contingent liabilities, or any other
obligations under a variable interest in an unconsolidated entity that provides
us with financing, liquidity, market risk or credit risk support.
Contractual Obligations
We lease facility space under non-cancelable operating leases in California and
Sweden that extend through 2016. The details of these contractual obligations
are further explained in Note 10 of the Notes to Condensed Consolidated
Financial Statements.
We use third-party contract manufacturers to assemble and test our hardware
products. In order to reduce manufacturing lead-times and ensure an adequate
supply of inventories, our agreements with some of these manufacturers allow
them to procure long lead-time component inventory based on rolling production
forecasts provided by us. We may be contractually obligated to purchase long
lead-time component inventory procured by certain manufacturers in accordance
with our forecasts. In addition, we issue purchase orders to our third-party
manufacturers that may not be cancelable at any time. As of September 30, 2012,
we had open non-cancelable purchase orders amounting to approximately $5.6
million, primarily with our third-party contract manufacturers.
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