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Ixia Announces Preliminary 2014 Fourth Quarter and Full Year Results

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Ixia (Nasdaq:XXIA) today reported its preliminary financial results for the fourth quarter and year ended December 31, 2014.

Total revenue for the 2014 fourth quarter is expected to be $127.2 million, compared with $120.6 million reported for the 2013 fourth quarter and $114.0 million reported for the 2014 third quarter. 2014 and 2013 fourth quarter revenue includes $17.8 million and $4.8 million, respectively, of revenue attributable to Net Optics, Inc. (“Net Optics”), which we acquired in December 2013.

“Our better than expected revenue was driven by record bookings and strong demand across our product lines and verticals, including higher sales of our visibility solutions to service providers,” said Bethany Mayer, Ixia’s president and chief executive officer. “We are very pleased with our execution in the quarter. Looking forward, we will continue our efforts to transform Ixia into an enabler of Application Performance and Security Resilience and to diversify and grow our business while focusing on operational fundamentals and driving financial discipline.”

Total revenue for fiscal year 2014 is expected to be $464.5 million, compared with $467.3 million reported for fiscal year 2013. The 2014 and 2013 fiscal years include $59.0 million and $4.8 million, respectively, of revenue attributable to Net Optics.

On a GAAP basis, the company expects to report net income for the 2014 fourth quarter of $286,000, or $0.00 per diluted share, compared with a net loss of $3.1 million, or $0.04 per diluted share, for the 2013 fourth quarter. The company expects to report a GAAP net loss for fiscal year 2014 of $41.6 million, or $0.54 per diluted share, compared with GAAP net income of $11.9 million, or $0.15 per diluted share, for fiscal year 2013.

Non-GAAP net income for the 2014 fourth quarter is expected to be $15.6 million, or $0.19 per diluted share, compared with non-GAAP net income of $11.9 million, or $0.15 per diluted share, for the 2013 fourth quarter. The company expects to report non-GAAP net income for fiscal year 2014 of $28.2 million, or $0.36 per diluted share, compared with non-GAAP net income of $56.5 million, or $0.69 per diluted share, for fiscal year 2013.

Additional non-GAAP information and a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measures for the 2014 and 2013 fourth quarters and fiscal years may be found in the attached financial tables.

Ixia ended the 2014 fourth quarter with approximately $126 million in cash, cash equivalents and investments, compared with $114 million at September 30, 2014.

Mayer added, “We are also pleased to announce that a candidate for the position of senior vice president, global sales has accepted our offer to join Ixia, and we expect him to start prior to the end of March after we complete various hiring-related matters.”

The company further announced that the completion of its 2014 financial statements and the related audit will require additional time beyond the March 2, 2015 due date for the filing with the Securities and Exchange Commission (the “SEC”) of the company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”). The company plans to file with the SEC a Form 12b-25 Notification of Late Filing (a “Form 12b-25″), which will allow the company an additional 15 calendar days to timely file its 2014 Form 10-K with the SEC. The company plans to file its 2014 Form 10-K within such 15-day period (i.e., on or before March 17, 2015).

Conference Call and Webcast Information

Ixia will host a conference call today at 5:00 p.m. Eastern time for analysts and investors to discuss its preliminary 2014 fourth quarter and full year results and its business outlook for the 2015 first quarter. The call will be open to the public, and interested parties may listen to the call by dialing (804) 681-3728. A live audio webcast of the conference call, along with supplemental financial information, will be accessible from the “Investors” section of the company’s web site (http://www.ixiacom.com). Following the live webcast, an archived version will be available in the “Investors” section on the Ixia web site for at least 90 days.

Non-GAAP Information

To supplement our consolidated financial results prepared in accordance with Generally Accepted Accounting Principles (“GAAP”), we have included certain non-GAAP financial measures in this press release and in the attachments hereto. Specifically, we have provided non-GAAP financial measures (i.e., non-GAAP net income and non-GAAP diluted earnings per share) that exclude certain non-cash and/or non-recurring income and expense items such as proceeds and expenses from certain legal and contractual settlements, expenses relating to internal investigations and any related remediation efforts, the restatement of our financial statements for the first and second quarters of 2013 and for the six months ended June 30, 2013, the pending securities class action against the company and certain of its current and former officers and directors as well as a shareholder derivative action and an SEC investigation, stock-based compensation expenses, acquisition and other related costs, restructuring expenses, the amortization of acquisition-related intangible assets, and the related income tax effects of these items, as well as certain other non-cash income tax impacts such as changes in the valuation allowance recorded against certain deferred tax assets. The aforementioned items represent income and expense items that may be difficult to estimate from period to period and/or that we believe are not directly attributable to the underlying performance of our business operations. We believe that by excluding these items, our non-GAAP measures provide supplemental information to both management and investors that is useful in assessing our core operating performance, evaluating our ongoing business operations and comparing our results of operations on a consistent basis from period to period. These non-GAAP financial measures are provided to enhance the user’s overall understanding of our financial performance. These non-GAAP financial measures are also used by management to plan and forecast future periods and to assist management in making operating and strategic decisions. The presentation of this additional information is not prepared in accordance with GAAP. The information therefore may not necessarily be comparable to that of other companies and should be considered as a supplement to, not a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP. Investors are encouraged to review the reconciliations of GAAP to non-GAAP financial measures, which are included below in the attached financial tables.

Safe Harbor under the Private Securities Litigation Reform Act of 1995

Certain statements made in this press release are forward-looking statements, including, without limitation, statements regarding the company’s financial results for the quarter and year ended December 31, 2014, the company’s future business, efforts, focus and opportunities, the hiring of the company’s new senior vice president, global sales, the completion of the company’s 2014 financial statements and of the related audit, and the filing with the SEC of the 2014 Form 10-K and of a Form 12b-25. In some cases, such forward-looking statements can be identified by terms such as may, will, should, expect, plan, believe, estimate, predict or the like. Such statements reflect our current intent, belief and expectations and are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements. Factors that could cause the actual results to differ materially from the results predicted include, among others, the completion of the company’s financial close process and consolidated financial statements for the quarter and year ended December 31, 2014, the completion of the audit of the company’s financial statements to be included in the 2014 Form 10-K, the risk that the completion of the company’s 2014 financial statements and of the related audit and the completion and filing of the Form 10-K take longer than expected, the risk that the company does not timely file any required Form 12b-25 with the SEC, the risk that the candidate for senior vice president, global sales does not commence employment with the company, the risk that the company will not be successful in transforming itself into an enabler of Application Performance and Security Resilience and in diversifying and growing its business while focusing on operational fundamentals and driving financial discipline, the risk that the company will not realize all of the expected benefits of our previously announced restructuring and cost reduction programs, the risk that the anticipated benefits and synergies of our 2013 acquisition of Net Optics will not be realized, changes in the global economy, competition, consistency of orders from significant customers, our success in leveraging our IP portfolio, expertise, and market opportunities, our success in developing and producing new products, our success in developing new sales channels and customers, market acceptance of our products, war, terrorism, political unrest, natural disasters and other circumstances that could, among other consequences, reduce the demand for our products, disrupt our supply chain, and/or impact the delivery of our products. Such factors also include those factors identified in our Annual Report on Form 10-K for the year ended December 31, 2013, and in our other filings with the SEC. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

About Ixia

Ixia provides application performance and security resilience solutions to validate, secure, and optimize businesses’ physical and virtual networks. Enterprises, service providers, network equipment manufacturers, and governments worldwide rely on Ixia’s solutions to deploy new technologies and achieve efficient, secure, ongoing operation of their networks. Ixia’s powerful and versatile solutions, expert global support, and professional services equip organizations to exceed customer expectations and achieve better business outcomes. Learn more at http://www.ixiacom.com.

IXIA

Consolidated Balance Sheets

(in thousands)

(unaudited)

As of December 31,
2014 2013
Assets
Current assets:
Cash and cash equivalents $ 46,394 $ 34,189
Short-term investments in marketable securities 79,760 51,507
Accounts receivable, net of allowances of $1,011 and $840 as of December 31, 2014 and 2013, respectively 99,528 109,590
Inventories 44,826 47,136
Prepaid expenses and other current assets 47,077 48,514
Total current assets 317,585 290,936
Property, plant and equipment, net 37,648 35,932
Intangible assets, net 145,018 189,949
Goodwill 338,873 338,836
Other assets 30,697 32,070
Total assets $ 869,911 $ 887,723
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable $ 16,902 $ 19,011
Accrued expenses and other 45,271 53,748
Deferred revenues 100,170 89,217
Convertible senior notes 200,000
Total current liabilities 362,343 161,976
Deferred revenues 18,046 15,106
Other liabilities 8,431 11,529
Convertible senior notes 200,000
Total liabilities 388,820 388,611
Shareholders’ equity:
Preferred stock, without par value; 1,000 shares authorized and none outstanding
Common stock, without par value; 200,000 shares authorized at December 31, 2014 and 2013; 78,575 and 76,849 shares issued and outstanding as of December 31, 2014 and 2013, respectively 187,790 178,347
Additional paid-in capital 206,520 191,976
Retained earnings 87,574 129,166
Accumulated other comprehensive loss (793 ) (377 )
Total shareholders’ equity 481,091 499,112
Total liabilities and shareholders’ equity $ 869,911 $ 887,723

IXIA

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

Three months ended
December 31,

Year ended
December 31,

2014 2013 2014 2013
Revenues:
Products $ 89,200 $ 90,348 $ 325,455 $ 352,712
Services 38,006 30,281 139,003 114,544
Total revenues 127,206 120,629 464,458 467,256
Costs and operating expenses:(1)
Cost of revenues – products (2) 25,608 26,322 98,815 89,136
Cost of revenues – services 4,038 3,303 16,166 13,867
Research and development 27,477 29,319 115,156 117,502
Sales and marketing 37,410 37,329 151,765 137,724
General and administrative 17,179 11,662 66,475 47,158
Amortization of intangible assets 10,915 10,552 46,901 40,805
Acquisition and other related (103 ) 3,892 3,277 6,920
Restructuring 1,623 1,782 10,310 1,840
Total costs and operating expenses 124,147 124,161 508,865 454,952
Income (loss) from operations 3,059 (3,532 ) (44,407 ) 12,304
Interest (expense) income and other, net (554 ) 632 (24 ) 6,269
Interest expense (2,437 ) (1,942 ) (8,266 ) (7,771 )
Income (loss) before income taxes 68 (4,842 ) (52,697 ) 10,802
Income tax expense (benefit) (218 ) (1,773 ) (11,105 ) (1,068 )
Net income (loss) $ 286 $ (3,069 ) $ (41,592 ) $ 11,870
Earnings (loss) per share:
Basic $ 0.00 $ (0.04 ) $ (0.54 ) $ 0.16
Diluted $ 0.00 $ (0.04 ) $ (0.54 ) $ 0.15
Weighted average number of common and common equivalent shares outstanding:
Basic 78,404 76,593 77,629 75,757
Diluted 79,563 76,593 77,629 77,513
(1) Stock-based compensation included in:
Cost of revenues – products $ 114 $ 140 $ 331 $ 550
Cost of revenues – services 44 53 126 209
Research and development 1,925 2,008 6,843 8,065
Sales and marketing 1,484 2,022 5,624 7,367
General and administrative 1,840 (449 ) 3,595 4,571
(2) Cost of revenues – products excludes amortization of intangible assets related to purchased technology of $6.4 million and $6.7 million for the quarters ended December 31, 2014 and 2013, respectively, and $28.9 million and $26.0 million for the years ended December 31, 2014 and 2013, respectively, which is included in Amortization of intangible assets.

IXIA

Non-GAAP Information and Reconciliation to Most Directly Comparable GAAP Financial Measures

(in thousands, except per share data)

(unaudited)

Three months ended
December 31,

2014 2013
GAAP net income (loss) $ 286 $ (3,069 )
Adjustments:
Stock-based compensation(a) 5,407 3,774
Amortization of intangible assets(b) 10,915 10,552
Acquisition and other related(c) (103 ) 3,892
Restructuring(d) 1,623 1,782
Investigations, shareholder litigation and related matters(e) 3,019 1,550
Legal and contract settlements and other(f) 1,000
Inventory adjustments(g) 523
Income tax effect(h) (6,518 ) (7,055 )
Non-GAAP net income $ 15,629 $ 11,949
GAAP diluted earnings (loss) per share $ 0.00 $ (0.04 )
Adjustments:
Stock-based compensation(a) 0.07 0.05
Amortization of intangible assets(b) 0.14 0.14
Acquisition and other related(c) 0.05
Restructuring(d) 0.02 0.02
Investigations, shareholder litigation and related matters (e) 0.04 0.02
Legal and contract settlements and other(f) 0.01
Inventory adjustments(g) 0.01
Income tax effect(h) (0.08 ) (0.09 )
Convertible senior notes(i) (0.01 ) (0.01 )
Non-GAAP diluted earnings per share $ 0.19 $ 0.15
Shares used in computing GAAP diluted earnings per common share

79,563

76,593

Effect of reconciling item(i)(j) 10,229 11,534

Shares used in computing non-GAAP diluted earnings per common share

89,792

88,127

(a) This reconciling item represents stock-based compensation expenses. As stock-based compensation represents a non-cash charge that is not directly attributable to the underlying performance of our business operations, we believe that by excluding stock-based compensation, we provide investors supplemental information that is useful in comparing our operating results from period to period and in evaluating our core operations and performance. While we expect to continue to recognize stock-based compensation expense in the future, management also excludes this expense when evaluating current performance, forecasting future results, measuring core operating results, and making operating and strategic decisions.
(b) This reconciling item represents the amortization of intangible assets related to the acquisitions of various businesses and technologies such as the acquisitions of Anue Systems, Inc. and BreakingPoint Systems, Inc. in 2012 and Net Optics, Inc. in 2013. As the amortization expense represents a non-cash charge that is not directly attributable to the underlying performance of our business operations, we believe that by excluding the amortization of acquisition-related intangible assets, we provide investors with supplemental information that is useful in evaluating our ongoing operations and performance. While the amortization of acquisition-related intangible assets is expected to continue in the future, management also excludes this expense when evaluating current performance, forecasting future results, measuring core operating results, and making operating and strategic decisions.
(c) This reconciling item represents costs associated with acquisition-related activities. Acquisition and other related costs consist primarily of transaction and integration-related costs such as professional fees for legal, accounting, tax, due diligence, valuation and other related services, amortization of deferred compensation, consulting fees, required regulatory costs, certain employee, facility and infrastructure costs, and other related expenses. We believe that by excluding acquisition and other related costs, we provide investors with supplemental information that is useful in comparing our ongoing operating results from period to period and in evaluating our core operations and performance.
(d) This reconciling item represents costs associated with our restructuring plans. During the fourth quarter of 2013, we initiated a plan to restructure certain of our operations related to our test products. During the first quarter of 2014, we initiated a plan to restructure certain of our operations following our December 5, 2013 acquisition of Net Optics, Inc. During the third quarter of 2014, we implemented a company-wide restructuring initiative to restructure our operations to better align our operating costs with our business opportunities. The restructuring costs associated with our restructuring plans primarily relate to employee termination benefits, lease exit costs and other related costs. We believe that by excluding restructuring costs, we provide investors with supplemental information that is useful in comparing our operating results from period to period and in evaluating our core operations and performance.
(e) This reconciling item represents costs incurred related to (i) internal investigations and any related remediation efforts, (ii) the June 2014 restatement of our financial statements for the first quarter of 2013 and for the three and six months ended June 30, 2013, and (iii) the securities class action against the company and certain of its current and former officers and directors as well as a shareholder derivative action, and for an SEC investigation. These costs consisted primarily of legal and accounting fees, recruiting and consulting expenses, severance and retention costs, and other related expenses. We believe that by excluding these non-recurring costs, we are providing our investors with supplemental information that is useful in comparing our operating results from period to period and in evaluating our core operations and performance.
(f) This reconciling item for the fourth quarter of 2014 represents a $1.0 million write-off for a one-time item related to a certain contractual matter. We believe that by excluding this item, we are providing our investors with supplemental information that is useful in comparing our operating results from period to period and in evaluating our core operations and performance.
(g) This reconciling item for the fourth quarter of 2013 represents the amortization of the purchase price accounting adjustment related to the fair value of inventory as a result of our acquisition of Net Optics, Inc. While we may have additional amortization charges in the future resulting from purchase price accounting adjustments, management excludes these expenses when evaluating current performance, forecasting future results, measuring core operating results, and making operating and strategic decisions. We believe that by excluding these charges, we provide investors with supplemental information that is useful in comparing our operating results from period to period and in evaluating our core operations and performance.
(h) This adjustment represents the income tax effects of the reconciling items noted in footnotes (a), (b), (c), (d), (e), (f), and (g), as well as certain other non-cash income tax impacts such as changes in the valuation allowance relating to certain deferred tax assets.
(i) This reconciling item for the non-GAAP diluted earnings per share calculation includes the impact of our convertible senior notes as this was anti-dilutive for the equivalent GAAP earnings per share calculations.
(j) This adjustment represents the effects of stock-based compensation on diluted common equivalent shares outstanding as well as any adjustments required due to a change from a net loss to a net income position.

IXIA

Non-GAAP Information and Reconciliation to Most Directly Comparable GAAP Financial Measures

(in thousands, except per share data)

(unaudited)

Year ended
December 31,

2014 2013
GAAP net (loss) income $ (41,592 ) $ 11,870
Adjustments:
Stock-based compensation(a) 16,519 20,762
Amortization of intangible assets(b) 46,901 40,805
Acquisition and other related(c) 3,277 6,920
Restructuring(d) 10,310 1,840
Investigations, shareholder litigation and related matters(e) 14,908 1,550
Legal and contract settlements and other(f) 1,000 (4,020 )
Inventory adjustments(g) 1,393 523
Income tax effect (h) (24,562 ) (23,794 )
Non-GAAP net income $ 28,154 $ 56,456
GAAP diluted (loss) earnings per share $ (0.54 ) $ 0.15
Adjustments:
Stock-based compensation(a) 0.21 0.27
Amortization of intangible assets(b) 0.60 0.53
Acquisition and other related(c) 0.04 0.09
Restructuring(d) 0.14 0.02
Investigations, shareholder litigation and related matters (e) 0.19 0.02
Legal and contract settlements and other(f) 0.01 (0.05 )
Inventory adjustments(g) 0.02 0.01
Income tax effect(h) (0.31 ) (0.31 )
Convertible senior notes(i) - (0.04 )
Non-GAAP diluted earnings per share $ 0.36 $ 0.69
Shares used in computing GAAP diluted earnings per common share

77,629

77,513

Effect of reconciling item(i)(j) 1,152 10,218

Shares used in computing non-GAAP diluted earnings per common share

78,781

87,731

(a)

This reconciling item represents stock-based compensation expenses. As stock-based compensation represents a non-cash charge that is not directly attributable to the underlying performance of our business operations, we believe that by excluding stock-based compensation, we provide investors with supplemental information that is useful in comparing our operating results from period to period and in evaluating our core operations and performance. While we expect to continue to recognize stock-based compensation expense in the future, management also excludes this expense when evaluating current performance, forecasting future results, measuring core operating results, and making operating and strategic decisions.
(b) This reconciling item represents the amortization of intangible assets related to the acquisitions of various businesses and technologies such as the acquisitions of Anue Systems, Inc. and BreakingPoint Systems, Inc. in 2012, and Net Optics, Inc. in 2013. As the amortization expense represents a non-cash charge that is not directly attributable to the underlying performance of our business operations, we believe that by excluding the amortization of acquisition-related intangible assets, we provide investors with supplemental information that is useful in evaluating our ongoing operations and performance. While the amortization of acquisition-related intangible assets is expected to continue in the future, management also excludes this expense when evaluating current performance, forecasting future results, measuring core operating results, and making operating and strategic decisions.
(c) This reconciling item represents costs associated with acquisition-related activities. Acquisition and other related costs consist primarily of transaction and integration-related costs such as professional fees for legal, accounting, tax, due diligence, valuation and other related services, amortization of deferred compensation, consulting fees, required regulatory costs, certain employee, facility and infrastructure costs, and other related expenses. We believe that by excluding acquisition and other related costs, we provide investors with supplemental information that is useful in comparing our ongoing operating results from period to period and in evaluating our core operations and performance.
(d) This reconciling item represents costs associated with our restructuring plans. During the fourth quarter of 2013, we initiated a plan to restructure certain of our operations related to our test products. During the first quarter of 2014, we initiated a plan to restructure certain of our operations following our December 5, 2013 acquisition of Net Optics, Inc. During the third quarter of 2014, we implemented a company-wide restructuring initiative to restructure our operations to better align the company’s operating costs with its business opportunities. The restructuring costs associated with our restructuring plans primarily relate to employee termination benefits, lease-exit costs and other related costs. We believe that by excluding restructuring costs, we provide investors with supplemental information that is useful in comparing our operating results from period to period and in evaluating our core operations and performance.
(e) This reconciling item represents costs incurred related to (i) internal investigations and any related remediation efforts, (ii) the June 2014 restatement of our financial statements for the first quarter of 2013 and for the three and six months ended June 30, 2013, and (iii) the securities class action against the company and certain of its current and former officers and directors as well as a shareholder derivative action and, for 2014, an SEC investigation These costs consisted primarily of legal and accounting fees, recruiting and consulting expenses, severance and retention costs, and other related expenses. We believe that by excluding these non-recurring costs, we are providing our investors with supplemental information that is useful in comparing our operating results from period to period and in evaluating our core operations and performance.
(f) This reconciling item represents $1.0 million write-off in the fourth quarter of 2014 for a one-time item related to a certain contractual matter, $1.0 million realized gain recorded in the third quarter of 2013 for the sale of certain investment securities that were previously written down, a $2.9 million realized gain recorded during the second quarter of 2013 for the sale of certain of our auction rate securities that were previously written down, and $1.2 million of proceeds from the settlement of a legal matter in the first quarter of 2013, partially offset by $1.0 million of costs incurred in the first six months of 2013 related to the April 2013 restatement of certain of our previously filed financial statements. We believe that by excluding these gains, proceeds and costs, we are providing our investors with supplemental information that is useful in comparing our operating results from period to period and in evaluating our core operations and performance.
(g) This reconciling item represents the amortization of the purchase price accounting adjustment related to the fair value of inventory as a result of our acquisition of Net Optics, Inc. While we may have additional amortization charges in the future resulting from purchase price accounting adjustments, management excludes these expenses when evaluating current performance, forecasting future results, measuring core operating results, and making operating and strategic decisions. We believe that by excluding these charges, we provide investors with supplemental information that is useful in comparing our operating results from period to period and in evaluating our core operations and performance.
(h) This adjustment represents the income tax effects of the reconciling items noted in footnotes (a), (b), (c), (d), (e), (f), and (g), as well as certain other non-cash income tax impacts such as changes in the valuation allowance relating to certain deferred tax assets.
(i) This reconciling item for the non-GAAP diluted earnings per share calculation for the year ended December 31, 2013 includes the impact of our convertible senior notes as these were anti-dilutive for the equivalent GAAP earnings per share calculations for the year ended December 31, 2013.
(j) This adjustment represents the effects of stock-based compensation on diluted common equivalent shares outstanding as well as any adjustments required due to a change from a net loss to a net income position.

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