##### Table of Contents



UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 000-31523
 IXIA
 (Exact name of Registrant as specified in its charter)
 California(State or other jurisdiction of 
incorporation or organization)
    
    95-4635982(I.R.S. Employer Identification No.)
 26601 West Agoura Road, Calabasas, CA 91302  (Address of principal executive offices, including zip code)
 (818) 871-1800  (Registrants telephone number, including area code)
 þ o
  o þ o
 o þ
  Common Stock(Class of Common Stock)
    
    68,159,716(Outstanding at August 1, 2007)




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##### 



IXIA
 TABLE OF CONTENTS
 Page NumberPART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006
    
    
    3Condensed Consolidated Statements of Income for the three and six months ended June 30, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    20PART II.
    
    OTHER INFORMATIONItem 1A.
    
    Risk Factors
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    22Item 5.
    
    Other Information
    
    
    22Item 6.
    
    Exhibits
    
    
    22SIGNATURES
    
    
    
    
    24EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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IXIA
 
 Condensed Consolidated Balance Sheets
 (in thousands)
 June 30,
    
    
    December 31,2007
    
    
    2006(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    84,136
    
    
    $
    64,644Short-term investments in marketable securities
    
    
    135,005
    
    
    
    152,703Accounts receivable, net of allowance for
doubtful accounts of $1,011 and $1,174 as of
June 30, 2007 and December 31, 2006,
respectively
    
    
    30,741
    
    
    
    36,221Inventories
    
    
    12,508
    
    
    
    11,604Deferred income taxes
    
    
    6,098
    
    
    
    6,382Prepaid expenses and other current assets
    
    
    3,318
    
    
    
    4,182Total current assets
    
    
    271,806
    
    
    
    275,736Investments in marketable securities
    
    
    21,439
    
    
    
    4,354Property and equipment, net
    
    
    21,372
    
    
    
    22,044Deferred income taxes
    
    
    11,217
    
    
    
    9,486Intangible assets, net
    
    
    17,263
    
    
    
    20,224Goodwill
    
    
    16,728
    
    
    
    16,728Other assets
    
    
    953
    
    
    
    487Total assets
    
    $
    360,778
    
    
    $
    349,059Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    2,295
    
    
    $
    2,195Accrued expenses
    
    
    18,544
    
    
    
    15,873Deferred revenues
    
    
    17,556
    
    
    
    17,346Income taxes payable
    
    
    360
    
    
    
    5,154Total current liabilities
    
    
    38,755
    
    
    
    40,568Deferred revenues
    
    
    7,164
    
    
    
    7,202Other liabilities
    
    
    4,133
    
    
    
    500Total liabilities
    
    
    50,052
    
    
    
    48,270Shareholders equity:Common stock, without par value; 200,000
shares authorized, 68,035 and 67,351 shares
issued and outstanding as of June 30, 2007 and
December 31, 2006, respectively
    
    
    135,900
    
    
    
    132,413Additional paid-in capital
    
    
    92,114
    
    
    
    86,305Retained earnings
    
    
    82,712
    
    
    
    82,071Total shareholders equity
    
    
    310,726
    
    
    
    300,789Total liabilities and shareholders equity
    
    $
    360,778
    
    
    $
    349,059
  3




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IXIA
 
 Condensed Consolidated Statements of Income
 (in thousands, except per share data)
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Products
    
    $
    36,864
    
    
    $
    33,909
    
    
    $
    71,579
    
    
    $
    64,643Services
    
    
    6,135
    
    
    
    6,561
    
    
    
    12,123
    
    
    
    12,894Total revenues
    
    
    42,999
    
    
    
    40,470
    
    
    
    83,702
    
    
    
    77,537Costs and operating expenses:(1)Cost of revenues  products
    
    
    8,379
    
    
    
    7,640
    
    
    
    16,234
    
    
    
    14,089Cost of revenues  amortization of purchased
technology
    
    
    1,427
    
    
    
    1,137
    
    
    
    2,756
    
    
    
    2,193Cost of revenues  services
    
    
    916
    
    
    
    508
    
    
    
    2,060
    
    
    
    1,094Research and development
    
    
    10,942
    
    
    
    11,063
    
    
    
    22,610
    
    
    
    21,623Sales and marketing
    
    
    13,466
    
    
    
    15,138
    
    
    
    28,309
    
    
    
    29,846General and administrative
    
    
    5,847
    
    
    
    5,149
    
    
    
    12,331
    
    
    
    10,803Amortization of intangible assets
    
    
    614
    
    
    
    424
    
    
    
    1,145
    
    
    
    823Impairment of purchased technology and
intangible assets
    
    
    3,263
    
    
    
    
    
    
    
    3,263
    
    
    
    Total costs and operating expenses
    
    
    44,854
    
    
    
    41,059
    
    
    
    88,708
    
    
    
    80,471Loss from operations
    
    
    (1,855
    )
    
    
    (589
    )
    
    
    (5,006
    )
    
    
    (2,934
    )Interest and other income, net
    
    
    2,912
    
    
    
    2,209
    
    
    
    5,611
    
    
    
    4,310Income before income taxes
    
    
    1,057
    
    
    
    1,620
    
    
    
    605
    
    
    
    1,376Income tax (benefit) expense
    
    
    (343
    )
    
    
    678
    
    
    
    (36
    )
    
    
    496Net income
    
    $
    1,400
    
    
    $
    942
    
    
    $
    641
    
    
    $
    880Earnings per share:Basic
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01Diluted
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01Weighted average number of common and common
equivalent shares outstanding:Basic
    
    
    67,834
    
    
    
    66,955
    
    
    
    67,625
    
    
    
    66,796Diluted
    
    
    69,232
    
    
    
    68,802
    
    
    
    69,161
    
    
    
    68,887
 
 (1) Stock-based compensation included in:Cost of revenues  products
    
    $
    84
    
    
    $
    136
    
    
    $
    226
    
    
    $
    308Cost of revenues  services
    
    
    32
    
    
    
    52
    
    
    
    86
    
    
    
    117Research and development
    
    
    839
    
    
    
    1,593
    
    
    
    2,260
    
    
    
    3,435Sales and marketing
    
    
    656
    
    
    
    1,996
    
    
    
    2,366
    
    
    
    4,028General and administrative
    
    
    445
    
    
    
    686
    
    
    
    960
    
    
    
    1,477
  4




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IXIA
 
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
  Six months endedJune 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    641
    
    
    $
    880Adjustments to reconcile net income to net cash provided by
operating activities, net of effect of acquisitions:Depreciation and amortization
    
    
    5,644
    
    
    
    4,673Amortization of intangible assets
    
    
    3,901
    
    
    
    3,017Impairment of purchased technology and intangible assets
    
    
    3,263
    
    
    
    Stock-based compensation
    
    
    5,898
    
    
    
    9,365Deferred income taxes
    
    
    (1,447
    )
    
    
    (2,180
    )Tax (shortfall) benefit from stock option transactions
    
    
    (89
    )
    
    
    552Excess tax benefits from stock-based compensation
    
    
    (149
    )
    
    
    (212
    )Changes in operating assets and liabilities, net of
effect of acquisitions:Accounts receivable, net
    
    
    5,480
    
    
    
    (7,779
    )Inventories
    
    
    (904
    )
    
    
    (64
    )Prepaid expenses and other current assets
    
    
    864
    
    
    
    (50
    )Other assets
    
    
    (466
    )
    
    
    (173
    )Accounts payable
    
    
    100
    
    
    
    573Accrued expenses
    
    
    (219
    )
    
    
    523Deferred revenues
    
    
    172
    
    
    
    1,952Income taxes payable and other liabilities
    
    
    (661
    )
    
    
    109Net cash provided by operating activities
    
    
    22,028
    
    
    
    11,186Cash flows from investing activities:Purchases of property and equipment
    
    
    (4,972
    )
    
    
    (7,456
    )Purchases of available-for-sale securities
    
    
    (27,300
    )
    
    
    (62,000
    )Proceeds from available-for-sale securities
    
    
    24,000
    
    
    
    43,100Purchases of held-to-maturity securities
    
    
    (20,217
    )
    
    
    (7,978
    )Proceeds from held-to-maturity securities
    
    
    24,130
    
    
    
    12,004Purchases of other intangible assets
    
    
    (84
    )
    
    
    (71
    )Payments in connection with acquisitions
    
    
    (1,729
    )
    
    
    (7,274
    )Net cash used in investing activities
    
    
    (6,172
    )
    
    
    (29,675
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    3,487
    
    
    
    3,800Excess tax benefits from stock-based compensation
    
    
    149
    
    
    
    212Net cash provided by financing activities
    
    
    3,636
    
    
    
    4,012Net increase (decrease) in cash and cash equivalents
    
    
    19,492
    
    
    
    (14,477
    )Cash and cash equivalents at beginning of period
    
    
    64,644
    
    
    
    51,837Cash and cash equivalents at end of period
    
    $
    84,136
    
    
    $
    37,360
  5




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IXIA
 
 Notes to Condensed Consolidated Financial Statements
 (unaudited)
 1. Business
  2. Basis of Presentation
    3. Income Taxes
   6




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4. Impairment of Intangible Assets
  5. Inventories
  June 30,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    3,320
    
    
    $
    3,391Work in process
    
    
    6,400
    
    
    
    6,891Finished goods
    
    
    2,788
    
    
    
    1,322$
    12,508
    
    
    $
    11,604
 6. Stock-Based Compensation
  7




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Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Expected lives (in years)
    
    
    4.5
    
    
    
    4.1
    
    
    
    4.5
    
    
    
    4.1Risk-free interest rates
    
    
    4.8
    %
    
    
    5.0
    %
    
    
    4.8
    %
    
    
    4.8
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    54.2
    %
    
    
    60.5
    %
    
    
    55.6
    %
    
    
    62.3
    %
   WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Exercise Price
    
    
    Contractual
    
    
    Intrinsicof Options
    
    
    Per Share
    
    
    Life (in years)
    
    
    ValueOutstanding as of December 31,
2006
    
    
    10,120
    
    
    $
    10.59Granted
    
    
    721
    
    
    
    9.60Exercised
    
    
    (424
    )
    
    
    4.74Forfeited/canceled
    
    
    (644
    )
    
    
    13.20Outstanding as of June 30, 2007
    
    
    9,773
    
    
    $
    10.60
    
    
    
    4.38
    
    
    $
    11,866Exercisable as of June 30, 2007
    
    
    6,857
    
    
    $
    9.89
    
    
    
    3.64
    
    
    $
    11,553
  WeightedAverage GrantNumber
    
    
    Date Fair Valueof Awards
    
    
    Per ShareOutstanding as of December 31,
2006
    
    
    323
    
    
    $
    9.64Awarded
    
    
    80
    
    
    
    8.93Released
    
    
    (74
    )
    
    
    9.45Forfeited/canceled
    
    
    (28
    )
    
    
    9.60Outstanding as of June 30, 2007
    
    
    301
    
    
    $
    9.49
  8




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7. Earnings Per Share
   Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Net income
    
    $
    1,400
    
    
    $
    942
    
    
    $
    641
    
    
    $
    880Denominator:Basic presentation:Weighted average common shares
    
    
    67,834
    
    
    
    66,955
    
    
    
    67,625
    
    
    
    66,796Denominator for basic calculation
    
    
    67,834
    
    
    
    66,955
    
    
    
    67,625
    
    
    
    66,796Diluted presentation:Shares used above
    
    
    67,834
    
    
    
    66,955
    
    
    
    67,625
    
    
    
    66,796Weighted average effect of
dilutive stock options and other
share-based awards
    
    
    1,398
    
    
    
    1,847
    
    
    
    1,536
    
    
    
    2,091Denominator for diluted calculation
    
    
    69,232
    
    
    
    68,802
    
    
    
    69,161
    
    
    
    68,887Basic earnings per share
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01Diluted earnings per share
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
  8. Concentrations
 Significant Customer
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Amount of total revenues
    
    $
    9,385
    
    
    $
    9,994
    
    
    $
    21,665
    
    
    $
    23,222As a percentage of total revenues
    
    
    21.8
    %
    
    
    24.7
    %
    
    
    25.9
    %
    
    
    30.0
    %
  9




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International Data
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Amount of total revenues
    
    $
    15,515
    
    
    $
    13,364
    
    
    $
    28,587
    
    
    $
    25,570As a percentage of total revenues
    
    
    36.1
    %
    
    
    33.0
    %
    
    
    34.2
    %
    
    
    33.0
    %
  9. Acquisition
  10. Recent Accounting Pronouncements
   10




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  OVERVIEW
  Revenues.
   11




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12




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Stock-Based Compensation.
  Cost of Revenues
 13




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
    
    changes in our pricing policies and those of our competitors;
    
    the pricing we are able to obtain from our component suppliers and contract manufacturers;
    
    the mix of our products sold, such as the mix of software versus hardware product
sales, including the effects of any related deferral, reversal and recognition of
revenues for implied PCS obligations;
    
    new product introductions by us and by our competitors;
    
    demand for our products;
    
    expenses related to acquired technologies, such as royalties and amortization of intangible assets;
    
    production volume; and
    
    the mix of sales channels through which our products are sold.
  Operating Expenses
     Interest and Other Income, Net.
 Income Tax.
 14




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RESULTS OF OPERATIONS
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Revenues:Products
    
    
    85.7
    %
    
    
    83.8
    %
    
    
    85.5
    %
    
    
    83.4
    %Services
    
    
    14.3
    
    
    
    16.2
    
    
    
    14.5
    
    
    
    16.6Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and operating expenses:(1)Cost of revenues  products
    
    
    19.5
    
    
    
    18.9
    
    
    
    19.4
    
    
    
    18.2Cost of revenues  amortization of purchased
technology
    
    
    3.3
    
    
    
    2.8
    
    
    
    3.3
    
    
    
    2.8Cost of revenues  services
    
    
    2.1
    
    
    
    1.3
    
    
    
    2.5
    
    
    
    1.4Research and development
    
    
    25.4
    
    
    
    27.3
    
    
    
    27.0
    
    
    
    27.9Sales and marketing
    
    
    31.3
    
    
    
    37.4
    
    
    
    33.8
    
    
    
    38.5General and administrative
    
    
    13.6
    
    
    
    12.7
    
    
    
    14.7
    
    
    
    13.9Amortization of intangible assets
    
    
    1.5
    
    
    
    1.1
    
    
    
    1.4
    
    
    
    1.1Impairment of purchased technology and
intangible assets
    
    
    7.6
    
    
    
    
    
    
    
    3.9
    
    
    
    Total costs and operating expenses
    
    
    104.3
    
    
    
    101.5
    
    
    
    106.0
    
    
    
    103.8Loss from operations
    
    
    (4.3
    )
    
    
    (1.5
    )
    
    
    (6.0
    )
    
    
    (3.8
    )Interest and other income, net
    
    
    6.8
    
    
    
    5.5
    
    
    
    6.8
    
    
    
    5.5Income before income taxes
    
    
    2.5
    
    
    
    4.0
    
    
    
    0.8
    
    
    
    1.7Income tax (benefit) expense
    
    
    (0.8
    )
    
    
    1.7
    
    
    
    (0.0
    )
    
    
    0.6Net income
    
    
    3.3
    %
    
    
    2.3
    %
    
    
    0.8
    %
    
    
    1.1
    %
 
 (1) Stock-based compensation included in:Cost of revenues  products
    
    
    0.2
    %
    
    
    0.3
    %
    
    
    0.3
    %
    
    
    0.4
    %Cost of revenues  services
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2Research and development
    
    
    2.0
    
    
    
    3.9
    
    
    
    2.7
    
    
    
    4.4Sales and marketing
    
    
    1.5
    
    
    
    4.9
    
    
    
    2.8
    
    
    
    5.2General and administrative
    
    
    1.0
    
    
    
    1.7
    
    
    
    1.1
    
    
    
    1.9
 Comparison of Three and Six Months Ended June 30, 2007 and 2006
 Revenues.
 15




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Cost of Revenues
  Research and Development Expenses.
  16




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Sales and Marketing Expenses.
  General and Administrative Expenses.
  Amortization of Intangible Assets.
 Impairment of Purchased Technology and Intangible Assets.
 Interest and Other Income, Net.
 17




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Income Tax.
 LIQUIDITY AND CAPITAL RESOURCES
     18




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SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
  19




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Sensitivity
  Exchange Rate Sensitivity
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  20




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
    
    Communication and Training Regarding PCS and Revenue Recognition Policies We
continue to communicate and reinforce to our sales, support, management and finance
personnel our policy with respect to the provision of PCS services (i.e., no
unauthorized out-of-maintenance services should be provided). In the second quarter
of 2007, we also continued to enhance our training program regarding our PCS and revenue
recognition policies. Specifically, we (i) completed the documentation and review of
our internal training materials with respect to our PCS and revenue recognition
policies, which materials are distributed to our sales, support, product management and
order management personnel in connection with the applicable training session, and (ii)
conducted a number of revenue recognition training sessions that were led by our Senior
Manager of Revenue Recognition and held in-person and in small groups to enhance the
effectiveness of the training.
 Inherent Limitations on Effectiveness of Controls
  21




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PART II. OTHER INFORMATION
 
 ITEM 1A. Risk Factors
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
 (a)
    
    On May 25, 2007, the Company held its 2007 Annual Meeting of Shareholders (the Annual
Meeting).(b)
    
    At the Annual Meeting, the following persons were elected as directors of the Company. The
number of votes cast for each director, as well as the number of votes withheld, are listed
opposite each directors name.
 Name of Director
    
    Votes Cast for Director
    
    Votes WithheldJean-Claude Asscher
    
    
    44,760,367
    
    
    
    19,879,327Massoud Entekhabi
    
    
    63,818,607
    
    
    
    821,087Jonathan Fram
    
    
    64,392,189
    
    
    
    247,505Errol Ginsberg
    
    
    64,392,189
    
    
    
    247,505Gail Hamilton
    
    
    63,779,268
    
    
    
    868,426Jon F. Rager
    
    
    63,771,155
    
    
    
    868,539
 (c)
    
    At the Annual Meeting, with 51,634,459 votes cast in favor and 4,810,049 votes cast against,
the shareholders approved an amendment to our Amended and Restated Non-Employee Director
Equity Incentive Plan to provide for the automatic grant of restricted stock units rather than
stock options to our non-employee directors upon their initial election or appointment to our
Board of Directors and upon their re-election to the Board. There were 8,172,059 broker
non-votes with respect to this matter and 23,127 abstentions.(d)
    
    At the Annual Meeting, with 63,924,867 votes cast in favor and 714,170 votes cast against,
the shareholders ratified the appointment of PricewaterhouseCoopers LLP as the Companys
independent registered public accounting firm for the year ending December 31, 2007. There
were 657 abstentions with respect to this matter.
 
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
 10.1
    
    Amended and Restated Non-Employee Director Equity Incentive Plan31.1
    
    Certification of Chief Executive Officer of Ixia pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
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##### Table of Contents



31.2
    
    Certification of Chief Financial Officer of Ixia pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certifications of Chief Executive Officer and Chief Financial
Officer of Ixia pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
 
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##### Table of Contents



SIGNATURES
  IXIADate: August 8, 2007
    
    By:
    
    /s/ Errol GinsbergErrol Ginsberg
President and Chief Executive OfficerDate: August 8, 2007
    
    By:
    
    /s/ Thomas B. MillerThomas B. Miller
Chief Financial Officer
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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description10.1
    
    Amended and Restated Non-Employee Director Equity
Incentive Plan31.1
    
    Certification of Chief Executive Officer of Ixia pursuant
to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer of Ixia pursuant
to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certifications of Chief Executive Officer and Chief
Financial Officer of Ixia pursuant to Rule 13a-14(b)
under the Exchange Act and 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
 25