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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 March 31, 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
    
 95-4635982incorporation or organization)
   
    (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)
 o o
  o þ o
 o þ
  Common Stock
    
    67,831,371(Class of Common Stock)
    
    (Outstanding at May 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 March 31, 2007 and December 31, 2006
    
    
    3Condensed Consolidated Statements of Income for the three months ended March 31, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    17PART II. OTHER INFORMATIONItem 1A. Risk Factors
    
    
    19Item 5. Other Information
    
    
    19Item 6. Exhibits
    
    
    19SIGNATURES
    
    
    20EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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IXIA
 
 Condensed Consolidated Balance Sheets
 (in thousands)
 March 31,
    
    
    December 31,2007
    
    
    2006(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    61,056
    
    
    $
    64,644Short-term investments in marketable securities
    
    
    144,802
    
    
    
    152,703Accounts receivable, net of allowance for
doubtful accounts of $1,180 and $1,174 as of
March 31, 2007 and December 31, 2006,
respectively
    
    
    33,348
    
    
    
    36,221Inventories
    
    
    11,796
    
    
    
    11,604Deferred income taxes
    
    
    5,771
    
    
    
    6,382Prepaid expenses and other current assets
    
    
    3,834
    
    
    
    4,182Total current assets
    
    
    260,607
    
    
    
    275,736Investments in marketable securities
    
    
    24,572
    
    
    
    4,354Property and equipment, net
    
    
    22,155
    
    
    
    22,044Deferred income taxes
    
    
    9,868
    
    
    
    9,486Intangible assets, net
    
    
    20,800
    
    
    
    20,224Goodwill
    
    
    16,728
    
    
    
    16,728Other assets
    
    
    483
    
    
    
    487Total assets
    
    $
    355,213
    
    
    $
    349,059Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    3,542
    
    
    $
    2,195Accrued expenses
    
    
    17,843
    
    
    
    15,873Deferred revenues
    
    
    16,742
    
    
    
    17,346Income taxes payable
    
    
    330
    
    
    
    5,154Total current liabilities
    
    
    38,457
    
    
    
    40,568Deferred revenues
    
    
    7,120
    
    
    
    7,202Other liabilities
    
    
    4,610
    
    
    
    500Total liabilities
    
    
    50,187
    
    
    
    48,270Shareholders equity:Common stock, without par value; 200,000
shares authorized, 67,627 and 67,351 shares
issued and outstanding as of March 31, 2007
and December 31, 2006, respectively
    
    
    133,622
    
    
    
    132,413Additional paid-in capital
    
    
    90,092
    
    
    
    86,305Retained earnings
    
    
    81,312
    
    
    
    82,071Total shareholders equity
    
    
    305,026
    
    
    
    300,789Total liabilities and shareholders equity
    
    $
    355,213
    
    
    $
    349,059
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IXIA
 
 Condensed Consolidated Statements of Income
 (in thousands, except per share data)
  Three months endedMarch 31,2007
    
    
    2006Revenues:Products
    
    $
    34,715
    
    
    $
    30,734Services
    
    
    5,988
    
    
    
    6,333Total revenues
    
    
    40,703
    
    
    
    37,067Costs and operating expenses:(1)Cost of revenues  products
    
    
    7,855
    
    
    
    6,449Cost of revenues  amortization of purchased
technology
    
    
    1,329
    
    
    
    1,056Cost of revenues  services
    
    
    1,144
    
    
    
    586Research and development
    
    
    11,668
    
    
    
    10,560Sales and marketing
    
    
    14,843
    
    
    
    14,708General and administrative
    
    
    6,484
    
    
    
    5,654Amortization of intangible assets
    
    
    531
    
    
    
    399Total costs and operating expenses
    
    
    43,854
    
    
    
    39,412Loss from operations
    
    
    (3,151
    )
    
    
    (2,345
    )Interest and other income, net
    
    
    2,699
    
    
    
    2,101Loss before income taxes
    
    
    (452
    )
    
    
    (244
    )Income tax expense (benefit)
    
    
    307
    
    
    
    (182
    )Net loss
    
    $
    (759
    )
    
    $
    (62
    )Loss per share:Basic
    
    $
    (0.01
    )
    
    $
    (0.00
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.00
    )Weighted average number of common and common
equivalent shares outstanding:Basic
    
    
    67,414
    
    
    
    66,635Diluted
    
    
    67,414
    
    
    
    66,635
 
 (1)
    
    Stock-based compensation included in: Cost of revenues  products
    
    $
    142
    
    
    $
    172Cost of revenues  services
    
    
    54
    
    
    
    65Research and development
    
    
    1,421
    
    
    
    1,842Sales and marketing
    
    
    1,710
    
    
    
    2,032General and administrative
    
    
    515
    
    
    
    791
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IXIA
 
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
  Three months endedMarch 31,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (759
    )
    
    $
    (62
    )Adjustments to reconcile net loss to net cash provided
by operating activities, net of effect of acquisitions:Depreciation and amortization
    
    
    2,803
    
    
    
    2,214Amortization of intangible assets
    
    
    1,860
    
    
    
    1,456Stock-based compensation
    
    
    3,842
    
    
    
    4,902Deferred income taxes
    
    
    229
    
    
    
    (1,627
    )Tax (shortfall) benefit from stock option transactions
    
    
    (55
    )
    
    
    432Excess tax benefits from stock-based compensation
    
    
    (91
    )
    
    
    (173
    )Changes in operating assets and liabilities, net of
effect of acquisitions:Accounts receivable, net
    
    
    2,873
    
    
    
    1,207Inventories
    
    
    (192
    )
    
    
    (770
    )Prepaid expenses and other current assets
    
    
    348
    
    
    
    (353
    )Other assets
    
    
    4
    
    
    
    (234
    )Accounts payable
    
    
    1,347
    
    
    
    (361
    )Accrued expenses
    
    
    (405
    )
    
    
    192Deferred revenues
    
    
    (686
    )
    
    
    1,632Income taxes payable and other liabilities
    
    
    (714
    )
    
    
    958Net cash provided by operating activities
    
    
    10,404
    
    
    
    9,413Cash flows from investing activities:Purchases of property and equipment
    
    
    (2,914
    )
    
    
    (4,116
    )Purchases of available-for-sale securities
    
    
    (22,300
    )
    
    
    (38,800
    )Proceeds from available-for-sale securities
    
    
    15,200
    
    
    
    31,875Purchases of held-to-maturity securities
    
    
    (20,217
    )
    
    
    (7,943
    )Proceeds from held-to-maturity securities
    
    
    15,000
    
    
    
    12,004Purchases of other intangible assets
    
    
    (48
    )
    
    
    (46
    )Payments in connection with acquisitions
    
    
    (13
    )
    
    
    (5,202
    )Net cash used in investing activities
    
    
    (15,292
    )
    
    
    (12,228
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    1,209
    
    
    
    1,468Excess tax benefits from stock-based compensation
    
    
    91
    
    
    
    173Net cash provided by financing activities
    
    
    1,300
    
    
    
    1,641Net decrease in cash and cash equivalents
    
    
    (3,588
    )
    
    
    (1,174
    )Cash and cash equivalents at beginning of period
    
    
    64,644
    
    
    
    51,837Cash and cash equivalents at end of period
    
    $
    61,056
    
    
    $
    50,663
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IXIA
 
 Notes to Condensed Consolidated Financial Statements
 (unaudited)
 1. Business
  2. Basis of Presentation
    3. Income Taxes
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4. Inventories
  March 31,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    2,888
    
    
    $
    3,391Work in process
    
    
    6,350
    
    
    
    6,891Finished goods
    
    
    2,558
    
    
    
    1,322$
    11,796
    
    
    $
    11,604
 5. Stock-Based Compensation
   Three months ended March 31,2007
    
    2006Expected life (in years)
    
    
    4.5
    
    
    
    4.1Risk-free interest rate
    
    
    4.7
    %
    
    
    4.6
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    59.0
    %
    
    
    64.0
    %
  6. Loss Per Share
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Three months ended March 31,2007
    
    
    2006Numerator:Net loss
    
    $
    (759
    )
    
    $
    (62
    )Denominator:Basic presentation:Weighted average common shares
    
    
    67,414
    
    
    
    66,635Denominator for basic calculation
    
    
    67,414
    
    
    
    66,635Diluted presentation:Shares used above
    
    
    67,414
    
    
    
    66,635Weighted average effect of
dilutive stock options and other
share-based awards
    
    
    
    
    
    
    Denominator for diluted calculation
    
    
    67,414
    
    
    
    66,635Basic loss per share
    
    $
    (0.01
    )
    
    $
    (0.00
    )Diluted loss per share
    
    $
    (0.01
    )
    
    $
    (0.00
    )
  7. Concentrations
 Significant Customer
  Three months ended March 31,2007
    
    2006Amount of total revenues
    
    $
    12,280
    
    
    $
    13,228As a percentage of total revenues
    
    
    30.2
    %
    
    
    35.7
    %
  International Data
  Three months ended March 31,2007
    
    2006Amount of total revenues
    
    $
    13,072
    
    
    $
    12,205As a percentage of total revenues
    
    
    32.1
    %
    
    
    32.9
    %
  8




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8. Acquisition
  9. Recent Accounting Pronouncements
   9




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  OVERVIEW
  Revenues.
   10




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Stock-Based Compensation.
  Cost of Revenues
  
    
    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;
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
    
    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.
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RESULTS OF OPERATIONS
  Three months endedMarch 31,2007
    
    
    2006Revenues:Products
    
    
    85.3
    %
    
    
    82.9
    %Services
    
    
    14.7
    
    
    
    17.1Total revenues
    
    
    100.0
    
    
    
    100.0Costs and operating expenses:(1)Cost of revenues  products
    
    
    19.3
    
    
    
    17.4Cost of revenues  amortization of purchased technology
    
    
    3.3
    
    
    
    2.9Cost of revenues  services
    
    
    2.8
    
    
    
    1.6Research and development
    
    
    28.7
    
    
    
    28.4Sales and marketing
    
    
    36.4
    
    
    
    39.6General and administrative
    
    
    15.9
    
    
    
    15.3Amortization of intangible assets
    
    
    1.3
    
    
    
    1.1Total costs and operating expenses
    
    
    107.7
    
    
    
    106.3Loss from operations
    
    
    (7.7
    )
    
    
    (6.3
    )Interest and other income, net
    
    
    6.6
    
    
    
    5.6Loss before income taxes
    
    
    (1.1
    )
    
    
    (0.7
    )Income tax expense (benefit)
    
    
    0.8
    
    
    
    (0.5
    )Net Loss
    
    
    (1.9
    )%
    
    
    (0.2
    )%
 
 (1)
    
    Stock-based compensation included in: Cost of revenues  products
    
    
    0.3
    %
    
    
    0.5
    %Cost of revenues  services
    
    
    0.1
    
    
    
    0.2Research and development
    
    
    3.5
    
    
    
    5.0Sales and marketing
    
    
    4.2
    
    
    
    5.5General and administrative
    
    
    1.3
    
    
    
    2.1
 Comparison of Three Months Ended March 31, 2007 and 2006
 Revenues.
 Cost of Revenues
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Research and Development Expenses.
 Sales and Marketing Expenses.
 General and Administrative Expenses.
 Amortization of Intangible Assets.
 Interest and Other Income, Net.
 Income Tax Expense.
 LIQUIDITY AND CAPITAL RESOURCES
  15




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SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
  16




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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
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
    
    Communication and Training Regarding PCS and Revenue Recognition Policies We have
communicated and reinforced, both orally and in writing, 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). Our
January 2007 international sales conference for all sales personnel included training
presented by senior finance personnel with respect to our implied PCS polices and
revenue recognition polices and practices.
    
    Revenue Recognition Senior Manager In late February 2007, we further strengthened
our control environment with respect to revenue recognition by hiring a Senior Manager,
Revenue Recognition who has technical understanding and experience in this highly
complex area. This individual, who is a certified public accountant, is responsible for
monitoring and helping ensure compliance with our revenue recognition policies,
including training our internal personnel (e.g., sales, finance, customer support,
product management and order management personnel) with regard to the policies,
participating in reviewing contract provisions and sales and other business practices,
including our PCS policies and practices, that affect revenue recognition and overseeing
the implementation of and monitoring controls designed to ensure compliance with our
revenue recognition policies and GAAP.
    
    Enhanced Revenue Recognition Policies and Practices During the quarter ended
December 31, 2006, we thoroughly reviewed, supplemented and clarified our written
revenue recognition policies and practices in an effort to ensure that our sales,
support and other personnel are aware of and clearly understand these policies. During
the first quarter of 2007, the Audit Committee completed its review of the enhanced
documentation for our revenue recognition policies and practices. In March 2007, our
Chief Financial Officer distributed a formal policy statement with respect to our
enhanced revenue recognition policies to all Company personnel. This policy statement
was also posted on our Intranet site for easy reference and is included with our Company
policies and procedures that are presented to all new hires in the United States.
 Inherent Limitations on Effectiveness of Controls
  18




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PART II. OTHER INFORMATION
 
 ITEM 1A. Risk Factors
  
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
 31.1
    
    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
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SIGNATURES
  IXIADate: May 9, 2007
    
    By:
    
    /s/ Errol Ginsberg

Errol GinsbergPresident and Chief Executive OfficerDate: May 9, 2007
    
    By:
    
    /s/ Thomas B. Miller

Thomas B. MillerChief Financial Officer
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EXHIBIT INDEX
 Exhibit No.
    
    Description31.1
    
    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
 21