Ixia 10Q 2010 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010


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		95-4635982
(State or other jurisdiction of incorporation 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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filero	Accelerated filerþ	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Common Stock (Class of Common Stock)		64,204,096 (Outstanding at April 26, 2010)

IXIA

TABLE OF CONTENTS


	Page Number
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009		3

Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009		4

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009		5

Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

Item 3. Quantitative and Qualitative Disclosures about Market Risk		22

Item 4. Controls and Procedures		23

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		24

Item 1A. Risk Factors		24

Item 5. Other Information		24

Item 6. Exhibits		24

SIGNATURES		25
EX-31.1
EX-31.2
EX-32.1

IXIA

Condensed Consolidated Balance Sheets

(in thousands)
(unaudited)


	March 31,		December 31,
	2010		2009
Assets
Current assets:
Cash and cash equivalents	$	29,940	$	15,061
Short-term investments in marketable securities		13,970		10,337
Accounts receivable, net of allowance for doubtful accounts of $705 and $654 as of March 31, 2010 and December 31, 2009, respectively		58,669		55,765
Inventories		14,449		14,541
Prepaid expenses and other current assets		12,749		9,727

Total current assets		129,777		105,431

Investments in marketable securities		50,894		53,582
Property and equipment, net		17,883		18,693
Intangible assets, net		64,903		69,132
Goodwill		60,121		60,121
Other assets		2,616		2,129

Total assets	$	326,194	$	309,088


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	7,185	$	6,136
Accrued expenses		25,928		21,253
Deferred revenues		33,389		29,842
Income taxes payable		1,729		1,263

Total current liabilities		68,231		58,494

Deferred revenues		7,659		7,309
Other liabilities		6,642		6,620

Total liabilities		82,532		72,423


Shareholders’ equity:
Common stock, without par value; 200,000 shares authorized, 63,954 and 63,062 shares issued and outstanding as of March 31, 2010 and December 31, 2009, respectively		90,591		87,283
Additional paid-in capital		121,276		118,754
Retained earnings		29,848		28,979
Accumulated other comprehensive income		1,947		1,649

Total shareholders’ equity		243,662		236,665

Total liabilities and shareholders’ equity	$	326,194	$	309,088

The accompanying notes are an integral part of these condensed consolidated financial statements.

IXIA

Condensed Consolidated Statements of Operations

(in thousands, except per share data)
(unaudited)


	Three months ended
	March 31,
	2010			2009
Revenues:
Products	$	50,669		$	30,081
Services		11,372			7,043

Total revenues		62,041			37,124


Costs and operating expenses:⁽¹⁾
Cost of revenues — products		11,445			7,566
Cost of revenues — services		1,508			943
Research and development		18,639			11,866
Sales and marketing		19,161			14,399
General and administrative		8,867			6,224
Amortization of intangible assets		5,058			1,325
Acquisition and other related		1,123			—
Restructuring		3,490			—

Total costs and operating expenses		69,291			42,323


Loss from operations		(7,250	)		(5,199	)
Interest and other income, net		8,787			561
Other-than-temporary impairment on investments		—			(1,405	)

Income (loss) before income taxes		1,537			(6,043	)
Income tax expense (benefit)		668			(2,052	)

Net income (loss)	$	869		$	(3,991	)


Earnings (loss) per share:
Basic	$	0.01		$	(0.06	)
Diluted	$	0.01		$	(0.06	)

Weighted average number of common and common equivalent shares outstanding:
Basic		63,496			63,053
Diluted		64,785			63,053


⁽¹⁾		Stock-based compensation included in:


Cost of revenues — products	$	123	$	170
Cost of revenues — services		46		64
Research and development		1,201		1,621
Sales and marketing		835		1,264
General and administrative		591		716

The accompanying notes are an integral part of these condensed consolidated financial statements.

IXIA

Condensed Consolidated Statements of Cash Flows

(in thousands)
(unaudited)


	Three months ended
	March 31,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	869		$	(3,991	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		2,457			2,645
Amortization of intangible assets		5,058			1,325
Stock-based compensation		2,796			3,835
Deferred income taxes		—			(2,881	)
Impairment on investments		—			1,405
Tax (shortfall) benefit from stock option transactions		(274	)		210
Excess tax benefits from stock-based compensation		(92	)		—
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net		(2,904	)		4,608
Inventories		92			30
Prepaid expenses and other current assets		(3,022	)		613
Other assets		(487	)		199
Accounts payable		649			(1,405	)
Accrued expenses		4,850			(2,407	)
Deferred revenues		3,897			212
Income taxes payable and other liabilities		284			109


Net cash provided by operating activities		14,173			4,507


Cash flows from investing activities:
Purchases of property and equipment		(1,670	)		(1,858	)
Purchases of available-for-sale securities		(9,393	)		(162,025	)
Proceeds from available-for-sale securities		8,973			—
Purchases of other intangible assets		(79	)		(67	)
Payments in connection with acquisitions		(525	)		—


Net cash used in investing activities		(2,694	)		(163,950	)


Cash flows from financing activities:
Proceeds from exercise of stock options		3,308			21
Repurchase of common stock		—			(5,323	)
Excess tax benefits from stock-based compensation		92			—


Net cash provided by (used in) financing activities		3,400			(5,302	)


Net increase (decrease) in cash and cash equivalents		14,879			(164,745	)
Cash and cash equivalents at beginning of period		15,061			192,791

Cash and cash equivalents at end of period	$	29,940		$	28,046

The accompanying notes are an integral part of these condensed consolidated financial statements.

IXIA

Notes to Condensed Consolidated Financial Statements
(unaudited)

1. Business

We were incorporated on May 27, 1997 as a California corporation. We are a leading provider of converged test systems and services for wireless and wired infrastructures and services. Our hardware and software allow our customers to test and measure the performance, functionality, service quality and conformance of wireless and wired Internet Protocol (IP) equipment and networks, and the applications that run over them. Our solutions generate, capture, characterize and analyze high volumes of realistic network and application traffic, identifying problems, assessing performance, ensuring functionality and interoperability, and verifying conformance to industry specifications. We offer hardware platforms with interchangeable media interfaces, utilizing a common set of applications, Application Programming Interfaces (APIs) and automation tools that allow our customers to create integrated, easy-to-use automated test environments. The networks that our systems analyze primarily include Ethernet networks operating at speeds of up to 100 gigabits per second and wireless networks that carry data traffic over optical fiber, electrical cable and airwaves. We also offer hardware platforms and equipment that test wireless equipment, especially those associated with 3G (third generation), 4G (fourth generation) and Long-Term Evolution (LTE) networks. Customers also use our suite of software applications to test and verify web, Internet, security and business applications.

2. Basis of Presentation

The accompanying condensed consolidated financial statements as of March 31, 2010 and for the three months ended March 31, 2010 and 2009, are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of our financial position, operating results and cash flows for the interim periods presented. The results of operations for the current interim period presented is not necessarily indicative of results to be expected for the full year ending December 31, 2010 or any other future period.

These condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of March 31, 2010 has been derived from our audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2009. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Certain reclassifications have been made to prior period condensed consolidated financial statements to conform to the current presentation. These reclassifications include classifying amortization of purchased technology within the amortization of intangible assets line item in the accompanying statements of operations.

3. Acquisitions

We acquired Catapult Communications Corporation (“Catapult”) on June 23, 2009 and Agilent Technologies, Inc.’s N2X Data Network Testing Product Line business (“N2X”) on October 30, 2009 and have included the results of these acquisitions in our consolidated results of operations since the acquisition dates.

The following table summarizes the pro forma total revenues and net loss of the combined entities had the acquisitions of Catapult and N2X occurred on January 1, 2009 (in thousands):


	Three Months
	Ended March 31,
	2009
	(Pro forma)
Total revenues	$	58,802
Net loss		(8,715	)

The combined results in the table above have been prepared for comparative purposes only and include acquisition related adjustments for, among others items, amortization of identifiable intangible assets and reductions in revenues related to the estimated fair value adjustment to deferred revenues. The combined results do not purport to be indicative of the results of operations which would have resulted had the acquisition been effective at the beginning of the applicable period noted above, or the future results of operations of the combined entity.

4. Restructuring Costs

During the first quarter of 2010, our management approved, committed to and initiated a plan to restructure our operations in light of our acquisition of N2X (“N2X Restructuring”). The N2X Restructuring included a net reduction in force of approximately 80 positions, which represented approximately 7% of our worldwide work force, including contractors, at the beginning of the first quarter of 2010. We recognized restructuring costs of approximately $3.5 million related to one-time employee termination benefits consisting of severance and other related costs in the first quarter of 2010, which was recorded to the Restructuring line item within our consolidated statement of operations.

During the third quarter of 2009, our management approved, committed to and initiated a plan to restructure our operations in light of our acquisition of Catapult (“Catapult Restructuring”). The Catapult Restructuring included a net reduction in force of approximately 45 positions, which represented approximately 4% of our worldwide work force, including contractors, at the beginning of the third quarter of 2009. The restructuring was substantially completed during the fourth quarter of 2009.

During the second quarter of 2009 and prior to the acquisition of Catapult, our management approved, committed to and initiated a plan to restructure our operations (“Ixia Restructuring”). The Ixia Restructuring included a net reduction in force of approximately 80 positions, which represented approximately 10% of our worldwide work force, including contractors, prior to the announcement of the restructuring. The restructuring was substantially completed during the third quarter of 2009.

Activity related to our restructuring plans are as follows (in thousands):


				N2X			Catapult			Ixia
	Total			Restructuring			Restructuring			Restructuring
Accrual at January 1, 2010	$	879		$	—		$	837		$	42
Charges		3,490			3,479			11			—
Payments		(1,896	)		(1,209	)		(655	)		(32	)

Accrual at March 31, 2010	$	2,473		$	2,270		$	193		$	10

5. Inventories

Inventories consist of the following (in thousands):


	March 31,		December 31,
	2010		2009
Raw materials	$	3,046	$	3,674
Work in process		3,726		4,731
Finished goods		7,677		6,136

	$	14,449	$	14,541

6. Other Comprehensive Income (Loss)

For the three months ended March 31, 2010 and 2009, comprehensive income (loss) was $1.2 million and $(4.0) million, respectively. In addition to net income (loss) in 2010 and 2009, the other components of comprehensive income (loss), all net of tax, were changes in unrealized gain or loss on our investments and foreign currency translation adjustments.

7. Earnings (Loss) Per Share

Basic earnings (loss) per share is based on the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is based on the weighted average number of common shares and dilutive potential common shares outstanding during the period.

The following table sets forth the computation of basic and diluted earnings (loss) per share for the three months ended March 31, 2010 and 2009 (in thousands, except per share data):


	Three months ended
	March 31,
	2010		2009
Numerator:
Net income (loss)	$	869	$	(3,991	)


Denominator:
Basic presentation:
Weighted average common shares		63,496		63,053

Denominator for basic calculation		63,496		63,053


Diluted presentation:
Shares used above		63,496		63,053
Weighted average effect of dilutive stock options and other share-based awards		1,289		—

Denominator for diluted calculation		64,785		63,053


Basic earnings (loss) per share	$	0.01	$	(0.06	)


Diluted earnings (loss) per share	$	0.01	$	(0.06	)

The diluted earnings per share computations for the three months ended March 31, 2010 and 2009 exclude employee stock options and other share-based awards to purchase or otherwise acquire 6.1 million shares and 10.1 million shares, respectively, which were antidilutive.

8. Concentrations

Significant Customer

For the three months ended March 31, 2010 and 2009, only one customer accounted for more than 10% of total revenues as follows (in thousands, except percentages):


	Three months ended
	March 31,
	2010			2009
Amount of total revenues	$	12,016		$	6,850
As a percentage of total revenues		19.4	%		18.5	%

As of March 31, 2010 and December 31, 2009, we had receivable balances from this customer approximating 17.5% and 14.2%, respectively, of total accounts receivable. As of March 31, 2010, we had a receivable balance from a second significant customer that approximated 16.2% of total accounts receivable, compared to approximately 14.2% of total accounts receivable as of December 31, 2009.

International Data

For the three months ended March 31, 2010 and 2009, total revenues from international product shipments consisted of the following (in thousands, except percentages):


	Three months ended
	March 31,
	2010			2009
Amount of total revenues	$	33,438		$	16,728
As a percentage of total revenues		53.9	%		45.1	%

For the three months ended March 31, 2010 and 2009, total revenues from product shipments to Japan approximated $9.0 million, or 14.5% of total revenues, and $4.4 million, or 11.9% of total revenues.

As of March 31, 2010 and December 31, 2009, our property and equipment were geographically located as follows (in thousands):


	March 31,		December 31,
	2010		2009
United States	$	10,509	$	10,874
Romania		2,397		2,647
India		2,392		2,506
Other		2,585		2,666

	$	17,883	$	18,693

9. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:


Level 1.		Observable inputs such as quoted prices in active markets;

Level 2.		Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3.		Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Financial assets carried at fair value as of March 31, 2010 and December 31, 2009 are classified in the table below in one of the three categories described above (in thousands):


	March 31, 2010								December 31, 2009
			Quoted Prices in								Quoted Prices in
			Active Markets for		Significant Other		Significant				Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs				Identical Assets		Observable Inputs		Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)		Fair Value		(Level 1)		(Level 2)		(Level 3)
Cash equivalents:⁽¹⁾
Money market funds	$	78	$	78	$	—	$	—	$	241	$	241	$	—	$	—
Short-term investments:⁽¹⁾
U.S. Treasury, government and agency debt securities		6,981		—		6,981		—		5,713		—		5,713		—
Corporate debt securities		6,994		—		6,994		—		4,624		—		4,624		—
Long-term investments:
U.S. Treasury, government and agency debt securities		27,650		—		27,650		—		34,673		—		34,673		—
Corporate debt securities		17,420		—		17,420		—		13,236		—		13,236		—
Auction rate securities⁽²⁾		5,819		—		—		5,819		5,673		—		—		5,673

Total financial assets	$	64,942	$	78	$	59,045	$	5,819	$	64,160	$	241	$	58,246	$	5,673


(1)		To estimate the fair value of our money market funds, U.S. government and agency debt securities, and corporate debt securities, we use the estimated fair value per our investment brokerage/custodial statements. To the extent deemed necessary, we may also obtain non-binding market quotes to corroborate the estimated fair values reflected in our investment brokerage/custodial statements.

(2)		Given the disruption in the auction process in the auction rate securities market, there is no longer an actively quoted market price for these securities. Accordingly, we utilized models to estimate the fair values of these auction rate securities based on, among other items: (i) the underlying structure of each security; (ii) the present value of future principal, interest and/or dividend payments discounted at the appropriate rate considering the market rate and conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; and (iv) credit quality and estimates of the recovery rates in the event of default for each security. These estimated fair values could change significantly based on, among other events: (i) a further deterioration in market conditions; (ii) further declines in the credit quality of our auction rate securities or of the issuers of our auction rate securities; or (iii) a cessation of dividend payments or default on interest or principal payments by the issuer of the securities.

The following table summarizes the activity for the three months ended March 31, 2010 and 2009 for those financial assets (primarily our auction rate securities) where fair value measurements are estimated utilizing Level 3 inputs (in thousands):


	Three Months Ended March 31,
	2010			2009
Beginning balance	$	5,673		$	3,211
Unrealized gain recorded in other comprehensive income		261			—
Unrealized loss recorded in earnings		—			(1,405	)
Settlements		(115	)		—

Ending balance	$	5,819		$	1,806


Unrealized losses recorded in earnings for Level 3 assets still held at March 31	$	—		$	(1,405	)

Auction Rate Securities Settlement

During the first quarter of 2010, we entered into an $8.9 million favorable legal settlement with a former investment manager attributable to our purchase in prior periods of certain investments in auction rate securities that have been substantially written down. We retained the auction rate securities at issue, which have an aggregate par value of $19.0 million and a fair value of $2.5 million as of March 31, 2010. The settlement proceeds were recorded to the Interest and other income, net line item within our consolidated statement of operations.

10. Commitments and Contingencies

Litigation

IneoQuest Technologies, Inc. vs. Ixia.In November 2008, IneoQuest filed a complaint against Ixia in the United States District Court for the Central District of California. The complaint alleges that Ixia makes and sells products that infringe a patent owned by IneoQuest, and that Ixia misappropriated IneoQuest’s trade secrets, in addition to numerous other related claims. The patent at issue allegedly relates to a system and method for analyzing the performance of multiple transportation streams of streaming media in packet-based networks. IneoQuest seeks a permanent injunction enjoining Ixia from infringing the patent at issue and from using IneoQuest’s trade secrets and confidential information, unspecified general and exemplary damages, and attorneys’ fees and costs.

In January 2009, Ixia filed an answer and counterclaim to IneoQuest’s complaint denying IneoQuest’s claims and raising several affirmative defenses. Ixia has also asserted a counterclaim against IneoQuest seeking declaratory relief that Ixia has not infringed the IneoQuest patent and that such patent is invalid. In April 2009, Ixia filed an amended answer and counterclaim to IneoQuest’s complaint in which Ixia asserted that IneoQuest has infringed four patents owned by Ixia. Although the Company cannot predict the outcome of this matter, Ixia believes that it has strong defenses to IneoQuest’s claims and is defending the action vigorously. The parties commenced discovery in this matter in the 2009 second quarter. The parties filed a Joint Claim Construction brief on November 30, 2009, and are awaiting a claim construction ruling from the Court. Fact discovery is set to conclude 90 days after the issuance of the claim construction ruling. Expert discovery is set to conclude 150 days after the issuance of the claim construction ruling. As yet, a trial date has not been set.

Tucana Telecom NV vs. Catapult.On May 22, 2007, the Antwerp Court of Appeal heard an appeal by Tucana Telecom NV, a Belgian company, of the previous dismissal by the Antwerp Commercial Court of an action by Tucana against Catapult. Tucana had sought damages of 10.4 million Euros (approximately $14.0 million as of March 31, 2010) for the alleged improper termination in 2002 by Catapult of Tucana’s purported distribution agreement with Catapult. On June 19, 2007, the Antwerp Court of Appeal confirmed the Commercial Court’s dismissal of Tucana’s action and assessed the costs of the appeal against Tucana. On July 22, 2008, Catapult was notified by its Belgian counsel that Tucana has appealed the judgment of the Antwerp Court of Appeal to the Belgian Supreme Court. In a decision dated January 14, 2010, the Belgian Supreme Court set aside the decision of the Antwerp Court of Appeal and remanded the matter for trial to the Ghent Court of Appeal. The matter has not yet been set for trial.

Catapult believes that it properly terminated any contract it had with Tucana and that Tucana is not entitled to any damages in this matter. Catapult has defended the action vigorously to date and will continue to do so. Catapult may be able to seek indemnification from Tekelec for any damages assessed against Catapult in this matter under the terms of the Asset Purchase Agreement that Catapult entered into with Tekelec, although there is no assurance that such indemnification would be available. On March 30, 2010, Tekelec’s legal counsel in Belgium informed Catapult’s Belgian counsel that its client is considering intervening voluntarily in the Ghent appeal proceedings but that no final decision has been taken in this respect yet. It is not possible to determine the amount of any loss that might be incurred in this matter.

We are not aware of any other pending legal proceedings than the matters mentioned above that, individually or in the aggregate, would have a material adverse effect on our business, results of operations or financial position. We may in the future be party to litigation arising in the ordinary course of business, including claims that we allegedly infringe upon third party trademarks or other intellectual property rights. Such claims, even if without merit, could result in the expenditure of significant financial and managerial resources.

11. Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). ASU 2009-13

establishes the accounting and reporting guidance for arrangements including multiple revenue-generating activities. ASU 2009-13 provides amendments to the criteria for separating deliverables, and measuring and allocating arrangement consideration to one or more units of accounting. The amendments in ASU 2009-13 also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. This guidance also requires providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. This guidance is effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010 or on a retrospective basis. Early application is permitted. We expect to adopt ASU 2009-13 on January 1, 2011 and are currently evaluating the impact of adopting ASU 2009-13 on our consolidated financial position, results of operations and cash flows.

In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements” (“ASU 2009-14”). ASU 2009-14 changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality,” and scopes these products out of current software revenue guidance. The new guidance includes factors to help companies determine the software elements that are considered “essential to the functionality.” The amendments will now subject software-enabled products to other revenue guidance and disclosure requirements, such as guidance surrounding revenue arrangements with multiple-deliverables. The amendments in ASU 2009-14 are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010 or on a retrospective basis. Early application is permitted. We expect to adopt ASU 2009-14 on January 1, 2011 relating to new revenue arrangements entered into or modified after that date, and are currently evaluating the impact of adopting ASU 2009-14 on our consolidated financial position, results of operations and cash flows.

In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures” (“ASU 2010-06”). ASU 2010-06 amends the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for us with the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for us with the reporting period beginning January 1, 2011. Other than requiring additional disclosures, adoption of this new guidance did not have a material impact on our consolidated financial position, results of operations and cash flows.


ITEM 2		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2010, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009 (“2009 Form 10-K”), including the “Risk Factors” section and the consolidated financial statements and notes included therein.

OVERVIEW

Acquisition of Catapult Communications Corporation.On June 23, 2009, we completed our acquisition of all of the outstanding shares of common stock of Catapult Communications Corporation (“Catapult”). The IxCatapult products provide advanced wireless test systems to network equipment manufacturers and service providers worldwide. The IxCatapult 3G and 4G wireless networking test solutions complement our wireline IP performance test systems and service verification platforms. With this acquisition, we have been able to broaden our product portfolio and provide a single source solution for testing converged multiplay IP services over wireless and wireline networks to new and existing customers. The purchase price for Catapult totaled $106.6 million, or $65.4 million net of Catapult’s existing cash and investment balances at the time of the acquisition. The Catapult acquisition was funded from our existing cash and cash equivalents. The results of operations of Catapult have been included in the consolidated statements of operations and cash flows since the date of the acquisition.

Acquisition of Agilent Technologies’ N2X Data Network Testing Product Line.On October 30, 2009, we completed our acquisition from Agilent Technologies, Inc. (“Agilent”) of its N2X Data Network Testing Product Line business (“N2X”) for $43.5 million in cash and the assumption of certain liabilities of N2X. In return for the consideration paid, we acquired certain assets and liabilities of N2X, including inventory, accounts receivables, fixed assets, accounts payable, customer relationships, certain intellectual property rights, and other assets required to run the business. The N2X products provide network equipment manufacturers and service providers with solutions to validate the performance and scalability characteristics of next-generation network equipment for voice, video and data (multiplay) services. The acquisition was funded from our existing cash and investments. The results of operations of N2X have been included in the consolidated statements of operations and cash flows since the date of the acquisition.

Revenues.Our revenues are principally derived from the sale and support of our test systems. Product revenues primarily consist of sales of our hardware and software products. Our service revenues primarily consist of the provision of post contract customer support and maintenance (“PCS”) related to the initial period provided with the product purchase (generally for 90-day or 12-month periods) and separately purchased extended PCS contracts, and to our implied PCS obligations. Service revenues also include separately purchased extended hardware warranty support for certain of our products, training and other professional services. PCS on our

software products includes unspecified when and if available software upgrades and customer technical support services. Our hardware products primarily consist of chassis and interface cards, and our Ethernet interface cards continue to represent the majority of our product revenues. In general, our Ethernet interface cards are used to test equipment and advanced IP services in the core and at the edge of the Internet and in enterprise applications. Looking forward, we expect that the sale of our Ethernet interface cards will continue to represent a significant portion of our revenues. Excluding the impact of our 2009 acquisitions, we did see some positive signs with respect to the stabilization of our business in the fourth quarter of 2009 with continued improvement in the first quarter of 2010. However, we remain cautiously optimistic about the extent and length of any economic recovery and about our customers’ willingness to significantly increase spending levels for the remainder of 2010.

Sales to our largest customer accounted for approximately $12.0 million, or 19.4%, and $6.9 million, or 18.5%, of our total revenues for the three months ended March 31, 2010 and 2009, respectively. To date, we have sold the majority of our products to network equipment manufacturers. While we expect that we will continue to have customer concentration for the foreseeable future, we continue to sell our products to a wider variety and increasing number of customers. To the extent that we continue to develop a broader and more diverse customer base, our reliance on any one customer or customer type should diminish. From a geographic perspective, we have historically generated the majority of our revenues from product shipments to customer locations within the United States. However, for the three months ended March 31, 2010, we generated revenues from product shipments to international locations of $33.4 million, or 53.9%, compared to $16.7 million, or 45.1%, of our total revenues for the three months ended March 31, 2009. During the three months ended March 31, 2010, our revenues generated from international locations increased both in dollars and as a percentage of revenues when compared to the same period in 2009 primarily due to additional sales arising from our acquisitions of Catapult in June 2009 and N2X in October 2009. Our sales in the Asia Pacific region for the three months ended March 31, 2010 and 2009 were $20.4 million and $9.7 million, respectively. The increase in sales for the Asia Pacific region was led by Japan, which had sales of $9.0 million for the first three months of 2010 compared to $4.4 million for same period in 2009. The increase in Japan sales was principally due to the contributions from our acquisitions in 2009. We intend to continue increasing our sales efforts internationally with targeted focus in the Europe and the Asia Pacific regions. Looking forward, and given the recent acquisitions of Catapult and N2X, we expect our international revenues to continue to grow on an annualized basis as a percentage of our total revenues.

In some instances our software products may be installed and operated independently from our hardware products. At other times, our software products are installed on and work with our hardware products to enhance the functionality of the overall test system. As our software is generally more than incidental to the sale of our test systems, we recognize revenue by applying software revenue recognition guidance.

Our test systems are generally fully functional at the time of shipment and do not require us to perform any significant production, modification, customization or installation after shipment. As such, revenue from hardware and software product sales to customers, including distributors, is recognized upon shipment provided that (i) evidence of an arrangement exists, which is typically in the form of a customer purchase order; (ii) delivery has occurred (i.e., risks and rewards of ownership have passed to the customer); (iii) the sales price is fixed or determinable; and (iv) collection is deemed probable.

When sales arrangements involve multiple elements, or multiple products, and we have vendor-specific objective evidence (“VSOE”) of fair value for each element in the arrangement, we recognize revenue based on the relative fair value of all elements within the arrangement. We determine VSOE based on sales prices charged to customers when the same element is sold separately or based upon stated substantive PCS renewal rates for certain arrangements. Many of our products, such as our software products, typically include an initial period (generally 90-day or 12–month periods) of free PCS, which is not sold separately. Accordingly, we are unable to establish VSOE for these products.

In cases where VSOE only exists for the undelivered elements such as PCS, we apply the residual method to recognize revenue. Under the residual method, the total arrangement fee is allocated first to the undelivered elements, typically PCS, based on their VSOE, and the residual portion of the fee is allocated to the delivered elements, typically our hardware and software products, and is recognized as revenue assuming all other revenue recognition criteria as described above have been met.

If VSOE cannot be determined for all undelivered elements of an arrangement, we defer revenue until the earlier of (i) the delivery of all elements or (ii) the establishment of VSOE for all undelivered elements, provided

that if the only undelivered element is PCS or a service, the total arrangement fee is recognized as revenue over the PCS or service term.

Services revenues from our initial and separately purchased extended PCS arrangements (generally offered for 12-month periods) are recognized ratably over the contractual coverage period. In addition, for implied PCS obligations we defer revenues from product sales and allocate these amounts to PCS revenues to account for the circumstances in which we provide PCS after the expiration of the customer’s contractual PCS period. Deferred revenues for these implied PCS obligations are recognized ratably over the implied PCS period, which is typically based on the expected economic life of our software products of four years. To the extent we determine that implied PCS is no longer being provided after the expiration of the customer’s contractual PCS period, the remaining deferred revenue balance related to the implied PCS obligation is reversed and recognized as revenue in the period of cessation of the implied PCS obligation. The implied PCS obligation for our software products ceases upon (i) the license management of our software upgrades and (ii) our determination not to provide PCS after the expiration of the contractual PCS period. Our license management system locks a software license to a specific computer or Ixia hardware chassis on which our software resides. The system then manages and controls the provision of software upgrades to ensure that the upgrades are only provided to customers that are entitled to receive such upgrades during an initial or extended PCS period. For software products that are not controlled under a license management system and for certain customers where we provide implied PCS outside of the contractual PCS period, we allocate and defer revenue for these implied PCS obligations and recognize this revenue ratably over the implied PCS periods as described above. For the three months ended March 31, 2010 and 2009, services revenues related to our implied PCS obligations approximated $904,000 and $1.1 million, respectively.

Revenues from our separately purchased extended hardware warranty arrangements are recognized ratably over the contractual coverage period. We recognize revenues from training and other professional services at the time the services are provided or completed, as applicable.

We use distributors to complement our direct sales and marketing efforts in certain international markets. Due to the broad range of features and options available with our hardware and software products, distributors generally do not stock our products and typically place orders with us after receiving an order from an end customer. These distributors receive business terms of sale generally similar to those received by our other customers.

Stock-Based Compensation.Share-based payments, including grants of stock options, restricted stock units and employee stock purchase rights, are required to be recognized in the financial statements based on the estimated fair values for accounting purposes on the grant date. We use the Black-Scholes option pricing model to estimate the fair value for accounting purposes of our share-based awards. The determination of the fair value for accounting purposes of share-based awards using the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life and risk-free interest rate. The expected life and expected volatility are estimated based on historical and other data trended into the future. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our share-based awards. Stock-based compensation expense recognized in our consolidated financial statements is based on awards that are ultimately expected to vest. The amount of stock-based compensation expense is reduced for estimated forfeitures based on historical experience as well as future expectations. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if estimated and actual forfeitures differ from these initial estimates. We evaluate the assumptions used to value share-based awards on a periodic basis. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Consistent with our past practice, we attribute the value of stock-based compensation to expense based on the graded, or accelerated multiple-option, approach.

For the three months ended March 31, 2010 and 2009, stock-based compensation expense was $2.8 million and $3.8 million, respectively. Our stock-based compensation expense declined for the quarter ended March 31, 2010 as compared to the same period in 2009 primarily due to an overall declining trend in the number of stock awards granted as well as lower average grant date fair values for more recent awards. The aggregate balance of gross unrecognized stock-based compensation to be expensed in the remainder of 2010 and through 2014 related to unvested share-based awards as of March 31, 2010 was approximately $18.7 million. To the extent that we grant additional share-based awards, future expense may increase by the additional unearned compensation resulting from

those grants. We anticipate that we will continue to grant additional share-based awards in the future as part of our long-term incentive compensation programs. The impact of future grants cannot be reasonably estimated at this time because it will depend on a number of factors, including the amount of share-based awards granted and the then current fair values of such awards for accounting purposes.

Cost of Revenues. Our cost of revenues related to the sale of our hardware and software products includes materials, payments to third party contract manufacturers, royalties, and salaries and other expenses related to our manufacturing, operations, technical support and professional service personnel. We outsource the majority of our manufacturing operations, and we conduct supply chain management, quality assurance, documentation control, shipping and some final assembly in Calabasas, California and Penang, Malaysia. Accordingly, a significant portion of our cost of revenues related to our products consists of payments to our contract manufacturers. Cost of revenues related to the provision of services includes salaries and other expenses associated with customer and technical support services, professional services and the warranty cost of hardware that is replaced or repaired during the warranty coverage period. Cost of revenues does not include an allocation of the amortization of intangible assets related to our acquisitions of certain businesses, product lines and technologies, which are discussed below and included on a separate line item within our consolidated statements of operations.

Our cost of revenues as a percentage of total revenues is primarily affected by the following factors:

	•		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 customers and sales channels through which our products are sold;

	•		the mix of our products sold, such as the mix of software versus hardware product sales;

	•		new product introductions by us and by our competitors;

	•		demand for our products; and

	•		production volume.

In the near term, although we anticipate that our cost of revenues as a percentage of total revenues will remain relatively flat, we expect to continue to experience pricing pressure on larger transactions and from larger customers as a result of competition and the current global business environment.

Operating Expenses. Our operating expenses are generally recognized when incurred and consist of research and development, sales and marketing, general and administrative, amortization of intangible assets, acquisition and other related costs and restructuring expenses. In dollar terms, we expect total operating expenses, excluding stock-based compensation expenses discussed above and amortization of intangible assets, acquisition and other related costs and restructuring expenses discussed below, to increase significantly for the remainder of 2010 when compared to the same periods in 2009 due to our 2009 acquisitions of Catapult and N2X. For the remainder of 2010, we expect operating expenses, excluding stock-based compensation expenses, amortization of intangible assets, acquisition and other related costs and restructuring expenses, in dollar terms and as a percentage of total revenues to decline or remain relatively flat on a quarterly basis as we seek to leverage our current operational infrastructure and employee base.

Research and development expenses consist primarily of salaries and other personnel costs related to the design, development, testing and enhancement of our products. We expense our research and development costs as they are incurred. We also capitalize and depreciate over a five-year period costs of our products used for internal purposes.

Sales and marketing expenses consist primarily of compensation and related costs for personnel engaged in direct sales, sales support and marketing functions, as well as promotional and advertising expenditures. We also

capitalize and depreciate over a two-year period costs of our products used for sales and marketing activities, including product demonstrations for potential customers.

General and administrative expenses consist primarily of salaries and related expenses for executive, finance, legal, human resources, information technology and administrative personnel, as well as professional fees (e.g., legal and accounting), facility costs related to our corporate headquarters, insurance costs and other general corporate expenses.

Amortization of intangible assets consists of the amortization of the purchase price of the various intangible assets over their estimated useful lives. Periodically we review goodwill and other intangible assets for impairment. An impairment charge would be recorded to the extent that the carrying value exceeds its estimated fair value in the period that the impairment circumstances occurred. The future amortization of acquired intangible assets depends on a number of factors, including the extent to which we acquire additional businesses, technologies or product lines or are required to record impairment charges related to our acquired intangible assets.

Acquisition and other related costs are expensed as incurred and consist primarily of transaction and integration related costs such as success-based banking fees, professional fees for legal, accounting, tax, due diligence, valuation and other related services, change in control payments, consulting fees, required regulatory costs and other related expenses. We expect our acquisition and other related expenses to fluctuate over time based on the timing of our acquisitions and related integration activities.

Restructuring expenses consist primarily of employee severance costs and related charges, as well as facility-related charges to consolidate operations.

Interest and Other Income, Net.Interest and other income, net represents interest on cash and a variety of securities, including money market funds, U.S. government and government agency debt securities, corporate debt securities and auction rate securities, and certain foreign currency gains and losses as well as legal settlement proceeds.

Income Tax.Income tax is determined based on the amount of earnings and enacted federal, state and foreign tax rates, adjusted for allowable credits and deductions, and for other effects of equity compensation plans. Our income tax provision may be significantly affected by changes to our estimates for tax in jurisdictions in which we operate and other estimates utilized in determining the global effective tax rate. Actual results may differ based on economic conditions. Such changes could have a substantial impact on the income tax provision. Our income tax provision could also be significantly impacted by estimates surrounding our uncertain tax positions and the recording of valuation allowances against certain deferred tax assets and changes to these valuation allowances in future periods. We continually reevaluate the judgments surrounding our estimates and make adjustments as appropriate.

RESULTS OF OPERATIONS

The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated:


	Three months ended
	March 31,
	2010			2009
Revenues:
Products		81.7	%		81.0	%
Services		18.3			19.0

Total revenues		100.0			100.0

Costs and operating expenses:⁽¹⁾
Cost of revenues — products		18.5			20.4
Cost of revenues — services		2.4			2.6
Research and development		30.0			32.0
Sales and marketing		30.9			38.7
General and administrative		14.3			16.8
Amortization of intangible assets		8.2			3.5
Acquisition and other related		1.8			—
Restructuring		5.6			—

Total costs and operating expenses		111.7			114.0


Loss from operations		(11.7	)		(14.0	)
Interest and other income, net		14.2			1.5
Other-than-temporary impairment on investments		—			(3.8	)

Income (loss) before income taxes		2.5			(16.3	)
Income tax expense (benefit)		1.1			(5.5	)

Net income (loss)		1.4	%		(10.8	)%


⁽¹⁾		Stock-based compensation included in:


Cost of revenues — products	0.2	%	0.5	%
Cost of revenues — services	0.1		0.2
Research and development	1.9		4.4
Sales and marketing	1.3		3.4
General and administrative	1.0		1.9

Comparison of Three Months Ended March 31, 2010 and 2009

As a result of our acquisitions of Catapult Communications Corporation (“Catapult”) on June 23, 2009 and Agilent Technologies, Inc. (“Agilent”) N2X Data Network Testing Product Line business (“N2X”) on October 30, 2009, our consolidated results of operations for the three months ended March 31, 2010 include the results of these operations from the respective acquisition dates. The integration of Catapult and its processes was substantially completed as of December 31, 2009, while the integration activities with respect to N2X was substantially completed as of March 31, 2010. To assist the readers of our financial statements in reviewing our year over year consolidated operating results, we have estimated the impacts of these acquisitions in the related statement of operations sections below, although some activities cannot be reasonably extracted and included as either a Catapult or N2X activity. We reported our financial results for the quarter ended March 31, 2010, on April 29, 2010, as furnished with our Current Report on Form 8-K filed with the Securities and Exchange Commission on that date. Those results have been adjusted in this Form 10-Q to increase net income by $176,000 due to the deferral of certain inventory costs.

Revenues.In the first quarter of 2010, total revenues increased 67.1% to $62.0 million from the $37.1 million recorded in the first quarter of 2009. As a result of our acquisitions of Catapult in June 2009 and the N2X in October 2009 (“2009 Acquisitions”), revenues for the first quarter of 2010 included $19.2 million related to the 2009 Acquisitions. Excluding the revenues from our 2009 Acquisitions, revenues increased to $42.8 million in the first quarter of 2010 due to a $2.2 million increase in shipments of our hardware and software products (primarily our IxLoad software product and our Ethernet interface cards) in the first quarter of 2010 over the same period in 2009 and a $1.7 million extended PCS renewal order from a customer for which implied PCS had been previously deferred. Revenues from Cisco Systems, our largest account, were $12.0 million, representing 19.4% of our total revenues for the first quarter of 2010, compared to $6.9 million or 18.5% of our total revenues for the first quarter of 2009.

Cost of Revenues. As a percentage of total revenues, our total cost of revenues decreased to 20.9% in the first quarter of 2010 from 22.9% in the first quarter of 2009. Our first quarter of 2010 cost of goods sold included approximately $3.6 million of cost of goods sold attributable to our 2009 Acquisitions. Excluding the cost of revenues related to our 2009 Acquisitions, our total cost of revenues increased to $9.4 million in the first quarter of 2010 from $8.5 million in the first quarter of 2009 due in part to the increased sales volumes and royalty payments in the first quarter of 2010 compared to the same period in 2009.

Research and Development Expenses.In the first quarter of 2010, research and development expenses increased 57.1% to $18.6 million from $11.9 million in the first quarter of 2009. As a result of our 2009 Acquisitions, our research and development expenditures in the first quarter of 2010 included approximately $6.5 million related to the research and development activities of the acquired operations. Excluding the incremental research and development costs related to the 2009 Acquisitions, research and development expense in the first quarter of 2010 were $12.1 million compared to $11.9 million in the first quarter of 2009. This increase was primarily due to higher compensation and related employee costs, including travel, of $1.2 million, partially offset by lower stock-based compensation expense of $616,000 and lower consulting costs of $207,000. The increase in compensation and related employee costs was primarily due to the reinstatement of our global bonus plan in 2010.

Sales and Marketing Expenses.In the first quarter of 2010, sales and marketing expenses increased 33.1% to $19.2 million from $14.4 million in the first quarter of 2009. As a result of our 2009 Acquisitions, our sales and marketing costs in the first quarter of 2010 included approximately $5.3 million related to these acquisitions. Excluding the incremental sales and marketing costs related to the 2009 Acquisitions, sales and marketing expenses in the first quarter of 2010 were $13.9 million compared to $14.4 million in the first quarter of 2009. This decrease of $0.5 million was primarily due to lower stock-based compensation expenses of $556,000.

General and Administrative Expenses.In the first quarter of 2010, general and administrative expenses increased 42.5% to $8.9 million from $6.2 million in the first quarter of 2009. As a result of our 2009 Acquisitions, our general and administrative costs in the first quarter of 2010 included approximately $736,000 related to these acquisitions. Excluding the incremental general and administrative costs related to the 2009 Acquisitions, general and administrative expenses in the first quarter of 2010 were $8.1 million compared to $6.2 million in the first quarter of 2009. The increase of $1.9 million was primarily due to higher compensation and related employee costs of $1.0 million, including costs related to the reinstatement of our global bonus plan in 2010, and higher litigation related expenses of $773,000.

Amortization of Intangible Assets.In the first quarter of 2010, amortization of intangible assets increased to $5.1 million from $1.3 million in the first quarter of 2009. The increase primarily related to the incremental amortization of intangibles related to our 2009 Acquisitions.

Acquisition and Other Related Expenses.Acquisition and other related expenses for the first quarter of 2010 were $1.1 million and primarily consisted of legal and accounting fees relating to our continued integration activities following our 2009 Acquisitions. There were no acquisition and other related expenses for the three months ended March 31, 2009.

Restructuring. Restructuring expenses for the three months ended March 31, 2010 were $3.5 million, and consisted primarily of employee severance costs related to the N2X Restructuring initiated during the first quarter of 2010. The N2X Restructuring included a reduction in force of approximately 80 positions, which represented approximately 7% of our worldwide work force, including contractors, prior to the announcement of the restructuring. There were no restructuring expenses for the three months ended March 31, 2009. We expect that

this restructuring initiative will produce cost savings of approximately $10.0 million to $11.0 million on an annualized basis. For additional information, please see Note 4 of Notes to Condensed Consolidated Financial Statements.

Interest and Other Income, Net.Interest and other income, net increased to $8.8 million in the first quarter of 2010 from the $561,000 recorded in the first quarter of 2009. This increase was primarily due to an $8.9 million favorable settlement with a former investment manager attributable to our purchase in prior periods of certain investments in auction rate securities with an aggregate par value of $19.0 million that have been substantially written down.

Other-than-Temporary Impairment on Investments.In the first quarter of 2009, other-than-temporary impairments on investments totaled $1.4 million related to our illiquid auction rate securities (“ARS”). There were no such write-downs in the same period of 2010.

Income Tax.Our provision for income taxes consists of federal, state and foreign income taxes. We recorded a tax provision of $668,000, or an effective rate of 43.5% for the first quarter of 2010, as compared to an income tax benefit of $2.1 million, or an effective rate of 34.0% for the first quarter of 2009. The increase to the effective tax rate is due to the fact that we continue to take a full valuation allowance against our U.S. deferred tax assets. As a result, we no longer record the benefits associated with the changes in these assets. Additionally, the increase to the effective tax rate was also driven by changes in the geographic mix in profitability. As a result, our tax provision consists primarily of foreign income tax liabilities.

LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations with our cash balances, cash generated from operations and proceeds from our initial public offering and from stock option exercises. The following table sets forth our summary cash flows for the three months ended March 31, 2010 and 2009 (in thousands):


	Three Months Ended March 31,
	2010			2009
Net cash provided by operating activities	$	14,173		$	4,507
Net cash used in investing activities		(2,694	)		(163,950	)
Net cash provided by (used in) financing activities		3,400			(5,302	)

Our cash, cash equivalents and short- and long-term investments, when viewed in the aggregate, increased to $94.8 million as of March 31, 2010 from $79.0 million as of December 31, 2009 primarily due to the $8.9 million settlement proceeds with a former investment manager attributable to our purchase of certain investments in auction rate securities, working capital changes and proceeds from employee stock option exercises.

Net cash provided by operating activities was $14.2 million in the first three months of 2010 and $4.5 million in the same period of 2009. Net cash generated from operations in the first three months of 2010 and 2009 was provided by a net income of $869,000 and net loss of $4.0 million, respectively, plus adjustments for non-cash items. In the first three months of 2010 and 2009, non-cash items included $7.5 million and $4.0 million, respectively, for depreciation and amortization of fixed and intangible assets, and $2.8 million and $3.8 million, respectively, for non-cash stock-based compensation charges. During the first three months of 2009, non-cash items also included a $1.4 million other-than-temporary impairment charge related to our illiquid auction rate securities.

Net cash used in investing activities was $2.7 million for the first three months of 2010, and consisted primarily of capital expenditures. Net cash used in investing activities in the first three months of 2009 was $164.0 million, and consisted primarily of $162.0 million from the net purchase of short-term U.S. Treasury securities.

Net cash provided by financing activities for the first three months of 2010 was $3.4 million as compared to a net cash used in financing activities of $5.3 million for the first three months of 2009. The net cash provided by financing activities during the first three months of 2010 was primarily due to the proceeds received from stock option exercises. The net cash used in financing activities during the first three months of 2009 was primarily due to the repurchase of our common stock for an aggregate purchase price of $5.3 million.

We believe that our existing balances of cash and cash equivalents and investments (excluding our illiquid long-term auction rate securities with an estimated fair value of $5.8 million), and cash flows expected to be generated from our operations will be sufficient to satisfy our operating requirements for at least the next 12 months. Nonetheless, we may seek additional sources of capital as necessary or appropriate to fund acquisitions or to otherwise finance our growth or operations; however, there can be no assurance that such funds, if needed, will be available on favorable terms, if at all. Our access to the capital markets to raise funds, through the sale of equity or debt securities, is subject to various factors, including the timely filing of our periodic reports with the Commission.

SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Statements that are not historical facts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the safe harbor created by that Section. Words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. These risks, uncertainties and other factors may cause our actual results, performances or achievements to be materially different from those expressed or implied by our forward-looking statements and include, among other things: the current global economy, our success with the integration of our recently completed acquisitions, competition, consistency of orders from significant customers, our success in developing and producing new products and market acceptance of our products. Many of these risks and uncertainties are outside of our control and are difficult for us to forecast or mitigate. Factors that may cause our actual results to differ materially from our forward-looking statements include the risks and other factors set forth in the “Risk Factors” and other sections of the Company’s 2009 Form 10-K and in our other filings with the Commission.


ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

The primary objective of our investment activities is to maintain the safety of principal and preserve liquidity while maximizing yields without significantly increasing risk. Some of the fixed rate securities that we have invested in may be subject to market risk. This means that a change in prevailing interest rates may cause the fair value of the investment to fluctuate. We do not enter into investments for trading or speculative purposes. We maintain our portfolio of cash equivalents and investments in a variety of securities, including U.S. government and federal agency securities, corporate debt securities, auction rate securities and money market funds. Our cash equivalents and investments consist of both fixed and variable rate securities. We do not use any derivatives or similar instruments to manage our interest rate risk. Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates. Our fixed rate securities are currently classified as available-for-sale securities. While we do not intend to sell these fixed rate securities prior to maturity based on a sudden change in market interest rates, should we choose to sell these securities in the future, our consolidated operating results and cash flows may be adversely affected. A smaller portion of our cash equivalents and investments portfolio consists of variable interest rate securities. Accordingly, we also have interest rate risk with these variable rate securities as the income produced may decrease if interest rates fall.

Exchange Rate Sensitivity

The majority of our revenue and expenses are denominated in U.S. dollars. However, since we have sales, development and service operations outside of the United States, we do have transactions that are denominated in foreign currencies, primarily the Japanese Yen, Romanian Lei, Indian Rupee, Chinese Yuan, Singapore Dollar, Malaysian Ringgit, Australian Dollar, Canadian Dollar, Swedish Kronor, Euro and British Pound. We utilize foreign currency forward contracts to hedge certain accounts receivable amounts that are denominated primarily in Japanese Yen. These contracts are used to reduce our risk associated with exchange rate movements, as gains and losses on these contracts are intended to offset exchange losses and gains on underlying exposures. Changes in the fair value of these forward contracts are recorded immediately in earnings. We do not enter into foreign exchange forward contracts for speculative or trading purposes and we do not expect net gains or losses on these derivative instruments to have a material impact on our results of operations or cash flows.


ITEM 4.		CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness, as of the end of the period covered by this report (i.e., as of March 31, 2010), of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) promulgated by the Commission under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of such period, were adequate and effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting are or will be capable of preventing or detecting all errors and all fraud. Any controls, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls will be met. The design of controls must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all controls, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

PART II. OTHER INFORMATION


ITEM 1.		Legal Proceedings

Discussion of legal matters is incorporated by reference from Part I, Item 1, Note 10, “Commitments and Contingencies,” of this document, and should be considered an integral part of Part II, Item 1, “Legal Proceedings.”


ITEM 1A.		Risk Factors

Information regarding risk factors appears in Part I, “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2009 and in certain of our other filings with the Securities and Exchange Commission. There have been no material changes to our risk factors previously disclosed in the 2009 Form 10-K.


ITEM 5.		Other Information

Our policy governing transactions in our securities by our directors, officers and employees permits such persons to adopt stock trading plans pursuant to Rule 10b5-1 promulgated by the Securities and Exchange Commission under the Exchange Act. Our directors, officers and employees may from time to time establish such stock trading plans. We do not undertake any obligation to disclose, or to update or revise any disclosure regarding, any such plans and specifically do not undertake to disclose the adoption, amendment, termination or expiration of any such plans.


ITEM 6.		Exhibits

	31.1		Certification of Chief Executive Officer of Ixia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2		Certification of Chief Financial Officer of Ixia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32.1		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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	IXIA

Date: May 6, 2010	By:	/s/ Atul Bhatnagar
		Atul Bhatnagar
		President and Chief Executive Officer


Date: May 6, 2010	By:	/s/ Thomas B. Miller
		Thomas B. Miller
		Chief Financial Officer

EXHIBIT INDEX


Exhibit No.		Description
31.1		Certification of Chief Executive Officer of Ixia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer of Ixia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Ixia (XXIA) Inactive 10-Q2010 Q1 Quarterly report

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