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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
 

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018.

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: 001-36355
Aerohive Networks, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
 
 
20-4524700
(State or other jurisdiction of
incorporation or organization)
 
 
 
(I.R.S. Employer
Identification Number)
 

1011 McCarthy Boulevard
Milpitas, California 95035
(408) 510-6100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

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.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   ¨
 
Accelerated filer   x
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company   ¨
 
 
Emerging growth company  x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The number of shares of the registrant's common stock, par value $0.001, outstanding as of April 27, 2018 was 54,629,170.





TABLE OF CONTENTS
 
 
Page
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 

The Aerohive Networks design logo and the marks “Aerohive®,” “HiveManager®,” “HiveOS®,” "Aerohive NetworksTM, "Aerohive Atom AP30TM,” “Aerohive ConnectTM,” “HiveManager ConnectTM,” “Aerohive SelectTM,” and “HiveCare SelectTM” are the property of Aerohive Networks, Inc. All Rights Reserved. This Quarterly Report on Form 10-Q contains additional trade names, trademarks and service marks of other companies.


1



PART I. FINANCIAL INFORMATION
ITEM 1.    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AEROHIVE NETWORKS, INC.
Condensed Consolidated Balance Sheets
(unaudited, in thousands, except share and per share amounts)
 
March 31,
 
December 31,
 
2018
 
2017
ASSETS
 
 
(As Adjusted)*
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
21,484

 
$
27,249

Short-term investments
56,388

 
57,675

Accounts receivable, net of allowance for doubtful accounts of $120 and $127 as of March 31, 2018 and December 31, 2017, respectively
19,474

 
17,662

Inventories
13,558

 
13,495

Prepaid expenses and other current assets
6,205

 
6,396

Total current assets
117,109

 
122,477

Property and equipment, net
6,988

 
6,381

Goodwill
513

 
513

Other assets
5,009

 
4,900

Total assets
$
129,619

 
$
134,271

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
12,020

 
$
11,946

Accrued liabilities
7,811

 
8,602

Debt, current
20,000

 

Deferred revenue, current
33,885

 
33,279

Total current liabilities
73,716

 
53,827

Debt, non-current

 
20,000

Deferred revenue, non-current
33,993

 
33,761

Other liabilities
1,734

 
1,769

Total liabilities
109,443

 
109,357

Commitments and contingencies (Note 5)

 

Stockholders’ equity:
 
 
 
Preferred stock, par value of $0.001 per share - 25,000,000 shares authorized as of March 31, 2018 and December 31, 2017; no shares issued and outstanding as of March 31, 2018 and December 31, 2017

 

Common stock, par value of $0.001 per share - 500,000,000 shares authorized as of March 31, 2018 and December 31, 2017; 54,625,924 and 54,171,498 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
55

 
55

Additional paid–in capital
281,146

 
278,528

Treasury stock - 1,361,243 shares as of March 31, 2018 and December 31, 2017, respectively
(6,216
)
 
(6,216
)
Accumulated other comprehensive loss
(69
)
 
(30
)
Accumulated deficit
(254,740
)
 
(247,423
)
Total stockholders’ equity
20,176

 
24,914

Total liabilities and stockholders’ equity
$
129,619

 
$
134,271

See notes to condensed consolidated financial statements.
* The Company has adjusted certain amounts for the retrospective change in accounting policy for revenue recognition.
(See Note 1)

2



AEROHIVE NETWORKS, INC.
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except share and per share amounts)
 
Three Months Ended March 31,
 
2018
 
2017
Revenue:
 
 
(As Adjusted)*
Product
$
25,066

 
$
26,967

Subscription and support
10,701

 
9,362

Total revenue
35,767

 
36,329

Cost of revenue (1):
 
 
 
Product
8,671

 
8,815

Subscription and support
3,404

 
3,176

Total cost of revenue
12,075

 
11,991

Gross profit
23,692

 
24,338

Operating expenses:
 
 
 
Research and development (1)
9,279

 
9,550

Sales and marketing (1)
15,670

 
17,437

General and administrative (1)
5,954

 
6,297

Total operating expenses
30,903

 
33,284

Operating loss
(7,211
)
 
(8,946
)
Interest income
289

 
140

Interest expense
(164
)
 
(130
)
Other expense, net
(173
)
 
(85
)
Loss before income taxes
(7,259
)
 
(9,021
)
Provision for income taxes
58

 
97

Net loss
$
(7,317
)
 
$
(9,118
)
Net loss per share, basic and diluted
$
(0.13
)
 
$
(0.17
)
Weighted-average shares used in computing net loss per share, basic and diluted
54,332,767

 
52,439,039

 
 
 
 
(1) Includes stock-based compensation as follows:
 
 
 
Cost of revenue
$
246

 
$
271

Research and development
1,046

 
688

Sales and marketing
997

 
1,294

General and administrative
1,382

 
1,300

Total stock-based compensation
$
3,671

 
$
3,553

See notes to condensed consolidated financial statements.  
* The Company has adjusted certain amounts for the retrospective change in accounting policy for revenue recognition
(See Note 1).




3



AEROHIVE NETWORKS, INC.
Condensed Consolidated Statements of Comprehensive Loss
(unaudited, in thousands)
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
(As Adjusted)*
Net loss
$
(7,317
)
 
$
(9,118
)
Unrealized loss on available-for-sale investments, net of tax
(39
)
 
(6
)
Comprehensive loss
$
(7,356
)
 
$
(9,124
)

See notes to condensed consolidated financial statements.  
* The Company has adjusted certain amounts have been adjusted for the retrospective change in accounting policy for revenue recognition (See Note 1).





4



AEROHIVE NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from operating activities
 
 
(As Adjusted)*
Net loss
$
(7,317
)
 
$
(9,118
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
708

 
842

Stock-based compensation
3,671

 
3,553

Other
(116
)
 
(15
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(1,812
)
 
4,562

Inventories
(63
)
 
961

Prepaid expenses and other current assets
191

 
(562
)
Other assets
(109
)
 
(57
)
Accounts payable
(56
)
 
(885
)
Accrued liabilities
(792
)
 
144

Other liabilities
12

 
(6
)
Deferred revenue
838

 
(975
)
Net cash used in operating activities
(4,845
)
 
(1,556
)
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(1,185
)
 
(223
)
Maturities of short-term investments
22,950

 
4,200

Purchases of short-term investments
(21,587
)
 
(7,709
)
Net cash provided by (used in) investing activities
178

 
(3,732
)
Cash flows from financing activities
 
 
 
Proceeds from employee stock option exercises and employee stock purchase plan
28

 
218

Payment for shares withheld for tax withholdings on vesting of restricted stock units
(1,080
)
 
(326
)
Payment on capital lease obligations
(46
)
 
(43
)
Net cash used in financing activities
(1,098
)
 
(151
)
Net decrease in cash and cash equivalents
(5,765
)
 
(5,439
)
Cash and cash equivalents at beginning of period
27,249

 
34,346

Cash and cash equivalents at end of period
$
21,484

 
$
28,907

Supplemental disclosure of cash flow information
 
 
 
Income taxes paid
$
36

 
$
99

Interest paid
$
168

 
$
126

Supplemental disclosure of noncash investing and financing activities
 
 
 
Unpaid property and equipment purchases
$
196

 
$
22

See notes to condensed consolidated financial statements.
* The Company has adjusted certain amounts for the retrospective change in accounting policy for revenue recognition.
(See Note 1).


5



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Aerohive Networks, Inc. was incorporated in Delaware on March 15, 2006, and, together with its subsidiaries (the "Company"), has designed and developed a leading cloud and enterprise Wi-Fi solution that enables the Company's customers to use the power of the Wi-Fi, cloud, analytics and applications to transform how they serve their customers. The Company's products include Wi-Fi access points, access switches and SD-WAN capable routers required to build an edge-access network; a cloud-based services platform for centralized management; data collection and analytics; and applications that leverage the network to provide additional capabilities to the business and IT organizations. Together, these products, service platforms and applications create a simple, scalable, and secure solution to deliver a better-connected experience.
The Company has offices in North America, Europe and Asia Pacific and employs staff around the world.
Basis of Presentation and Consolidation
The Company prepared the accompanying consolidated financial statements in accordance with generally accepted accounting principles in the United States (GAAP), which includes the accounts of Aerohive Networks, Inc. and its wholly owned subsidiaries. The Company has eliminated all intercompany accounts and transactions in consolidation.
Use of Estimates
When preparing the accompanying consolidated financial statements in conformity with GAAP, management makes estimates and assumptions that affect the amounts the Company reports in the consolidated financial statements and accompanying notes. Those estimates and assumptions include, among others, the determination of standalone selling price (SSP) of product, software and related support and subscriptions, determination of fair value of stock-based awards, inventory valuation, accounting for income taxes, including the valuation reserve on deferred tax assets and uncertain tax positions, allowance for sales reserves, allowance for rebate reserves, allowance for doubtful accounts, and warranty costs. Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. As the Company cannot determine future events and their effects with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the consolidated financial statements.
Foreign Currency
The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. The Company remeasures the transactions denominated in currencies other than the functional currency at the average exchange rate in effect during the period. At the end of each reporting period, the Company remeasures its subsidiaries’ monetary assets and liabilities to the U.S. dollar using exchange rates in effect at the end of the reporting period. The Company remeasures its non-monetary assets and liabilities at historical exchange rates. The Company records gains and losses related to remeasurement in other income (expense), net in the consolidated statements of operations. Foreign currency exchange losses have not been significant in any period presented and the Company has not undertaken any hedging transactions related to foreign currency exposure.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from contracts with customers (Topic 606), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) and most industry-specific guidance. This standard requires entities to recognize revenue when they transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 deferring the effective date of this standard by one year to December 15, 2017. In the first quarter of 2018, the Company adopted ASC 606, using the full retrospective method, which required the Company to restate its historical financial information to be consistent with the standard. The most significant impact of the standard related to the way the Company accounts for arrangements with its stocking distributors. The Company previously deferred the recognition of revenue and the cost of revenue from sales to these stocking distributors until the stocking distributors had sold the products to their customers (known as “sell-through” revenue recognition). Under the new standard, the Company recognizes all revenue and related cost of revenue on sales to stocking distributors upon shipment and transfer of control (known as “sell-in” revenue

6



recognition), rather than deferring recognition until the stocking distributors report that they have sold the products to their customers, provided that all other revenue recognition criteria have been met. The Company also attributes the impact to its revenue and deferred revenue balance to the removal of the limitation on contingent revenue, which accelerates revenue recognition for certain contracts. Further, the adoption of this standard also resulted in differences in the timing of recognition of contract costs, such as sales commissions.    
The Company has finalized the adoption of the standard and product revenue was $113.1 million and $134.6 million for fiscal years ended December 31, 2017 and 2016, respectively, and subscription and support revenue was $40.4 million and $33.3 million for fiscal years ended December 31, 2017 and 2016, respectively. The adoption of the standard resulted in a decrease in total deferred revenue of $3.3 million as of December 31, 2017, driven by the Company's recognition in the period of revenue related to stocking distributors upon shipment and also the removal of the limitation on contingent revenue accelerating revenue recognition for certain contracts. The adoption of the standard resulted in a decrease of $0.3 million in capitalized contract costs as of December 31, 2017. The adoption of this standard did not have a significant impact on the revenue or the related costs and sales commission for the three months ended March 31, 2017. In addition, the adoption of the standard had no significant impact on the provision for income taxes and the net cash provided by (used in) operating, investing, or financing on the Company's consolidated statements of cash flows.
ASC 606 Adoption Impact to Previously Reported Results
The following tables present the impacts to reported results from the Company's adoption of the standard on the Company's condensed consolidated balance sheets and condensed consolidated statements of operations.
Consolidated Balance Sheet (in thousands)
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
As Reported
 
Impact of
Adoption
 
As Adjusted
 
 
Prepaid expenses and other current assets
$
6,513

 
$
(117
)
 
$
6,396

Total current assets
122,594

 
(117
)
 
122,477

Other assets
5,124

 
(224
)
 
4,900

Total assets
134,612

 
(341
)
 
134,271

Deferred revenue, current
34,281

 
(1,002
)
 
33,279

Total current liabilities
54,829

 
(1,002
)
 
53,827

Deferred revenue, non-current
36,083

 
(2,322
)
 
33,761

Total liabilities
112,681

 
(3,324
)
 
109,357

Accumulated deficit
(250,406
)
 
2,983

 
(247,423
)
Total stockholders' equity
21,931

 
2,983

 
24,914

Total liabilities and stockholders' equity
$
134,612

 
$
(341
)
 
$
134,271


7



Consolidated Statements of Operations (in thousands, except per share amounts)
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
As Reported
 
Impact of
 Adoption
 
As Adjusted
 
 
Product revenue
$
26,870

 
$
97

 
$
26,967

Subscription and support
9,481

 
(119
)
 
9,362

Total Revenue
36,351

 
(22
)
 
36,329

Cost of revenue - Product
8,736

 
79

 
8,815

Total cost of revenue
11,912

 
79

 
11,991

Gross profit
24,439

 
(101
)
 
24,338

Sales and marketing
17,439

 
(2
)
 
17,437

Total operating expenses
33,286

 
(2
)
 
33,284

Operating loss
(8,847
)
 
(99
)
 
(8,946
)
Net loss
$
(9,019
)
 
$
(99
)
 
$
(9,118
)
Net loss per share, basic and diluted
$
(0.17
)
 
$

 
$
(0.17
)

Effect on certain items in the Statement of Cash Flows (operating activities, in thousands)
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
As Reported
 
Impact of
Adoption
 
As Adjusted
Cash flows from operating activities:
 
   Net loss:
$
(9,019
)
 
$
(99
)
 
$
(9,118
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
      Prepaid expenses and other current assets
(638
)
 
76

 
(562
)
      Other assets
(58
)
 
1

 
(57
)
      Deferred revenue
(997
)
 
22

 
(975
)
Revenues by geographic location, based on the billing address of the respective channel partner’s bill-to location, which reflect the adoption of ASC 606, are as follows: (in thousands)
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
As Reported
 
Impact of
Adoption
 
As Adjusted
 
 
Americas
$
23,918

 
$
(22
)
 
$
23,896

Europe, Middle East and Africa
9,832

 

 
9,832

Asia Pacific
2,601

 

 
2,601

     Total revenues
$
36,351

 
$
(22
)
 
$
36,329


8



Under ASC 606, the Company recognizes revenue as of the time of transfer of promised goods or services to customers in an amount that reflects the consideration the Company expects to be entitled to from those goods or services. As shown on the condensed consolidated statement of operations, the Company derives revenue from two sources: (i) product, which includes hardware and software revenue, and (ii) subscription and support, which includes post-contract customer support (PCS) and software delivered as a service (SaaS).
Beginning with its first quarter, fiscal year 2018, the Company follows the following five-step approach in recognizing revenue:
Identification of the contract, or contracts, with a customer - A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which the Company bases on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
Identification of the performance obligations in the contract - The Company identifies performance obligations promised in a contract based on the goods or services that the Company will transfer to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or services either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, the Company applies judgment to determine whether promised goods or services are capable of being distinct and distinct in the context of the contract.
Determination of the transaction price - The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer.
Allocation of the transaction price to the performance obligations in the contract - If the contract contains a single performance obligation, the Company allocates the entire transaction price to the single performance obligation. The Company allocates the transaction price of contracts that contain multiple performance obligations to each performance obligation based on a relative SSP. The Company determines SSP based on the price at which the performance obligation is sold separately. If the Company cannot observe SSP through past transactions, the Company estimates the SSP by taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
Recognition of revenue when, or as, we satisfy a performance obligation - The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. The Company recognizes revenue at the time the related performance obligation is satisfied by transferring a promised good or service to a customer.
Revenue Recognition
The Company’s product revenue consists of sales to distributors, and value-added resellers, or VARs and an OEM partner. The Company considers purchase orders such distributors, VARs and OEM partner issue to the Company, which are in some cases governed by master sales agreements, to be the Company's contracts with such customers, as such documents provide enforceable rights and obligations between the Company and distributor, VAR or OEM partner. As part of its consideration of the contract, the Company evaluates certain factors including the customer’s ability to pay (or credit risk). For each contract, the Company considers the promise to transfer goods or services to be the identified performance obligation. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. The Company allocates the transaction price to each distinct performance obligation based on its respective and relative standalone selling price. The Company recognizes revenue when control of the product or service is transferred to the customer (i.e., when the Company has met its performance obligation is satisfied). Further, in determining whether control has transferred, the Company considers if there is a present right to payment and legal title, along with risks and rewards of ownership having transferred to the customer.
The Company makes sales of products to most distributors under terms allowing certain price adjustments and limited rights of return (known as “stock rotation”) of the Company’s products held in their inventory. The Company recognizes

9



revenue from sales to distributors upon the transfer of control of the product to the distributor. Frequently, distributors need to sell product at a discounted price lower than the standard distribution price in order to win business. After the Company verifies that the distributor had obtained the Company's pre-approval for the discount claim, the Company may issue a credit memo to the distributor representing a rebate of the amount of the discount. In determining the transaction price, the Company considers these price adjustments to be variable consideration. The Company estimates such price adjustments using the expected-value method based on an analysis of actual credit claims and at the distributor level, over a period of time the Company considers adequate to account for current pricing and business trends. Historically, actual price adjustments relative to those the Company estimates and includes when determining the transaction price have not materially differed. Stock rotation rights provide distributor with the ability to return certain specified amounts of inventory. Stock rotation adjustments are an additional form of variable consideration which the Company also estimates using the expected-value method based on historical return rates. Historically, distributor stock rotation adjustments have not been material.

The Company makes sales to certain distributors, VARs and its OEM partner under terms that do not include rights of return or price concessions after the product is shipped. Accordingly, upon application of steps one through five above, the Company recognizes product revenue is recognized upon shipment and transfer of control.

The Company generally provides a limited lifetime warranty that its products will substantially conform to the published specifications. The Company limits its liability to either a credit equal to the purchase price or replacement of the defective part. The Company does not consider activities related to such warranty a separate performance obligation.

Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 90 days. In instances where the timing of the Company's revenue recognition differs from the timing of its invoicing, the Company has determined that its contracts generally do not include a significant financing component.

The Company records accounts receivable at the invoiced amount, net of an allowance for doubtful accounts. The Company recognizes a receivable in the period the Company deliver goods or provide services or when its right to consideration is unconditional.

Significant Judgments

The Company's contracts with customers often include promises to transfer multiple products and services to a customer. The Company may exercise significant judgment when determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together. The Company may also exercise judgment to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the hardware and recognized upon transfer of control.

The Company may further require judgment to determine the SSP for each distinct performance obligation. The Company determines SSP for the purposes of allocating the arrangement, primarily based on historical transaction pricing. The Company segregates historical transactions based on its pricing model and go-to-market strategy, which includes factors such as type of sales channel (VAR, OEM or distributor), the geographies in which the Company sells its products and services (domestic or international) and offering type (product series, software subscriptions and level of support for PCS).

Disaggregation of Revenue

Product Revenue - The Company’s product revenue consists of revenue from the sale of the Company’s hardware products, which each contain embedded software related to the Company's proprietary operating system that is not considered to be distinct in the context of the contract, HiveOS. Therefore, the Company considers its hardware appliances together with related embedded HiveOS software (collectively, “the hardware”) as a single performance obligation. The Company transfers these items to the customer concurrently. The Company recognizes hardware revenue upon transfer of control to its customers, which occurs upon shipment. The Company’s product revenue includes the sales of software licenses of HiveManager, a license-based unified networking management system, which consists of the purchase of a perpetual license of the HiveManager software. The Company generally recognizes revenue from its software licenses upon transfer of control to its customers.

Subscription and Support Revenue - The Company’s subscription and support revenue consists of revenue from SaaS and PCS arrangements. SaaS arrangements with customers do not provide the right to take possession of the software at any time during the hosting period and have a defined contract term. PCS arrangements include software updates, access to technical support personnel, and expedited replacement of defective hardware products. Each of the promised services is

10



distinct in the context of the contract as the services are not inputs to a combined output for which the Company provides any significant integration service, the provision of each service does not significantly modify or customize the other, and the Company could provide each service independently of the other. Though the Company has identified that each of the performance obligations are distinct, as each of the performance obligations represents a series of distinct services that have the same pattern of transfer (stand ready obligations) and the same measure of progress of transfer (days of service) the Company will account for the all series as a single performance obligation. The Company recognizes revenue from SaaS and PCS arrangements on a straight-line basis over the service contract term, which is typically one, three or five years. The contract term typically commences upon transfer of control of the corresponding products to our customer.

See the condensed consolidated statement of operations for the Company's product revenue and subscription and support revenue amounts for the three months ended March 31, 2018 and 2017, respectively.
Costs to Obtain and Fulfill a Contract

The Company capitalizes certain contract acquisition costs consisting primarily of commissions paid and the related payroll taxes when customer contracts are signed. The Company capitalizes commission expenses earned by sales personnel and the related payroll taxes that are incremental to obtaining customer contracts. The Company amortizes deferred sales commission amounts based on the expected future revenue streams under the customer contracts. The Company includes amortization of deferred sales commissions in sales and marketing expense in the accompanying consolidated statements of operations. The Company classifies deferred commissions as current or non-current based on the timing of when the Company expects to recognize the expense. The Company periodically reviews these costs for impairment.

The Company records deferred revenue when it invoices the customer, collection is probable, and the associated revenue has not yet been earned. The current portion of deferred revenue represents the amounts the Company expects to be recognized as revenue within one year of the condensed consolidated balance sheet date. See Note 3, Consolidated Balance Sheet Components, for the changes in the deferred revenue and deferred commissions during the three months ended March 31, 2018 and 2017, respectively.
Contracted-but-not-recognized revenue

The Company's contracted but not invoiced performance obligations do not include the option for its customers to cancel. The Company's revenue allocated to remaining performance obligations represents contracted revenue that the Company has not yet recognized (“contracted not recognized”), which includes deferred revenue and non-cancelable amounts that the Company will invoice and recognize as revenue in future periods. Contracted-but-not-recognized revenue was $72.3 million as of March 31, 2018, of which the Company expects to recognize approximately 53% of the revenue over the next 12 months and the remainder thereafter.
Other Recently Adopted Accounting Pronouncements
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments, to clarify certain aspects of ASU No. 2016-01. We adopted these standards effective January 1, 2018. The Company's adoption of these standards did not have a material impact on the Company's financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which provides guidance to decrease the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company adopted ASU 2016-15 in the first quarter of 2018. The Company's adoption of this standard did not have a material impact on the Company's financial statements.
    
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the lease accounting requirements in Topic 840. This standard requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The standard also requires qualitative and quantitative disclosures to supplement the amounts recorded in the financial statements so that

11



users can understand more about the nature of an entity’s leasing activities, including the Company's significant judgments and changes in judgments. This standard is effective beginning in fiscal year 2019. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. An impairment charge will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The standard is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company plans to adopt this standard in 2021 when it becomes effective.
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The Company maintains cash equivalents in money market funds. The Company maintains short-term investments in U.S. treasuries, corporate securities, and commercial paper.
The Company sells its products primarily to channel partners, which include value-added resellers, or VARs, distributors, Managed Service Providers, or MSPs, and Original Equipment Manufacturers, or OEMs. The Company’s accounts receivable are typically unsecured and are derived from revenue earned from customers located in the Americas, Europe, the Middle East and Africa, and Asia Pacific. The Company performs ongoing credit evaluations to determine customer credit, but generally does not require collateral from its customers. The Company maintains reserves for estimated credit losses and these losses have historically been within management’s expectations. 
The Company has entered into separate agreements with certain individual distributors that are part of a consolidated group of entities which collectively constitutes greater than 10% of the Company’s total revenue or gross accounts receivable balance for certain periods, as presented in the tables below.
The percentages of revenue from a consolidated group of entities (Distributor A and Distributor B) greater than 10% of total consolidated revenue were as follows:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
 
 
(As Adjusted)
Distributor A
 
17.2
%
 
15.1
%
Distributor B
 
35.1
%
 
19.6
%
 
The percentages of receivables from Distributor A and Distributor B greater than 10% of total consolidated accounts receivable were as follows:
 
 
March 31,
 
December 31,
 
 
2018
 
2017
Distributor A
 
22.9
%
 
27.9
%
Distributor B
 
32.0
%
 
29.4
%


12



2. FAIR VALUE MEASUREMENTS
The Company records its financial assets and liabilities at fair value. The Company categorizes these assets and liabilities based upon the level of judgment associated with inputs the Company uses to measure the fair value. The categories are as follows:
Level 1
 
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2
 
Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3
 
Unobservable inputs are used when little or no market data is available.
The Company classified its cash equivalents and short-term marketable investments within Level 1 and Level 2 in the fair value hierarchy as of March 31, 2018 and December 31, 2017, respectively. Level 1 assets include highly liquid money market funds that the Company includes in cash equivalents. The Company classifies these instruments within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. Level 2 assets include U.S. treasuries, corporate securities, agency securities and commercial paper. The Company classifies these instruments within Level 2 of the fair value hierarchy because they are valued based on pricing obtained from an independent pricing service, which may use quoted market prices for identical or comparable instruments or model driven valuations using observable market date or inputs corroborated by observable market data. The Company classifies these instruments as short-term investments unless their maturities are three months or less when purchased, in which case the Company includes them in cash and cash equivalents. The Company uses inputs such as actual trade data, benchmark yields, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency, which the Company obtains from quoted market prices, independent pricing vendors, or other sources, to determine the ultimate fair value of these assets.
The components of the Company’s Level 1 and Level 2 assets are as follows:
 
March 31, 2018
 
Amortized Cost
 
Gross Unrealized Gain (Loss)
 
Estimated Fair Value
 
Cash equivalents
 
Short-term investments
 
(in thousands)
Level 1:
 
 
 
 
 
 
 
 
 
Money market funds
6,937

 

 
6,937

 
6,937

 

 
$
6,937

 
$

 
$
6,937

 
$
6,937

 
$

Level 2:
 
 
 
 
 
 
 
 
 
U.S. treasuries
9,411

 
(13
)
 
9,398

 

 
9,398

Corporate securities
19,911

 
(56
)
 
19,855

 

 
19,855

Commercial paper
29,133

 

 
29,133

 
1,998

 
27,135

 
$
58,455

 
$
(69
)
 
$
58,386

 
$
1,998

 
$
56,388

Total
$
65,392

 
$
(69
)
 
$
65,323

 
$
8,935

 
$
56,388


 
December 31, 2017
 
Amortized Cost
 
Gross Unrealized Gain (Loss)
 
Estimated Fair Value
 
Cash equivalents
 
Short-term investments
 
(in thousands)
Level 1:
 
 
 
 
 
 
 
 
 
Money market funds
7,538

 

 
7,538

 
7,538

 

 
$
7,538

 
$

 
$
7,538

 
$
7,538

 
$

Level 2:
 
 
 
 
 
 
 
 
 
U.S. treasuries
9,480

 
(3
)
 
9,477

 

 
9,477

Corporate securities
15,293

 
(27
)
 
15,266

 

 
15,266

Commercial paper
32,932

 

 
32,932

 

 
32,932

 
$
57,705

 
$
(30
)
 
$
57,675

 
$

 
$
57,675

Total
$
65,243

 
$
(30
)
 
$
65,213

 
$
7,538

 
$
57,675


13



All short-term investments the Company held as of March 31, 2018 and December 31, 2017 contractually mature within one year from these respective dates.
Unrealized gains and losses related to these investments are due to interest rate fluctuations as opposed to credit quality. In addition, the Company does not intend to sell, and it is not more likely than not that the Company would be required to sell, these investments before recovery of their cost basis. As a result, there was no other-than-temporary impairment for these investments as of March 31, 2018 and December 31, 2017.  
3. CONSOLIDATED BALANCE SHEET COMPONENTS
Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
 
 
 
March 31,
 
December 31,
 
 
 
2018
 
2017
 
 
 
 
 
(As Adjusted)
 
 
 
(in thousands)
Deferred sales commissions, current portion
 
 
$
3,100

 
$
3,072

Prepaid expenses
 
 
2,543

 
2,543

Other
 
 
562

 
781

Total prepaid expenses and other current assets
 
 
$
6,205

 
$
6,396

Property and Equipment, net
Property and equipment, net consists of the following:
 
 
 
 
March 31,
 
December 31,
 
 
Estimated Useful Lives
 
2018
 
2017
 
 
 
 
(in thousands)
Computer and other equipment
 
3 years
 
$
1,714

 
$
1,713

Manufacturing, research and development laboratory equipment
 
3 years
 
4,888

 
4,630

Software
 
2 to 5 years
 
9,230

 
8,182

Office furniture and equipment
 
3 to 7 years
 
2,061

 
2,061

Leasehold improvements
 
shorter of useful life or lease term
 
1,025

 
1,017

Property and equipment, gross
 
 
 
18,918

 
17,603

Less: Accumulated depreciation and amortization
 
 
 
(11,930
)
 
(11,222
)
Property and equipment, net
 
 
 
$
6,988

 
$
6,381

The software category includes the capitalized software for the Company's cloud service platform. The Company amortizes these capitalized costs to cost of subscription and support revenue on a straight-line basis over an estimated useful life of the software of five years.
Depreciation and amortization expense was $0.7 million and $0.8 million for the three months ended March 31, 2018 and 2017, respectively.
Office furniture and equipment classified under capital lease was $1.2 million at March 31, 2018 and December 31, 2017 respectively, and the related accumulated depreciation was $0.5 million and $0.4 million at March 31, 2018 and December 31, 2017, respectively.
Other assets
Other assets consist of the following:

14



 
 
 
March 31,
 
December 31,
 
 
 
2018
 
2017
 
 
 
 
 
(As Adjusted)
 
 
 
(in thousands)
Deferred sales commissions, non-current portion
 
 
$
2,985

 
$
2,947

Investment in privately held company
 
 
1,500

 
1,500

Other
 
 
524

 
453

Total other assets
 
 
$
5,009

 
$
4,900


Deferred Commission
The current portion of deferred commission represents the amounts that the Company expects to be recognized as commission expense within one year of the consolidated balance sheet date. Significant changes in the balance of total deferred commission (contract asset) during the three months ended March 31, 2018 and March 31, 2017 are as follows:

 
 
 
Three Months Ended March 31,
 
 
 
2018
 
2017
 
 
 
 
 
(As Adjusted)
 
 
 
(in thousands)
Beginning balance
 
 
$
6,019

 
$
5,766

Recognized
 
 
(3,018
)
 
(3,224
)
Additions
 
 
3,084

 
3,416

Ending balance
 
 
$
6,085

 
$
5,958

Current portion
 
 
$
3,100

 
$
2,928

Non-current portion
 
 
$
2,985

 
$
3,030


Of the $6.1 million total deferred commission balance as of March 31, 2018, the Company expects to recognize approximately 51% as commission expense over the next 12 months and the remainder thereafter.
In January 2016, the Company paid $1.5 million in cash to purchase a convertible note issued by a privately held company, which provides Wi-Fi application and analytics. In June 2017, the convertible note and accrued interest on the note converted into shares of preferred stock of the privately held company and the note was canceled. The accrued interest on the note was immaterial. The Company currently has no significant voting rights, investor rights or influence over the privately held company. Since the investment has no readily determinable market value, the Company elected the measurement alternative. As of March 31, 2018, the Company carried the investment at the value of original principal and the Company reviews such carried value quarterly for indicators of fair value changes when there are observable prices less any potential impairment. The Company did not recognize a change in value or impairment for the three months ended March 31, 2018 and 2017, as there were no identified events or changes in circumstances that might have a significant impact on the carrying value. The Company has classified the investment as other assets on the condensed consolidated balance sheet.
Accrued Liabilities
Accrued liabilities consist of the following:
 
 
 
March 31,
 
December 31,
 
 
 
2018
 
2017
 
 
 
(in thousands)
Accrued compensation
 
 
$
6,691

 
$
6,971

Accrued expenses and other liabilities
 
 
903

 
1,385

Warranty liability, current portion
 
 
217

 
246

Total accrued liabilities
 
 
$
7,811

 
$
8,602


15



Deferred Revenue
The current portion of deferred revenue represents the amounts that the Company expects to recognize as revenue within one year of the consolidated balance sheet date. Significant changes in the balance of total deferred revenue (contract liability) during the three months ended March 31, 2018 and March 31, 2017 are as follows:
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
(As Adjusted)
 
(in thousands)
Beginning balance
$
67,040

 
$
63,239

Recognized
(10,701
)
 
(9,362
)
Additions
11,539

 
8,387

Ending balance
$
67,878

 
$
62,264

Current portion
$
33,885

 
$
30,326

Non-current portion
$
33,993

 
$
31,938


Of the $67.9 million total deferred revenue balance as of March 31, 2018, the Company expects to recognize approximately 50% as revenue over the next 12 months and the remainder thereafter.
Warranty Liability
The following table summarizes the activity related to the Company’s accrued liability for estimated future warranty:
 
Three Months Ended March 31,
 
2018
 
2017
 
(in thousands)
Beginning balance
$
577

 
$
975

Charges to operations
126

 
121

Obligations fulfilled
(153
)
 
(197
)
Changes in existing warranty
(4
)
 
(42
)
Total product warranties
$
546

 
$
857

Current portion
$
217

 
$
516

Non-current portion
$
329

 
$
341

Changes in existing warranty reflect a combination of changes in expected warranty claims and changes in the related costs to service such claims.
4. DEBT
Financing Agreements
In June 2012, the Company entered into a revolving credit facility with Silicon Valley Bank (the "Revolving Credit Facility"). The Revolving Credit Facility is collateralized by substantially all of the Company’s property, other than intellectual property. Since January 1, 2016, the Revolving Credit Facility bears interest rate at the lesser of (i) LIBOR rate plus 1.75% or (ii) prime rate minus 1.0%. In March 2017, the Company further amended the Revolving Credit Facility to extend the maturity date by two years and reduce the minimum cash requirements. The weighted-average interest rate of the Revolving Credit Facility was 3.28% and 2.57% for the three months ended March 31, 2018 and 2017, respectively.
The Revolving Credit Facility contains customary negative covenants which, unless waived by the bank, limit the Company’s ability to, among other things, incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets or engage in merger and acquisition activity, including merge or consolidate with a third party. The Revolving Credit Facility also requires the Company to maintain a minimum adjusted quick ratio of 1.25 to 1.00 and a minimum cash balance with the bank as of the last day of each month of $35.0 million and to demonstrate the absence of

16



defined events of default in order to assure full access to the available borrowing. The Revolving Credit Facility also contains customary events of default, subject to customary cure periods for certain defaults, that include, among other things, non-payment defaults, covenant defaults, material judgment defaults, bankruptcy and insolvency defaults, cross-defaults to certain other material indebtedness, and defaults due to inaccuracy of representation and warranties. Upon an event of default, the lender may declare all or a portion of the outstanding obligations payable by the Company to be immediately due and payable and exercise other rights and remedies provided for under the Revolving Credit Facility. During the existence of an event of default, interest on the obligations under the Revolving Credit Facility could be increased by 5.0%. As of March 31, 2018, the Company was in compliance with these covenants.
The Revolving Credit facility currently provides, among other things (i) a maturity date of March 31, 2019; and (ii) a revolving line up to $20.0 million, subject to certain conditions.
As of March 31, 2018, $20.0 million remains outstanding under the Revolving Credit Facility, and the Company classifies this amount as a current liability in the condensed consolidated balance sheet.
5. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company currently leases its main office facility in Milpitas, California, which lease is set to expire in June 2023. In addition, the Company leases office space for its subsidiaries in the United Kingdom, the Netherlands, Korea and China under non-cancelable operating leases that expire at various times through September 2022. The Company has also entered into various lease agreements in other locations in the United States and globally to support its sales and research and development functions.
The Company recognizes rent expense on a straight-line basis over the respective lease period. Future minimum lease payments by year under operating leases as of March 31, 2018 are as follows:
 
Amount
Year Ending December 31,
(in thousands)
2018 (remaining nine months)
$
1,185

2019
1,471

2020
1,103

2021
1,090

2022
999

Thereafter
445

Total
$
6,293

Rent expense was $0.5 million for the three months ended March 31, 2018 and 2017.

17



Capital Lease Obligations
The Company has certain office furniture and equipment that it classifies under capital leases. The terms of the capital leases range from three years to seven years. The interest expense is immaterial in any particular period. Future minimum lease payments by year under capital lease obligations as of March 31, 2018 are as follows:
 
Amount
Year Ending December 31,
(in thousands)
2018 (remaining nine months)
$
141

2019
178

2020
172

2021
170

2022
162

Thereafter
83

Total
$
906

Manufacturing Commitments
The Company subcontracts with manufacturing companies to manufacture its hardware products. The contract manufacturers procure components based on non-cancelable orders the Company places with them. If the Company cancels all or part of an order, the Company is liable to the contract manufacturers for the cost of the related components they purchased under such orders.
As of March 31, 2018 and December 31, 2017, the Company had manufacturing commitments with contract manufacturers for inventory totaling approximately $3.9 million and $6.0 million, respectively.
Contingencies
The Company may be subject to legal proceedings and litigation arising from time to time. The Company will record a liability when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated. The Company expects periodically to evaluate developments in its legal matters that could affect the amount of liability that it has previously accrued, if any, and make adjustments as appropriate. The Company exercises significant judgment to determine both likelihood of there being, and the estimated amount of, a loss related to such matters, and the Company’s judgment may be incorrect. The Company cannot reasonably determine in advance the outcome of any litigation proceeding. Until the final resolution of any such matter for which the Company may be required to accrue, the Company may have an exposure to loss in excess of the amount the Company has accrued, and such excess amount could be significant.
The Company is currently engaged in the following separate security litigations:
In January 2018, three purported class actions were filed in the United States District Court for the Northern District of California against the Company and two of its officers.  The actions are McGovney v. Aerohive Networks, Inc., et al., Case No. 5:18-cv-00435, Beyerbach v. Aerohive Networks, Inc., et al., Case No. 5:18-cv-0544 and Panjabi v. Aerohive Networks, Inc., et al., Case No. 5:18-cv-00656.  The complaints allege that the defendants made false and misleading statements, in particular regarding the Company’s financial outlook for the fourth quarter of 2017. The complaints assert claims for violations of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 on behalf of those who purchased the Company’s common stock between November 1, 2017 and January 16, 2018, inclusive. The complaints seek monetary damages in an unspecified amount.  On March 20, 2018, three shareholders filed respective motions to consolidate the three cases and to be appointed lead plaintiff for a class.  The Company anticipates that these cases will be consolidated and that a court-appointed lead plaintiff will file a consolidated complaint later this year.
On March 26, 2018, a purported shareholder derivative complaint was filed in the California Superior Court for the County of Santa Clara against the Company’s board of directors and two of its officers.  The action is titled Flores v. Flynn, et.al, Case No. 18CV325517.  The complaint alleges that the same general conduct alleged in the securities class actions also constituted a breach of fiduciary duty, waste of corporate assets, abuse of control, mismanagement, and unjust enrichment.  The complaint seeks monetary damages in an unspecified amount, restitution, and certain changes to the Company’s corporate governance and internal procedures.

18



The outcomes of the legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to the Company's operating results and cash flows for any particular period.
The Company intends to defend these lawsuits vigorously, and is not able to predict or estimate any range of reasonably possible loss related to these lawsuits. If these matters have an adverse outcome, they may have a material impact on the Company’s financial position, results of operations or cash flows.       
Guarantees
The Company typically enters into agreements with its customers that contain indemnification provisions in the event of claims alleging that the Company’s products infringe the intellectual property rights of a third party. The Company has at its option and expense, the ability to resolve any infringement, replace product with a non-infringing product that is equivalent-in-function, or refund to the customers the total product price. These agreements also typically include guarantees of product and service performance. The Company has not recorded a liability related to these indemnification and guarantee provisions and the Company’s indemnification and guarantee provisions have not had any impact on the consolidated financial statements to date.
6. STOCKHOLDERS' EQUITY
Common Stock reserved for Future Issuance
As of March 31, 2018, the Company had the following reserved shares of common stock for future issuance:
 
March 31,
 
2018
Common stock reserved for future grant under the 2014 Equity Incentive Plan
11,033,424

Common stock reserved for future purchase under the 2014 Employee Stock Purchase Plan
2,169,988

Options and Restricted Stock Units issued and outstanding
7,559,655

Total reserved shares of common stock for future issuance
20,763,067


Stock Repurchase Program
In February 2016, the Company's board of directors authorized a stock repurchase program of up to $10.0 million, with stock purchases made from time to time in compliance with applicable securities laws in the open market or in privately negotiated transactions. The timing and amounts of any purchases will be based on market conditions and other factors including price, regulatory requirements and capital availability. The authorization does not require the purchase of any minimum number of shares, and the Company may suspend, modify or discontinue the program at any time without prior notice. In August 2017, the Company's board of directors extended this program to June 30, 2018. In November 2017, the Company's board of directors increased the authorized amount under this program to $20.0 million.
During the three months ended March 31, 2018 and the three months ended March 31, 2017, the Company did not repurchase any shares. As of March 31, 2018, the Company had repurchased under this program 1,361,243 shares of its common stock at a total price $6.2 million with an average purchase price $4.57 per share of our common stock. Approximately $13.8 million remains available to the Company as of March 31, 2018 for repurchases under this program.

7. STOCK-BASED COMPENSATION
2014 Equity Incentive Plan
On March 26, 2014, the Company's 2014 Equity Incentive Plan ("2014 Plan") became effective. On March 27, 2014, the Company terminated its earlier 2006 Global Share Plan ("2006 Plan"), added all reserved-but-unissued shares under the 2006 Plan to the 2014 Plan and rolled into the 2014 Plan all shares underlying stock awards granted under the 2006 Plan that otherwise would return to the 2006 Plan. The Company may not grant additional awards under the 2006 Plan, but the 2006 Plan will continue to govern outstanding awards previously granted under the 2006 Plan.
The 2014 Plan provides for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code, only to employees of the Company or any parent or subsidiary of the Company, and for the grant of

19



nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to employees, directors and consultants of the Company, and the employees and consultants of any parent or subsidiary of the Company.
In January 2018, the Company effected an increase of 2,708,575 shares reserved under the 2014 Plan. As of March 31, 2018, the Company had 11,033,424 total shares of common stock reserved and available for grant under the 2014 Plan.
The following table summarizes the total number of shares available for grant under the 2014 Plan as of March 31, 2018:
 
 
 
Shares Available for Grant
 
 
Balance, December 31, 2017
7,997,691

Authorized
2,708,575

Options granted

Options canceled
94,449

Awards granted
(304,188
)
Awards canceled
536,897

Balance, March 31, 2018
11,033,424

Stock Options
The following table summarizes the information about outstanding stock option activity:
 
Options Outstanding
 
Number of
Shares
Underlying
Outstanding
Options
 
Weighted
Average
Exercise 
Price
 
Weighted
Average
Remaining
Contractual Term
(Years)
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
(in thousands)
Balance, December 31, 2017
4,247,911

 
$
6.03

 
5.80
 
$
4,472

Options granted

 

 
 
 
 
Options exercised
(7,125
)
 
1.22

 
 
 
 
Options canceled
(94,449
)
 
6.43

 
 
 
 
Balance, March 31, 2018
4,146,337

 
$
6.03

 
5.54
 
$
2,602

Options exercisable, March 31, 2018
3,607,547

 
$
5.94

 
5.24
 
$
2,602

There were no options granted during the three months ended March 31, 2018 and 2017.
The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2018 and 2017 was $0.03 million and $0.4 million, respectively. The intrinsic value for each share underlying an option represents the difference between the option exercise price per share and the closing stock price of a share of the Company’s common stock. The total grant-date fair value of the options vested was $0.7 million and $4.8 million, respectively, during the three months ended March 31, 2018 and 2017, respectively.
Restricted Stock Units
The Company currently grants Restricted Stock Units (RSUs) to certain employees and directors. The RSUs typically vest over a period of time, generally one to three years, and are subject to the participant’s continuing service to the Company over that period. Until vested, RSUs do not have the voting and dividend participation rights of common stock and the shares underlying the awards are not considered issued and outstanding.

20



The following is a summary of the Company’s RSU grant activity and related information for the three months ended March 31, 2018:
 
Restricted Stock Units Outstanding
 
Shares
 
Weighted-Average
Grant-Date
Fair Value Per Share
 
 
 
 
Balance, December 31, 2017
4,089,067

 
$
6.47

Awards granted
304,188

 
4.30

Awards vested
(699,069
)
 
5.29

Awards canceled
(280,868
)
 
5.45

Balance, March 31, 2018
3,413,318

 
$
5.32


The weighted-average grant-date fair value of RSUs the Company granted during the three months ended March 31, 2018 and 2017 was $4.30 and $5.00 per share, respectively. The aggregate grant-date fair value of RSUs the Company granted during the three months ended March 31, 2018 and 2017 was $3.7 and $4.0 million, respectively. The aggregate fair value of shares vested as of the respective vesting dates during the three months ended March 31, 2018 and 2017 was $1.3 and $2.2 million, respectively.
The number of RSUs vested during a particular period includes shares that the Company withheld during the period on behalf of certain employees to satisfy the minimum statutory tax withholding requirements, as determined by the Company. During the three months ended March 31, 2018 and 2017, the Company withheld 256,029 and 70,368 shares of stock, respectively, for an aggregate value of $1.1 million and $0.3 million, respectively. The Company returned such withheld shares to the 2014 Plan, which were then available under the plan terms for future issuance.
In the three months ended March 31, 2017, Company granted 378,644 shares of RSUs as performance-based restricted stock units (PBRSUs) to certain executives pursuant to the 2014 Plan. Each PBRSU represents the right to receive one share of the Company's common stock upon vesting, subject to the Company's achievement of certain performance conditions. 251,037 of these PBRSU awards vested in the three months ended March 2018. The Company did not grant any PBRSUs during the three months ended March 31, 2018.
            The Company granted 358,000 market-based restricted stock units (MBRSUs) to certain executives in June 2017 pursuant to the 2014 Plan. Each MBRSU represents the right to receive one share of the Company's common stock upon vesting subject to the Company's achievement of certain stock price targets. The Company estimated the fair value of the MBRSUs using the Monte Carlo option-pricing model as of the date of grant as the MBRSUs contain both market and service conditions. The weighted-average grant-date fair value of these MBRSUs was $4.18 per share. The Company will record the total expense related to all of the MBRSUs on a graded-vesting method over the estimated term.  36,625 of these MBRSU awards vested in the three months ended March 31, 2018. The Company did not grant any MBRSUs during the three months ended March 31, 2018 and March 31, 2017.     
2014 Employee Stock Purchase Plan
The 2014 Employee Stock Purchase Plan ("ESPP") is a ten-year plan, effective in March 2014. The ESPP authorizes the Company to issue shares of common stock pursuant to purchase rights it grants to its employees and those of its designated subsidiaries. In January 2018, the Company effected an increase of 541,715 shares reserved under the ESPP. As of March 31, 2018, the Company had 2,169,988 total shares of common stock reserved and available for issuance under the ESPP.
Under the ESPP, the Company grants stock purchase rights to all eligible employees, currently covering a one-year offering period ending December 1, 2018, with purchase dates at the end of each interim six-month purchase period. Employees purchase shares using employee payroll deductions at purchase prices equal to 85% of the lesser of the fair market value of the Company’s common stock at either the first day of each offering period or the date of purchase. The ESPP currently has a reset provision: If the closing price of the Company’s common stock on the last day of any purchase period during an offering period is lower than the closing sales price on the first day of the related offering period, that offering period will terminate upon the purchase of shares for such purchase period and participants will be automatically re-enrolled in the immediately following offering period. As a result, the reference price for purposes of determining the purchase price of shares for subsequent purchase periods for all participants of the new offering period resets to such lower price. No participant may purchase more

21



than $25,000 worth of common stock in any calendar year, or 5,000 shares of common stock in any six-month purchase period. The Company did not issue any shares under the ESPP during the three months ended March 31, 2018 and March 31, 2017.
Determination of Fair Values
Weighted-average assumptions to value employee stock purchase rights under the Black-Scholes model were as follows:
 
Three Months Ended March 31,
 
2018
 
2017
ESPP purchase rights:
 
 
 
Expected term (in years)
0.50 - 1.00
 
0.50 - 1.00
Expected volatility
46% - 48%
 
34% - 39%
Risk free interest rate
1.45% - 1.62%
 
0.60% - 0.82%
Stock-based Compensation Expense
The Company recognized total stock-based compensation for stock-based awards in the condensed consolidated statements of operations as follows:
 
Three Months Ended March 31,
 
2018
 
2017
 
(in thousands)
Cost of revenue
$
246

 
$
271

Research and development
1,046

 
688

Sales and marketing
997

 
1,294

General and administrative
1,382

 
1,300

Total stock-based compensation
$
3,671

 
$
3,553

The following table presents stock-based compensation expense by award-type:
 
Three Months Ended March 31,
 
2018
 
2017
 
(in thousands)
Stock Options
$
541

 
$
883

Restricted Stock Units
2,792

 
2,270

Employee Stock Purchase Plan
338

 
400

Total stock-based compensation
$
3,671

 
$
3,553

The stock-based compensation expense the Company recorded for restricted stock units for the three months ended March 31, 2018 and 2017 includes the amount of stock-based compensation recorded for PBRSUs of approximately $0.2 million and $0.1 million, respectively and MBRSUs of approximately $0.2 million and $0.01 million, respectively.
As of March 31, 2018, unrecognized stock-based compensation related to outstanding stock options, RSUs, including performance-based and market-based RSUs and ESPP purchase rights, was $1.7 million, $14.3 million and $0.9 million, respectively, which the Company expects to recognize over weighted-average periods of 1.24 years, 1.72 years and 0.67 years, respectively.
8. NET LOSS PER SHARE
The Company calculates basic and diluted net loss per share by dividing the net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is the same as basic net loss per share, since the effects of potentially dilutive securities are antidilutive.
The following table presents the computation of basic and diluted net loss per share:

22



 
Three Months Ended March 31,
  
2018
 
2017
 
 
 
(As Adjusted)
 
(in thousands, except for share and per share data)
Numerator:
 
 
 
Net loss
$
(7,317
)
 
$
(9,118
)
Denominator:
 
 
 
Weighted-average shares used to compute net loss per share, basic and diluted
54,332,767

 
52,439,039

Net loss per share:
 
 
 
Basic and diluted
$
(0.13
)
 
$
(0.17
)
The Company excluded the following period-end outstanding common stock equivalents from its computation of diluted net loss per share for the periods presented because including them would have been antidilutive:
 
As of March 31,
 
2018
 
2017
Shares of common stock issuable under the Equity Incentive Plan
7,559,655

 
9,465,157

Employee Stock Purchase Plan
456,426

 
470,217

Total
8,016,081

 
9,935,374

9. INCOME TAXES
The Company's provision for income taxes was approximately $0.1 million, for the three months ended March 31, 2018 and 2017. The Company's provision for income taxes consisted primarily of state taxes and foreign income taxes.
For the three months ended March 31, 2018 and 2017, the Company's provision for income taxes differed from the statutory amount primarily due to the Company's maintaining a full valuation allowance against the U.S. net deferred tax assets, partially offset by foreign and state taxes.
The Company has intercompany services agreements with its subsidiaries located in the United Kingdom, the Netherlands, New Zealand, Australia, Canada and China, which require payment for services rendered by these subsidiaries at an arm’s-length transaction price. The foreign tax expense represents foreign income tax payable by these subsidiaries on profit generated on intercompany services agreements.
The Company's realization of deferred tax assets depends on future taxable income, the existence and timing of which is uncertain. Based on the Company’s history of losses, management has determined it cannot conclude that it is more likely than not that the deferred tax assets will be realized and, accordingly, management has placed a full valuation allowance against its domestic deferred tax assets, including net operating loss carryforwards and research and development and other tax credits, as of March 31, 2018 and December 31, 2017, respectively.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one‑time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (6) creating the base erosion anti‑abuse tax (“BEAT”), a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
The Company has not completed its accounting assessment for the effects of the Tax Act; however, based on its initial assessment, the Company has determined that the Tax Act did not have a material effect on its consolidated financial statements for the three months ended March 31, 2018. 
10. SEGMENT INFORMATION

23



The Company’s chief operating decision maker (CODM) is its Chief Executive Officer. The Company derives its revenue primarily from sales of products and subscription and support services. The Company’s CODM reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, the Company determined that it operates as one reportable and operating segment.
The following table represents the Company's revenue based on the billing address of the respective channel partners:
 
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
(As Adjusted)
 
(in thousands)
Americas
$
20,830

 
$
23,896

Europe, Middle East and Africa
11,900

 
9,832

Asia Pacific
3,037

 
2,601

Total revenues
$
35,767

 
$
36,329

     The Company has included within Americas in the above table revenue from sales in the United States of $19.0 million and $22.0 million, respectively, for the three months ended March 31, 2018 and 2017. Aside from the United States, no country comprised 10% or more of the Company's total revenue for each of the three months ended March 31, 2018 and 2017, respectively.
Property and equipment, net by location is summarized as follows:  
 
March 31,
 
December 31,
 
2018
 
2017
 
(in thousands)
United States
$
6,366

 
$
5,323

People's Republic of China
512

 
875

United Kingdom
110

 
183

Total property and equipment, net
$
6,988

 
$
6,381


24



ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis contains forward-looking statements reflecting our current expectations and involves risks and uncertainties. We intend to identify forward-looking statements when we use the words “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” and similar expressions that convey uncertainty of future events or outcomes. Our actual results and the timing of events may differ materially from those we discuss in our forward-looking statements as a result of various factors, including those we discuss below and those we discuss in the section entitled "Risk Factors" included in this Quarterly Report on Form 10-Q.
These forward-looking statements include, but are not limited to, statements concerning the following:
our ability to predict our revenue, operating results and gross margin accurately;
our ability to timely develop, deliver and transition to new product offerings and pricing strategies, and transition existing and new end-customers to such offerings and strategies, while maintaining existing revenue and margins and our existing service level commitments to end-customers;
our ability to continue to secure orders from larger customers and any potential loss of or reductions in orders from such larger customers;
our ability to maximize sales to our education vertical, including in conjunction with opportunities from the U.S. Federal Communications Commission’s E-Rate program and the timing and uncertainty of the availability of such funding, the level of available funding and the decisions by end-customers to purchase our products using such funding;
the length and seasonal unpredictability of our sales cycles, including with service provider end-customers;
the effects of increased competition in and consolidation of our market and our ability to compete with larger competitors with greater financial, technical and other resources;
our ability to continue to enhance and broaden our product and solutions offerings and bring new products, product functionality and solutions to market;
our ability to attract new end-customers within the verticals and geographies in which we currently operate;
changes in global consumer confidence and demand for our products internationally, due to changes to foreign currency exchange rates and other factors;
our ability to continue to build and enhance relationships with channel partners and to derive revenue from our investments in those partnerships, particularly with our strategic partners;
our ability to protect our intellectual property and our exposure to third party claims that we or our customers or channel partners infringe their intellectual property; and
other risk factors included under the section titled “Risk Factors.”    
These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in “Risk Factors” included in Part II, Item 1A and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances we discuss in this report may not occur, and our actual results could differ materially and adversely from those we anticipate or imply in the forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, we caution you not to place undue reliance on such forward-looking statements.
Overview
Our goal is to be a leading independent cloud networking company by simplifying and transforming the connected experience through information, applications and insights. We have designed and developed a leading cloud-managed networking platform that enables enterprises to deploy and manage a mobile-centric network edge. Our platform builds on the foundation of our Wi-Fi and wired network infrastructure. Our platform also connects and stores valuable data about the

25



network and network users that can enable better IT and business applications. Customers around the world, from Fortune 500 businesses to small schools, have chosen our products.
For the three months ended March 31, 2018, our revenue was $35.8 million, a decline of $0.6 million, compared to $36.3 million for the three months ended March 31, 2017. In the three months ended March 31, 2018 and 2017, our net losses were $7.3 million and $9.1 million, respectively.
We primarily conduct business in three geographic regions: (1) Americas, (2) Europe, the Middle East and Africa, or EMEA, and (3) Asia Pacific, or APAC. From a geographic perspective, year-over-year revenue decreased in the three months ended March 31, 2018, compared to the three months ended March 31, 2017 by 12.8% in the Americas, and increased by 21.0% in EMEA and 16.8% in APAC. For the three months ended March 31, 2018, we generated 58.2% of our total revenue from Americas, 33.3% from EMEA and 8.5% from APAC.
We believe that the growth of our business and our future success depends upon many factors, including our ability to continue to develop innovative technologies and timely provide new product offerings to the marketplace; increase our sales capabilities and develop our channel partner program; acquire new end customers, expand our end customer base and increase penetration within our existing end customer base (including through new product offerings); and demonstrate revenue growth to our investors and financial analysts while also demonstrating that we can achieve profitability on an acceptable timeline and predictably maintain profitability thereafter.
We operate in the highly competitive wired and wireless network access products market, which is characterized by rapid technological innovation. We will need to continue to innovate in order to achieve market adoption of our products and services. We have continued the expansion of our product portfolio with the release of new Wi-Fi access points, access switches, SD-WAN routers and management software to allow us to deliver a unified wired and wireless network edge.
In the wireless market, we have seen almost all customer demand shift to the 802.11ac standard, which uses new radio hardware to deliver substantially higher wireless performance. In 2016, we continued the push towards higher performance with the release of our 802.11ac "wave2" access points. We also continue to develop new functionality in our product offerings to take advantage of the changes to industry standards, including continued evolution of "Wave 2" and we plan to release products based on the emerging 802.11ax standard this summer.
We believe we have a unique market opportunity based on our ability to deliver unified Wi-Fi, switch and SD-WAN router solutions operating on a single, unified management platform, with subscription-based SaaS solutions and data analytics, at a low entry and operating cost, and the ability to tailor and expand based on each user's needs. We have developed a cloud-based services platform to provide network management and support additional value-added applications. HiveManager (which we formerly called HiveManager NG), the newest version of our network management application, HiveManager Classic, provides a single management interface that customers use to configure network policies, monitor and troubleshoot performance, manage access and security, and run reports on network operations. We will continue to sell and support the legacy version of HiveManager Classic. However, our focus is to continue to transition our business to HiveManager and make our cloud-services platform and applications available to customers in either a subscription-based public cloud or on-premises private cloud deployment. We announced in January 2017, HiveManager Connect, a simplified version of HiveManager included as a part of our new Aerohive Connect product line. Under the Aerohive Connect program, customers may purchase a less complex, connectivity-oriented solution at attractive entry-point pricing. Aerohive Connect customers can expand their Connect deployment, as needed, and can add subscriptions or licenses to upgrade to our full-featured Select offering and premium support services. Our Aerohive Connect and Select offerings are available across our entire portfolio of access points and switches. We believe that separating our product line into these two offerings deliver compellingly priced cloud-managed hardware for connectivity-oriented deployments and enables us to capture more subscription and software license revenue from those customers who require a more advanced feature set and support. In November 2017, we announced that we had entered an OEM agreement with Dell EMC to deliver Aerohive's Wi-Fi access point hardware and HiveManager cloud services platform. The agreement includes joint sales, marketing, support services and logistic investments, and combines Aerohive's technology with Dell EMC's go-to-market and support capabilities through Dell EMC sales teams, Dell EMC channel partners, and Dell EMC services offerings. We also announced later in 2017 our SD-WAN solution for highly distributed commercial enterprises, retail chains and long-term healthcare providers which, when combined with our existing SD-LAN offering, enables organizations to simplify branch deployments with a unified cloud-managed Wi-Fi, switching, and SD-WAN VPN routing solution. In addition, in early 2018 we announced our A3 secure access management and authentication product, Aerohive Atom AP30 pluggable access point and development of a family of enterprise-class 802.11ax access points.
Our business is seasonally driven by annual budget cycles in the enterprise and spending seasonality in the education vertical. The buying cycle for K-12 schools in the United States historically has driven strong sequential growth for us in the second quarter. We expect this seasonality to continue into 2018, as well.

26



A substantial portion of our revenue has, historically, depended on the volatile education market, which has brought uncertainty to our results in particular quarters. For this reason, a priority for our business continues to be to expand and diversify our offerings and revenue opportunities into other verticals, with particular focus on enterprise customers. We also intend to continue to invest significant resources in developing our innovative technologies and new product offerings, acquiring new end customers in new and existing geographies, and to increase penetration within our existing end customer base. As a result, we increased in our first quarter of our fiscal year, non-K-12 education contribution to approximately 75% of our overall business, up from approximately 70% in the prior quarter and approximately 60% percent in the first quarter of our fiscal year 2017.
In November 2017, we announced that we had changed our sales leadership, following which we, uncovered underlying sales execution issues which became fully apparent in the last month of the fourth quarter. We have taken actions to replace underperforming sales team members, and we expect to continue to invest in our organization and our channel and strategic partnerships to meet the needs of our customers and to pursue opportunities in new and existing markets. In particular, we are continuing to invest in our sales efficiency and expand and improve our channel program. As such, we will continue to incur expenses in the near term, due to our continuing investments to grow our business, including internationally, in advance of and in preparation for, our expected increase in sales and expansion of our customer base. We believe that over the long term, we will be able to leverage these investments in the form of a higher revenue growth rate compared to the growth rate of our operating expenses.


27



Results of Operations
The following table sets forth our results of operations for the periods presented, in dollars (in thousands):
 
Three Months Ended March 31,
 
 
 
(As Adjusted)
 
2018
 
2017
Revenue:
 
 
 
Product
$
25,066

 
$
26,967

Subscription and support
10,701

 
9,362

Total revenue
35,767

 
36,329

Cost of revenue(1):
 
 
 
Product
8,671

 
8,815

Subscription and support
3,404

 
3,176

Total cost of revenue
12,075

 
11,991

Gross profit
23,692

 
24,338

Operating expenses:
 
 
 
Research and development(1)
9,279

 
9,550

Sales and marketing(1)
15,670

 
17,437

General and administrative(1)
5,954

 
6,297

Operating loss
(7,211
)
 
(8,946
)
Interest income
289

 
140

Interest expense
(164
)
 
(130
)
Other income (expense), net
(173
)
 
(85
)
Loss before income taxes
(7,259
)
 
(9,021
)
Income tax provision
58

 
97

Net loss
$
(7,317
)
 
$
(9,118
)
(1)Includes stock-based compensation as follows:    
 
Three Months Ended March 31,
 
2018
 
2017
 
(in thousands)
Cost of revenue
$
246

 
$
271

Research and development
1,046

 
688

Sales and marketing
997

 
1,294

General and administrative
1,382

 
1,300

Total stock-based compensation expense
$
3,671

 
$
3,553



28



The following table sets forth our results of operations for the periods presented, as a percentage of our total revenue:
 
Three Months Ended March 31,
 
2018
 
2017
Revenue:
 
 
 
Product
70
 %
 
74
 %
Subscription and support
30

 
26

Total revenue
100

 
100

Cost of revenue:
 
 
 
Product
24

 
24

Subscription and support
10

 
9

Total cost of revenue
34

 
33

Gross profit
66


67

Operating expenses:
 
 
 
Research and development
26

 
26

Sales and marketing
44

 
48

General and administrative
17

 
18

Operating loss
(21
)

(25
)
Interest income
1

 

Interest expense

 

Other income (expense), net

 

Loss before income taxes
(20
)

(25
)
Income tax provision

 

Net loss
(20
)%

(25
)%

Revenue  

We derive revenue from the sales of our products and services and we recognize revenue when we have identified the contract with the customer, identified the performance obligations in the contract, determined the transaction price, allocated the price to the performance obligations, and the performance obligations have been satisfied.
Our total revenue comprises the following:
Product Revenue.  We derive product revenue primarily from sales of our hardware products, which include wireless access points, SD-WAN routers, and switches, all of which are embedded with our proprietary operating system, HiveOS, and perpetual licenses for our unified network management system, HiveManager, and other software applications, as well as related accessories. We recognize product revenue at the time of shipment, provided that all other revenue recognition criteria have been met.
Subscription and Support Revenue.  We derive subscription and support revenue primarily from sales of our subscription and support offerings that we deliver over a specified term. These offerings primarily include post-contract customer support, or PCS, related to our perpetual software licenses and subscriptions to HiveManager and other software applications delivered as SaaS, including related customer support, and from subsequent renewals of those contracts. To benefit fully from potential contract renewals, we plan to continue to invest in systems to better track existing customer support commitments and renewal opportunities and provide offerings which continue to be attractive to our customers. Our PCS includes tiered maintenance and support services under renewable, fee-based maintenance and support contracts, which include technical support, bug fixes, access to priority hardware replacement services and unspecified upgrades on a when-and-if available basis. Our SaaS subscriptions include comparable maintenance and support services. The higher the percentage of our end-customers that purchase SaaS subscriptions, as opposed to HiveManager and PCS, the higher our subscription and support revenue will be as a percentage of our total revenue. We recognize subscription and support revenue ratably over the term of the contract, which is typically one, three or five years. As a result, our recognition of subscription and support revenue lags our recognition of related product revenue.

29



 
Three Months Ended March 31,
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
Revenues:
 
 
 
 
 
 
 
Product
$
25,066

 
$
26,967

 
$
(1,901
)
 
(7
)%
Subscription and support
10,701

 
9,362

 
1,339

 
14
 %
Total revenue
$
35,767

 
$
36,329

 
$
(562
)
 
(2
)%
 
 
 
 
 
 
 
 
Percentage of revenues:
 
 
 
 
 
 
 
Product
70
%
 
74
%
 
 
 
 
Subscription and support
30
%
 
26
%
 
 
 
 
Total
100
%
 
100
%
 
 
 
 

 
Three Months Ended March 31,
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
Revenue by geographic region:
 
 
 
 
 
 
Americas
$
20,830

 
$
23,896

 
$
(3,066
)
 
(13
)%
EMEA
11,900

 
9,832

 
2,068

 
21
 %
APAC
3,037

 
2,601

 
436

 
17
 %
Total revenue
$
35,767

 
$
36,329

 
$
(562
)
 
(2
)%
 
 
 
 
 
 
 
 
Percentage of revenue by geographic region:
 
 
 
 
Americas
58
%
 
66
%
 
 
 
 
EMEA
33
%
 
27
%
 
 
 
 
APAC
9
%
 
7
%
 
 
 
 
Total
100
%
 
100
%
 
 
 
 

Revenue decreased $0.6 million for the three months ended March 31, 2018, compared to the three months ended March 31, 2017, primarily due to a decrease in product revenue, partially offset by an increase in software and subscriptions revenue.
The decrease in our product revenue of $1.9 million in the three months ended March 31, 2018, compared to the same period last year, was due to the decrease related to our Connect and Select offering in the list prices of our hardware products.
The increase in our subscription and support revenue of $1.3 million in the three ended March 31, 2018, compared to the same period last year, was primarily due to an increase in sales of PCS and SaaS offerings, including our cloud-management platforms, and our recognition of deferred revenue.
The Americas accounted for the majority of our total revenue in the three months ended March 31, 2018 and March 31, 2017. The decrease in revenue in our Americas region for the three months ended March 31, 2018, compared to the same period in 2017, was primarily due to the decrease related to our Connect-to-Select strategy in list prices of our hardware products we sold in that region.
Cost of Revenues
Our cost of revenue includes the following:
Cost of Product Revenue.  Our cost of product revenue primarily includes manufacturing costs of our products payable to third-party manufacturers. Our cost of product revenue also includes personnel costs, including stock-based compensation, shipping costs, third-party logistics costs, provisions for excess and obsolete inventory, warranty and replacement costs, the depreciation and amortization of testing and imaging equipment, inbound license fees, certain allocated facilities and information technology infrastructure costs, and other expenses associated with logistics and quality control.

30



Cost of Subscription and Support Revenue.  Our cost of subscription and support revenue primarily includes personnel costs, including stock-based compensation, certain allocated facilities information technology infrastructure costs, costs associated with our provision of PCS and SaaS activities and datacenter costs. Our cost of subscription and support revenue also includes amortization of capitalized costs related to HiveManager, our internally developed, cloud-services platform, which we completed and launched in April 2015.

Three Months Ended March 31,

2018

2017

$ Change

% Change

(dollars in thousands)
Cost of revenues:







Product
$
8,671


$
8,815


$
(144
)

(2
)%
Subscription and support
3,404


3,176


228


7
 %
Total cost of revenues
$
12,075


$
11,991


$
84


1
 %
Cost of revenue increased $0.1 million for the three months ended March 31, 2018, compared to the three months ended March 31, 2017. We primarily attribute the decrease in our cost of product revenue for the three months ended March 31, 2018 to changes in the mix of the products we sold in the period. We primarily relate the increase in our cost of subscription and support revenue to an increase in software and services revenue and an increase in the cost of our cloud operations as we scale to support more managed devices.
Gross Margin
Our gross margin or gross profit has been and will continue to be affected by a variety of factors, including product shipment volumes, average sales prices of our products, discounts we offer to our VAR, OEM and distributor partners, the mix of revenue between products and subscription and support services, and the mix of products we sold in the period, because our products have varying gross margins depending on the product offering and the lifecycle of the product. We expect our subscription and support gross margin to increase over the long term because we expect our subscription and support revenue to increase more quickly than our cost of subscription and support revenue. We expect our gross margin to be volatile and may decrease at any given time as we experience additional competitive pricing pressure. Further, we believe the pricing of our new Connect and Select offerings may dampen our product gross margin; however, we expect these offerings to generate improvements in our subscription and support gross margin as well as to increase our deferred revenue over the period.
 
Three Months Ended March 31,
 
2018
 
2017
 
Amount
 
GM
 
Amount
 
GM
 
(dollars in thousands)
Gross margin:
 
 
 
 
 
 
 
Product
$
16,395

 
65.4
%
 
$
18,152

 
67.3
%
Subscription and support
7,297

 
68.2
%
 
6,186

 
66.1
%
Total gross margin
$
23,692

 
66.2
%
 
$
24,338

 
67.0
%
Total gross margin decreased from 67.0% to 66.2% for the three months ended March 31, 2018, as compared to the same period in the prior year, primarily due to the decrease related to our Connect-to-Select strategy in list prices of our hardware products, accompanied by the increase in software and subscription prices.
Product gross margin decreased from 67.3% to 65.4% for the three months ended March 31, 2018, compared to the three months ended March 31, 2017. The decrease in our product gross margin was primarily due to the decrease related to our Connect-to-Select strategy in list prices of our hardware products and the mix of products sold to our OEM partner in the period. A result of our planned pricing shift related to our Connect-to-Select strategy, revenue shifted from hardware products and increased our subscription and support revenue. Subscription and support gross margin increased from 66.1% to 68.2% for the three months ended March 31, 2018, compared to the three months ended March 31, 2017. The increase in our subscription and support gross margin was primarily due to higher growth in our subscription and support revenue than our related cost of delivering these subscription and support services.
Research and Development

31



Our research and development expenses consist primarily of personnel costs, including bonuses, stock-based compensation, recruiting fees and travel expenses for employees engaged in research, design and development activities. Research and development expenses also include costs for prototype-related expenses, product certification, consulting services, depreciation and certain allocated facilities and information technology infrastructure costs. We believe that continued investment in research and development is important to attaining our strategic objectives. Over time, we expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future as we continue to invest in the development of our products and services. Our research and development expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our research and development expenses.
 
Three Months Ended March 31,
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
Research and development
$
9,279

 
$
9,550

 
$
(271
)
 
(3
)%
% of revenue
26
%
 
26
%
 
 
 
 

Research and development expense decreased $0.3 million for the three months ended March 31, 2018, compared to the three months ended March 31, 2017. The decrease was primarily due to a decrease of $0.8 million in personnel and related costs, offset by an increase of $0.3 million in stock-based compensation expense, and an increase of $0.2 million in other expenses, primarily due to increases in professional services and prototype expenses.
    
Sales and Marketing
Our sales and marketing expenses consist primarily of personnel costs, including commission costs, stock-based compensation, recruiting fees and travel expenses for employees engaged in sales and marketing activities. Sales and marketing expenses also include the cost of trade shows, marketing and training programs, promotional materials, demonstration equipment, consulting services, depreciation and certain allocated facilities and information technology infrastructure costs. Over time, we expect our sales and marketing expenses to continue to increase in absolute dollars as we increase the size of our sales and marketing organization, expand into new markets and further develop our channel program. Our sales and marketing expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our sales and marketing expenses.
 
Three Months Ended March 31,
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
Sales and marketing
$
15,670

 
$
17,437

 
$
(1,767
)
 
(10
)%
% of revenue
44
%
 
48
%
 
 
 
 

Sales and marketing expense decreased $1.8 million for the three months ended March 31, 2018, compared to the three months ended March 31, 2017. The decrease was primarily due to decreases of $1.5 million in personnel and related costs and $0.3 million in stock-based compensation, each due to lower headcount.     
General and Administrative
Our general and administrative expenses consist primarily of personnel costs, including bonuses, stock-based compensation and travel expenses for our executive, finance, human resources, legal and operations employees, as well as compensation for our board of directors. General and administrative expenses also include fees for outside consulting, legal, audit, investor relations, and accounting service and insurance, as well as depreciation and certain allocated facilities and information technology infrastructure costs. Over time, we expect our general and administrative expenses to continue to increase in absolute dollars due to the additional legal, accounting, insurance, investor relations, information technology and other costs that we will continue to incur as a public company, as well as other costs associated with growing our business. Our general and administrative expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our general and administrative expenses.

32



 
Three Months Ended March 31,
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
General and administrative
$
5,954

 
$
6,297

 
$
(343
)
 
(5
)%
% of revenue
17
%
 
18
%
 
 
 
 
General and administrative expense decreased $0.3 million for the three months ended March 31, 2018, compared to the three months ended March 31, 2017. The decrease was primarily due to a decrease of $0.2 million in personnel and related costs, primarily due to lower headcount and a decrease of $0.2 million in professional services due to a decrease in consulting and legal expenses.
Interest Income
    
Our interest income primarily consists of interest earned on our cash, cash equivalents and short-term investments. We have invested our cash in money-market funds and other short-term, high quality investments. Historically, our interest income has not been material.
 
Three Months Ended March 31,
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
Interest income
$
289

 
$
140

 
$
149

 
106
%
Interest income increased for the three months ended March 31, 2018, compared to the three months ended March 31, 2017, primarily due to higher rates we earned on our short-term investments.
Interest Expense

Our interest expense consists primarily of interest on our indebtedness.
 
Three Months Ended March 31,
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
Interest expense
$
(164
)
 
$
(130
)
 
$
(34
)
 
26
%
The change in our interest expense was not significant.
Other Income (expense), Net

Our other income, net primarily consists of gains and losses from foreign currency exchange transactions.
 
Three Months Ended March 31,
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
Other income (expense), net
$
(173
)
 
$
(85
)
 
$
(88
)
 
104
%
The change in our other income (expense) primarily related to changes due to foreign currency fluctuations.
Provision for Income Taxes
Our provision for income taxes consists primarily of foreign tax expense due to our cost-plus agreements with our foreign entities, which guarantee our foreign entities a profit, and to a lesser extent federal and state income tax expense. We expect our provision for income taxes to increase in absolute dollars in future periods.
 
Three Months Ended March 31,
 
2018
 
2017
 
$ Change
 
% Change
 
(dollars in thousands)
Provision for income taxes
$
58

 
$
97

 
$
(39
)
 
(40
)%

33



The change in our provision for income taxes primarily related to foreign and state income taxes and was not significant. As of March 31, 2018 and March 31, 2017, respectively, we maintained a full valuation allowance against our domestic deferred tax assets, including net operating loss carryforwards and research and development and other tax credits.
Liquidity and Capital Resources
As of March 31, 2018, we had cash and cash equivalents of $21.5 million and short-term investments of $56.4 million. As of March 31, 2018, we held $76.4 million of our cash, cash equivalents and short-term investments within the United States.
In June 2012, we entered into the Revolving Credit Facility with Silicon Valley Bank, which matures on March 31, 2019. We have been using the amount drawn under the Revolving Credit Facility for working capital and general corporate purposes. As of March 31, 2018 we had $20.0 million of outstanding debt, under the Revolving Credit Facility, and we were in compliance with all covenants under our loan agreement. See Note 4 to the Condensed Consolidated Financial Statements included in this Form 10-Q for more information about our debt.
We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our spending to support our research and development efforts, the expansion of our sales and marketing activities, the introduction of new and enhanced product and service offerings, the costs to ensure access to adequate manufacturing capacity, and the level of market acceptance of our products. However, we may be required to raise additional funds in the future through public or private debt or equity financing to meet additional working capital requirements.
Cash Flows    
The following table summarizes our cash flows for the periods indicated:
 
Three Months Ended March 31,
 
2018
 
2017
 
(in thousands)
Net cash provided by (used in) operating activities
$
(4,845
)
 
$
(1,556
)
Net cash provided by (used in) investing activities
178

 
(3,732
)
Net cash provided by (used in) financing activities
(1,098
)
 
(151
)
Net decrease in cash and cash equivalents
$
(5,765
)
 
$
(5,439
)
Operating Activities
We have had in the past negative cash flows from operating activities as we continue to invest in our business. Our largest uses of cash from operating activities are for employee-related expenditures and purchases of finished products from our contract manufacturers. Our primary source of cash flows from operating activities is cash receipts from our channel partners. Our cash flows from operating activities will continue to be affected principally by the extent to which we grow our total revenue and our operating expenses, primarily in our sales and marketing and research and development functions, in order to grow our business.
For the three months ended March 31, 2018, cash used in operating activities was $4.8 million as a result of our net loss of $7.3 million, partially offset by non-cash charges of $4.3 million and a net change of $1.8 million in our net operating assets and liabilities. Non-cash charges consisted primarily of stock-based compensation of $3.7 million and depreciation and amortization expense of $0.7 million. The net change in our net operating assets and liabilities was primarily due to a $1.8 million increase in accounts receivable primarily due to the timing of shipments, $0.8 million decrease in accrued liabilities, a $0.1 million increase in cash used for inventory purchases, a $0.2 million decrease in prepaid expenses, $0.1 million increase in other assets, and a $0.1 million increase in accounts payable, partially offset by a $0.8 million increase in deferred revenue. Our days sales outstanding, or DSO, was 49 days as of March 31, 2018, which we calculate by dividing net accounts receivable at the end of the quarter by revenue recognized during the quarter, multiplied by the total days in the quarter. The decrease in DSO to 49 days as compared to 54 days for the same period last year is primarily due to the timing of shipments.
For the three months ended March 31, 2017, cash used in operating activities was $1.6 million as a result of our net loss of $9.1 million, partially offset by non-cash charges of $4.4 million and a net change of $3.2 million in our net operating assets and liabilities. Non-cash charges consisted primarily of stock-based compensation of $3.6 million and depreciation and amortization expense of $0.8 million. The net change in our net operating assets and liabilities was primarily due to a $4.6 million decrease in accounts receivable, $1.0 million decrease in inventory, and $0.1 million increase in accrued liabilities,

34



partially offset by a $1.0 million increase in deferred revenue, $0.9 million decrease in accounts payable, $0.6 million increase in prepaid expenses and other current assets, and $0.1 million increase in other assets. Our days sales outstanding, or DSO, was 54 days as of March 31, 2017.
Investing Activities
Our investing activities have primarily consisted of purchases of property and equipment, an investment in a privately held company and purchases and sales of marketable securities.
For the three months ended March 31, 2018, cash provided by investing activities was $0.2 million, primarily attributable to maturities of marketable securities of $23.0 million offset by cash used for purchases of marketable securities of $21.6 million, and cash used for purchases of property and equipment of $1.2 million, relating primarily to purchase of software.
For the three months ended March 31, 2017, cash used in investing activities was $3.7 million, primarily attributable to cash used for purchases of marketable securities of $7.7 million, cash used for purchases of property and equipment of $0.2 million, relating primarily to manufacturing and research and development lab equipment, offset by maturities of marketable securities of $4.2 million.
Financing Activities
Our financing activities have primarily consisted of proceeds from and repayments against our Revolving Credit Facility, proceeds from our employees' exercises of stock options and proceeds from employee purchases under our stock purchase plan offset by our repurchases of treasury shares.
For the three months ended March 31, 2018, cash used in financing activities was $1.1 million, primarily as a result of $1.1 million of cash used to satisfy our estimate of minimum employee tax withholding requirements on vesting of restricted stock units.
For the three months ended March 31, 2017, cash used in financing activities was $0.2 million, primarily as a result of a $0.3 million of cash used to satisfy our estimate of minimum employee tax withholding requirements on vesting of restricted stock units, offset by $0.2 million in proceeds from employee exercises of stock options.
Off-Balance Sheet Arrangements
Through March 31, 2018, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
Our exposure to market risk for changes in interest rates relates primarily to our cash, cash equivalents, short-term investments and our outstanding debt obligations. We had cash, cash equivalents and short-term investments of $77.9 million and $84.9 million as of March 31, 2018 and December 31, 2017, respectively. We held these amounts primarily in bank deposits, money market funds, certificates of deposit, commercial paper and bonds issued by corporate institutions and U.S. government agencies. Such interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in our interest income have not been significant.
We have outstanding debt of $20.0 million as of March 31, 2018, consisting of our borrowing under our Revolving Credit Facility. The Revolving Credit Facility bears interest at a variable rate.
We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. We have not been exposed to material risks due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods we present in this report would not have had a material impact on our financial statements.
Foreign Currency Risk
We denominate all of our sales in U.S. dollars and, therefore, our revenues are not currently subject to significant foreign currency risk. However, when the exchange rate of the U.S. dollar to foreign currencies is strong, the price of our

35



products outside the United States may become less competitive, reducing our sales or requiring us to lower pricing for our products outside the United States in order to maintain sales and revenue performance. Our operating expenses are denominated in the currencies of the countries in which our operations are located, including in EMEA and APAC, and may be subject to fluctuations due to changes in foreign currency exchange rates. However, to date, we have not used derivative financial instruments to mitigate our exposure to foreign currency exchange risks. A hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our consolidated financial statements in any of the periods presented.
ITEM 4.    CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2018. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2018, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable-assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS
The information set forth under the “Contingencies” subheading in Note 5 - Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.
ITEM 1A.    RISK FACTORS
In evaluating Aerohive and our business, you should carefully consider the risks and uncertainties described below, together with all of the other information in this report, including our condensed consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. If any of the following or other risks occur, our business, financial condition, operating results, and prospects could be materially harmed. In that event, the price of our common stock could decline, and you could lose part or all of your investment.

36



Risks Related to Our Business
We have a history of losses and we may not achieve profitability in the future.
We manage our ongoing operating expenses in an effort to position us to achieve non-GAAP operating profitability at certain target levels of quarterly revenue, which we may announce publicly from time-to-time. We may subsequently take actions which could raise or lower the level of quarterly revenue we would need to achieve non-GAAP profitability in any period. Nonetheless, we have a history of losses. We have never achieved GAAP profitability on a quarterly or annual basis, and we cannot predict with certainty whether or when we might be profitable in the foreseeable future, even at these revenue levels. We experienced net losses on a GAAP basis of $38.2 million, $22.1 million and $7.3 million for fiscal years 2016, 2017 and the three months ended March 31, 2018, respectively. As of March 31, 2018, our accumulated deficit was $255 million. We expect to continue to incur expenses associated with the continued development and expansion of our business, including expenditures to hire additional personnel: specifically, personnel costs relating to sales, marketing and engineering, and investments in channel and product development and support. As such, we may not control our expenses sufficiently to achieve operating profitability on a non-GAAP basis even if we achieve quarterly revenue in the indicated range. If we fail to increase our revenue and manage our cost structure, we may not achieve profitability in the future. Once achieved, we may not be able to sustain or increase our profitability, at all or at levels our investors or industry analysts expect, or we may choose to continue to make investments in our operations which we feel will promote long-term growth but which will reduce near-term profitability. This could also require us to continue to use available cash to support our investments and ongoing operations. As a result, our business and prospects, and how investors view and value our common stock, would be harmed.
Our operating results may fluctuate significantly from period to period, which makes our future operating results difficult to predict and could cause our operating results in any particular period or over an extended period to fall below expectations of investors or analysts.
Our operating results have fluctuated significantly in the past and we expect will continue to fluctuate significantly in the future. In particular, the timing and size of sales of our products and services, including results across regions, are highly variable and difficult for us to predict and can result in significant fluctuations in our revenue from period to period. Other participants in our industry have also experienced these fluctuations. As a result, our future results in any particular period or over any extended period may be difficult for us, our investors and analysts to predict.
In addition, our planned expense levels depend in part on our expectations of future revenue. We may choose to maintain or increase levels of investment in areas such as R&D and sales and marketing, despite near-term fluctuations in revenue, in order to position us for continued growth. We also may reduce product prices in order to increase revenue growth and/or penetration of our products into targeted verticals. For example, in January 2017, we announced HiveManager Connect, a simplified version of HiveManager included as part of our new Aerohive Connect product line designed for customers with less complex connectivity-oriented requirements. Under the Aerohive Connect program, customers may purchase access points at lower list prices. Aerohive Connect customers can expand their Connect deployment, as needed, and can add subscriptions or licenses to upgrade to our full-featured Select offering and premium support services. In May 2017, we announced that our Aerohive Connect and Select offerings are available across our entire portfolio of access points and switches. We believe that separating our product line into these two offerings will deliver compellingly priced cloud-managed hardware for connectivity-oriented deployments and enables us to capture more subscription and software license revenue from those customers who require a more advanced feature set and support. This program may reduce our revenue, or the rate of our revenue growth, as purchasers take advantage of the lower entry pricing for our products. In addition, it may be difficult and take time for us to adjust expenses sufficiently to compensate for a shortfall in revenue, even when we may anticipate the shortfall. In such instances, even a small shortfall or seasonal fluctuation in revenue could disproportionately and adversely affect our overall operating margin, operating results and use of cash for a given quarter.
Our operating results may also fluctuate due to a variety of other factors, both within and outside of our control and which we may not foresee, or which we may foresee but not effectively manage, including the changing and volatile domestic and international economic environments, and demand for our products in general and from any particular vertical which may be a target market for our products. Such factors may cause our operating results and stock price to fluctuate. In addition to other risks listed in this “Risk Factors” section, factors that may affect our operating results include:
fluctuations in demand for our products and services, including seasonal variations, especially in the education vertical where purchasing in the United States has typically been stronger in the second and third quarters and weakest in the first and fourth quarters, and where purchasing at any time may depend on the availability of funding, including fluctuations based on the timing and availability of funding for schools under the Federal Communications Commission's ("FCC") E-Rate program and the decisions of schools to defer purchases in anticipation of the availability of such funding or due to a decision to delay product deployments;

37



our ability to forecast and provide guidance to our investors and industry analysts regarding our revenue and operating results in any particular period, or to achieve results consistent with the guidance we provide;
our ability to control operating expenses in order to achieve non-GAAP operating profitability in any particular quarterly period;
our ability to hire, train, develop, integrate and retain a sufficient number of skilled sales and engineering employees to support our continued growth, including, specifically, in Silicon Valley and Hangzhou, China, and to replace turn-over of our employees in these functions and locations;
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