Sandvine Corporation. Annual Information Form For The Fiscal Year Ended November 30, January 15th, 2015

Transcription

1 Sandvine Corporation Annual Information Form For The Fiscal Year Ended November 30, 2014 January 15th, 2015

2 TABLE OF CONTENTS GENERAL MATTERS AND FORWARD LOOKING INFORMATION... 1 CORPORATE STRUCTURE... 3 GENERAL DEVELOPMENT OF THE BUSINESS... 5 NARRATIVE DESCRIPTION OF THE BUSINESS RISK FACTORS DIVIDEND POLICY CAPITAL STRUCTURE MARKET FOR SECURITIES DIRECTORS AND OFFICERS BOARD COMMITTEES LEGAL PROCEEDINGS AND REGULATORY ACTIONS INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS TRANSFER AGENT AND REGISTRAR MATERIAL CONTRACTS INTERESTS OF EXPERTS ADDITIONAL INFORMATION APPENDIX A - Audit Committee Charter... 38

3 GENERAL MATTERS AND FORWARD LOOKING INFORMATION This Annual Information Form ( AIF ) is dated as of January 15, 2015 and all dollar amounts stated in this AIF are expressed in Canadian dollars unless otherwise indicated. Unless otherwise noted, or the context otherwise requires, Sandvine and the Company shall refer to Sandvine Corporation and its subsidiaries. Forward-looking statements Certain statements in this AIF, constitute forward-looking information within the meaning of applicable Canadian securities laws and are based on expectations, estimates and projections as of the date of this MD&A. Forward-looking statements include, without limitation, statements with respect to projected revenues, earnings, growth rates, targets, revenue mix and product plans and the Company s future growth, results of operations, performance and business prospects and opportunities. The words plans, expects, scheduled, budgeted, projected, estimated, forecasts, anticipates, intend, guidance, potential, seek, aim, strategy, targets or believes, or variations of such words and phrases or statements that certain future conditions, actions, events or results will, may, could, would, should, might or can, or negative versions thereof, be taken, occur, continue or be achieved, and other similar expressions, identify forward-looking statements. Forward-looking statements are necessarily based upon management s perceptions of historical trends, current conditions and expected future developments, as well as a number of specific factors and assumptions that, while considered reasonable by the Company as of the date of such statements, are inherently subject to significant business, economic and competitive uncertainties and contingencies which could result in the forward-looking statements ultimately being incorrect. The forward-looking statements contained in this AIF are based on certain assumptions, including, but not limited to the following: the overall development of the Network Policy Control market, including reliance on major customers; adoption of Virtual Series solutions; the requirement for increasingly innovative product solutions; growth strategy; the demand for the Company s products and fluctuations in future revenues; the stability of general economic and market conditions; currency exchange rates and interest rates; equity and debt markets continuing to provide the Company with access to capital; and its continued compliance with third party intellectual property rights; foreign exchange hedging; and that the risk factors noted below, collectively, do not have a material impact on the Company. By its nature, forward-looking information is subject to inherent risks and uncertainties that may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that objectives, strategic goals and priorities will not be achieved. Many factors could cause the actual results of the Company to differ materially from the results, performance, achievements or developments expressed or implied by such forwardlooking statements, including, without limitation, each of the following factors, which are discussed in further detail below under the heading Risk Factors beginning on page 17: The Company s revenues may fluctuate from quarter to quarter and year to year depending upon sales cycles, customer demand and the timing of customer purchase decisions; The Company s gross margins may fluctuate from quarter to quarter and year to year depending upon a variety of factors including product mix in the quarter, competitive pricing pressures and the level of sales generated through indirect channels; The Company is dependent upon and expects to continue to derive a large percentage of its revenue from both a small number of key customers and key reseller partners, none of whom are bound to any fixed purchase commitment or exclusivity obligations and could change their buying patterns and/or source of supply at any time, which could have a material impact on the Company s revenues. In addition, the Company extends credit to its customers and resellers by virtue of agreed upon payment terms and could be exposed to collection risk - 1 -

4 on its receivables particularly if any key customer or key reseller were to face financial challenges. The Company s reseller partners may also offer their own products which are competitive with the Company s products; By selling its products in certain markets through resellers, the Company is able to avoid certain costs related to operating in those markets including but not limited to local support costs, costs of maintaining a local legal entity, administration costs, and logistics. Should the Company choose or be required to sell direct in these markets (due to customer preference, termination of a reseller relationship or other reasons) the cost advantages described will no longer be available to the Company which could results in an increase in operating costs; The Company faces intense competition in markets where there are typically several different competing technologies and rapid technological changes. The Company faces the risk of the emergence of new technologies and new approaches to network architecture that may be either competitive to those of the Company or that change the requirements of the Company s customers for solutions such as those offered by the Company. If the Company is unable to adapt its offerings in response to these trends it could have a material impact on the ability of the Company to market its solutions; The Company s growth is dependent on the development of the market for Network Policy Control solutions and the decisions of the Company s target customers to deploy and further invest in those technologies, which decisions may be impacted by changing requirements in the area of broadband network management policies and/or changes in the regulatory framework to which the Company s customers may be subject. In particular, numerous telecommunications legislators and regulators in various jurisdictions have considered or are considering what, if any, regulations might be appropriate with respect to how internet service providers manage the impact of different types of traffic on their networks. These ongoing processes may cause uncertainty in the network investment decisions of the Company s target customers, and any new rules or regulations that result from these considerations may impact the demand for the Company s products within various markets, including markets that may not be considering any new regulation but where the Company s customers may look to other markets for future guidance or trends; With the adoption of network functions virtualization ( NFV ) and software defined networks ( SDN ), the market in which Sandvine operates may face a shift in how some of its customers purchase the Company s products. It is the Company s intention to continue to offer and develop Network Policy Control products for customer networks architected for NFV or SDN. These products will run on commercial off-the-shelf hardware. The introduction of these product offerings could see a shift in the Company s pricing practices from perpetual based software licenses to term based software licenses. It is anticipated that revenues from term-based licenses would be recognized over the license term while revenues from perpetual licenses are generally recognized at the time of delivery. While the timing and impact of this shift is not anticipated to materially impact the Company s results in 2015, it is difficult for the Company to accurately predict. As such, depending on the rate of adoption, the Company could experience a loss or delay in hardware and/or software revenue and reduced profits in 2015 or beyond; The Company is dependent on certain third party sub-assembly manufacturers in its supply chain and any disruption in the operations or quality of those suppliers or any increase in expected lead times from those suppliers could result in lost or delayed revenue and/or reduced profits; The majority of the Company s operating expenses are denominated in Canadian dollars, U.S. dollars, and Indian rupees. The Company s earnings are impacted by fluctuations in the exchange rates between the U.S. dollar and these currencies; The Company operates in various jurisdictions throughout the world and generates revenues through its international sales efforts. The Company s financial results may be impacted by political and economic developments of a particular country or geography, - 2 -

5 including but not limited to the economic and political climate in Argentina. If the current economic and/or political climate in Argentina continues or deteriorates it may negatively impact the Company s financial results including the ultimate collection of outstanding receivables. The Company has operations in India and Hong Kong, both considered by management to be emerging markets. The operations in India are predominantly a contract research and development facility and the Company conducts business in Hong Kong through a branch sales representative office. These risk factors are not intended to represent a complete list of the factors that could affect the Company and the reader is cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on forward-looking statements. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Forwardlooking statements are provided for the purpose of providing information about management s expectations and plans relating to the future. The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, or to explain any material difference between subsequent actual events and such forward-looking statements, except to the extent required by applicable law. All of the forward-looking statements contained in this AIF are qualified by these cautionary statements. CORPORATE STRUCTURE Sandvine Corporation is an Ontario corporation, incorporated under the Business Corporations Act (Ontario), with its registered head office at 408 Albert Street, Waterloo, Ontario, Canada N2L 3V3. In connection with its initial public offering of shares, the Company filed articles of amendment on March 14, 2006 pursuant to which all of the then issued and outstanding shares of the Company (consisting of class A, class B and common shares) were exchanged for an equivalent number of newly created common shares of the Company (the Common Shares ) and thereupon all previous classes of shares were cancelled. The Common Shares included a redemption feature entitling the holders thereof to redeem the Common Shares on demand in return for a cash payment equal to 90% of their average trading price during the ten trading days preceding the notice of redemption, subject to certain limitations as to the number of cash redemptions to be made in any one month period (the Redemption Feature ). The Company filed articles of amendment on October 27, 2006 removing the Redemption Feature from the Common Shares. SVC. The Company s shares trade on the Toronto Stock Exchange ( TSX ) under the symbol On March 15, 2013 the Company s listing on the AIM of the London Stock Exchange was cancelled and ceased further trading on that exchange, where the shares had traded since March

6 The following chart outlines the inter-corporate relationships between the Company and its subsidiaries. Each subsidiary is wholly-owned by its respective parent and the respective jurisdictions of incorporation for each entity is designated in parentheses. CAPITAL REORGANIZATIONS PRIOR TO AIM LISTING In connection with the March 21, 2006 admission to trading of the common shares of the Company on AIM, the Company undertook a capital reorganization, the primary components of which are described below. Share Exchange Agreement In connection with the admission of its common shares to trading on AIM, the Company entered into a share exchange agreement on March 7, 2006 with its operating subsidiary, Sandvine Incorporated, and each shareholder that was then a shareholder of Sandvine Incorporated (each a "Participating Shareholder") (the "Share Exchange Agreement"). The Share Exchange Agreement was the primary document effecting the reorganization of the capital, structure and affairs of the Company prior to the admission of the common shares to trading on AIM. Under the Share Exchange Agreement, Sandvine Corporation, along with Sandvine Incorporated and the Participating Shareholders entered into a share-for-share exchange transaction (the "Share Exchange") pursuant to which the Participating Shareholders exchanged all of their Sandvine Incorporated shares for shares in Sandvine Corporation, causing Sandvine Incorporated to become a wholly-owned subsidiary of Sandvine Corporation. Each Participating Shareholder received the number and class of shares that corresponded to the number and class of Sandvine Incorporated shares held by the Participating Shareholder. After the Share Exchange, the Company s articles of incorporation were amended on March 14, 2006 to reorganize its share capital (the "Capital Reorganization"), pursuant to which each Participating Shareholder exchanged all of the shares they held in Sandvine Corporation for Common Shares (the Share Exchange and the Capital Reorganization are collectively referred to as the "Reorganization")

7 Option Exchange Agreements Prior to the Capital Reorganization, certain employees of Sandvine Incorporated held options to acquire common shares of Sandvine Incorporated pursuant to the Sandvine Incorporated employee share option plan, dated June 29, 2001, as amended and restated September 1, Pursuant to option exchange agreements that Sandvine Corporation entered into with Sandvine Incorporated and each of these employees, dated on or about March 7, 2006, each holder of options to acquire Sandvine Incorporated common shares under the Sandvine Incorporated employee share option plan surrendered for cancellation to Sandvine Incorporated its options, and received in exchange options to acquire an equivalent number of Common Shares under the Sandvine Corporation option plan. PRIOR TO TSX LISTING In connection with the Company listing its Common Shares on the TSX and becoming a reporting issuer in Canada in October 2006, the Company filed articles of amendment on October 27, 2006 to remove the Redemption Feature from the Common Shares. GENERAL DEVELOPMENT OF THE BUSINESS The Company carries on active business operations through its wholly owned subsidiaries, including, Sandvine Incorporated ULC. Sandvine Incorporated, an Ontario corporation, was founded in Sandvine Incorporated was continued as Sandvine Incorporated ULC under the Alberta Business Corporations Act by way of Certificate of Continuance dated June 29, The Company began to develop its Network Policy Control solutions in The Company launched its first generation Policy Traffic Switch ("PTS") product in In 2006 the Company introduced its next PTS series product to the market by way of its PTS platform with support for 10 gigabit per second Ethernet interconnects. This was followed up with the release of its PTS series platform in September 2009, supporting 60 gigabit per second through-put and the release of its PTS series platform in February 2011, providing an effective size and capacity alternative for edge and aggregation layer deployments. Over the past several years the Company has continued to expand the uses for its platform and solutions with the introduction of various software based Network Policy Control solutions in the fields of Traffic Optimization, Revenue Generation and Business Intelligence, which software solutions can operate both on the Company s platform and, in some cases, independently of the Company s hardware platform. In February of 2014, the Company released the PTS 32000, a 100GE Network Policy Control element providing increased scalability, deployment versatility and efficiency, and a virtual managed business services offering that provides communication service providers with the ability to offer the Company s entire suite of Network Policy Control solutions as a managed service defined as the Company s Virtual Series. The Company has pursued a diversification strategy over the past several years to expand its revenue base from being primarily customers who are North American, cable based broadband service providers. This strategy has been multi-pronged in its approach to expand the penetration of the Company s products in to other access technologies, including DSL, wireless, fixed mobile and FTTx as well as in to other markets including Europe, the Middle East, Africa, Asia, Australia and Latin America. As of the end of fiscal 2013, the Company has over 250 service provider customers in over 90 countries. Together these customers serve hundreds of millions of fixed line and mobile broadband internet subscribers

8 The following describes significant product and business developments over the last three fiscal years. For a more detailed discussion of year over year comparison of the performance of the business, readers are encouraged to review the Company s annual MD&A as filed on SEDAR for each of fiscal 2012, 2013 and 2014 FY 2012 In December 2011, the Company announced that it had added a total of 44 new customers in its recently completed fiscal year 2011, being 18 more than it had added in fiscal On January 20, 2012, the Company announced that it had concluded an agreement with Industry Canada to re-purchase for cancellation a Warrant that had been issued to Industry Canada in connection with funding received by the Company under the Technology Partnerships Canada Program. The Warrant was repurchased for $100,000 and had entitled the holder to purchase 619,280 Common Shares of the Company. In February 2012, the Company announced the release of new upgrades to the Sandvine Fairshare Traffic Management solution for mobile networks, becoming the only available solution that offered true mobility awareness across a mobile network. On March 7, 2012 the Company announced that the Board of Directors of the Company (the Board ) had approved the adoption of a shareholder rights plan, subject to approval of shareholders at the annual and special meeting of shareholders to be held the following month. The Company subsequently announced the formal approval of that plan by the shareholders at the annual and special meeting of shareholders held on April 5, On April 25, 2012 the Company released its 2012 Global Internet Phenomena Report, identifying key trends in internet traffic and consumer usage patterns based on data from a variety of broadband services providers around the world. On May 3, 2012, the Company announced that its technology had been selected for deployment by a Tier-1 Asian service provider following an extensive testing and evaluation phase against several competing solutions. In June 2012 the Company announced that it had successfully completed the testing of its Policy Traffic Switch platform with IPv6 protocols in a major south-east asian network. In July 2012, the Company announced that it had concluded a new global supply agreement with Alcatel Lucent relating to the sale of Sandvine s products and services to a multi-national operator group customer for which Alcatel-Lucent had been selected as the supplier. In connection with the conclusion of this arrangement, Sandvine announced some immediate follow-on orders that had been received in respect of the end customer. In August 2012, the Company announced the tragic passing of one of the members of the Board, David Thomson. In September 2012, the Company announced growing momentum in the Asia-Pacific market, with $5 million USD in follow-on orders from a Tier-1 customer in the region and the addition of two new service provider customers in the region

9 On October 27, 2012, the Company announced that its Fairshare Traffic Management product had been awarded a Four Diamond rating in the Broadband Technology Report s Diamond Technology Review. This represented Sandvine s fifth BTR Diamond Technology Review award. In October 2012 the Company announced further follow-on orders from a tier-1 customer in Asia-Pacific, bringing the total order value from this customer above $10 million during the preceding four (4) months. On November 7, 2012 the Company released its Second-Half 2012 Global Internet Phenomena Report, identifying key trends in internet traffic and consumer usage patterns based on data from a variety of broadband services providers around the world. Key findings included a 120% increase in internet data usage in North America over the preceding 12 months. On November 13, 2012, the Company announced an initial order from a Tier-1 Western European service provider ranked as one of the 12 largest telecommunications operators world-wide. FY 2013 On January 10, 2013 the Company announced the appointment of Dermot O Carroll to the Board. Mr. O Carroll is a former Senior Vice-President of Network Engineering and Operations at Rogers Communications and has over forty (40) years of experience in the telecommunications industry. In January 2013 the Company announced orders from three (3) customers in the Middle East region as the Company s presence in that region continued to grow. On January 30, 2013 the Company announced the approval by the TSX of its Normal Course Issuer Bid ( NCIB ) covering the one year period from February 1, 2013 to January 30, 2014 under which the Company could re-purchase for cancellation up to 12.5 million of its outstanding common shares. The Company also announced the entering in to of an automatic share purchase plan with a broker to facilitate purchases under its NCIB. In February 2013 the Company announced the availability of its newest version of its Usage Management solution which added new features to the service creation opportunities that are enabled through Sandvine Usage Management. On February 12, 2013 the Company announced the availability of its latest hardware platform, the PTS 24700, specifically optimized for LTE networks. On February 15, 2013 the Company announced its intention to cancel the listing of its Common Shares for trading on the AIM of the London Stock Exchange as a result of numerous considerations including low trading volumes on that market and the administrative costs of maintaining the listing. Such cancellation became as of March 15, In March 2013 the Company provided an update on the success of its eco-system partner program, announcing that more than forty (40) deployments had been completed in conjunction with its eco-system partners in the fields of video optimization, parental controls and content caching

10 On April 10, 2013 the Company held its Annual and Special Meeting of Shareholders for fiscal 2012 at which various matters were approved by its shareholders, including the renewal of the Company s stock option plan and adoption of an advance notice bylaw relating to the nomination of directors for election. On May 14, 2013 the Company released its Global Internet Phenomena Report for the first half of 2013, identifying key trends in internet traffic and consumer usage patterns based on data from a variety of broadband services providers around the world. One of the key findings of the report is the growing consumption of streaming video over mobile devices. On May 21, 2013 Heavy Reading and Sandvine released a joint white paper on the topic of the role of Policy Control within Software Defined Network (SDN) architecture. The primary thesis of the paper is the role and need for subscriber awareness within an SDN architecture. In June 2013 the Company announced significant follow on orders from three Tier 1 network operators, one being in North America and two in Europe. On July 9, 2013 the Company announced the release of its latest Service Delivery Engine platform with Policy Charging and Rules Function ( PCRF ) functionality. In August 2013 the Company announced new customer wins with service providers in Eastern Europe and Africa, and identified each of these markets as attractive growth opportunities for the Company. On September 16, 2013 the Company announced that it had joined Juniper Networks SDN Technology Partner Program and would be integrating its Network Policy Control solution within the Juniper Networks Contrail program specifically designed for Software Defined Networks. In October 2013 the Company demonstrated a completely virtualized Network Policy Control system in an open-stack framework at the SDN and OpenFlow World Congress in Frankfurt, Germany. On November 11, 2013 the Company released its Second-Half 2013 Global Internet Phenomena Report, identifying key trends in internet traffic and consumer usage patterns based on data from a variety of broadband services providers around the world. Key findings included the continued decline of peer to peer file-sharing traffic as a percentage of overall traffic and the continued rise of live video consumption rather than downloaded for later viewing. On November 28, 2013 the Company announced that it had received initial orders from a Tier 1 mobile service provider group that operates across most countries within Latin America. FY 2014 On December 3, 2013 the Company announced that it had recently received an expansion order from a Tier 1 North American Operator worth over $5 million USD and that it had won twenty-five new customers during its fourth quarter of 2013, spanning twenty-two countries and offering their services over mobile, DSL, cable, fixed wireless and fiber network access infrastructures

11 On December 10, 2013 the Company announced that it had recently launched an Engineering Accreditation Program as part of its Global Channel Partner Program and has experienced significant channel partner growth in the African and Asia-Pacific regions. On January 8, 2014 the Company announced that it had received approximately $10 million USD in expansion orders from a Tier 1 North American operator for the Company s Service Creation portfolio, Service Delivery Engine and Policy Traffic Switch platform. On January 22, 2014 the Company announced that it had entered into an agreement with a syndicate of underwriters led by Canaccord Genuity Corp. to sell, on a bought deal basis, 10,000,000 Common Shares of the Company at a price of $3.30 per Common Share, with net proceeds from the sale to be used for general corporate and working capital purposes. On February 3, 2014 the Company announced that it had received a $5 million USD expansion order from a leading North American cable operator for the Company s Business Intelligence and Traffic Optimization solutions. On February 4, 2014 the Company announced the introduction of the PTS 32000, the world s first 100GE Network Policy Control element in a two rack unit form factor, offering servicing providers extreme scalability, deployment versatility and unmatched efficiency. On February 11, 2014 the Company announced the launch of the Device Insights Dashboard which enables communication service providers to gain critical insight into how devices are being used across the network to increase subscriber segmentation and drive service innovation. On February 12, 2014 the Company announced that it had completed its previously announced $33 million bought deal financing. On February 13, 2014 the Company announced a virtual managed business services offering that provides communication service providers with the ability to offer the Company s entire suite of Network Policy Control solutions as a managed service to their business customers. On February 19, 2014 the Company announced that ClearSky Technologies is offering the industry s first virtual Network Policy Control services offering, based on the Company s virtualized Policy Traffic Switch, which makes it easier for carriers to rapidly deploy customized services for their end user subscribers. On February 24, 2014 the Company announced the launch of Usage Management release 5.0 offering new capabilities to help both fixed and mobile communications service providers create, manage and implement new service plan offerings. On May 6, 2014 the Company announced the launch of the Capacity Planning Dashboard as part of the company s Networking Analytics offering. The Capacity Planning Dashboard provides communications service providers with interactive and actionable insight into network resource performance trends on fixed, mobile and converged networks which will allow for the deferral of capital spending without impacting the quality of experience of their subscribers

12 On May 13, 2014 the Company announced that Econet Wireless has transformed network usage through the successfully introduction of innovative service plans, like WhatsApp, using the Company s Usage Management solution, implemented by the Company s local partner Three6Five Technologies. On May 14, 2014 the Company released its bi-annual Global Internet Phenomena Report, identifying key trends in internet traffic and consumer usage patterns based on data from a variety of broadband services providers around the world. On June 18, 2014 the Company announced that Smart Communications is using the Company s Network Policy Control solutions to support PowerApp, the world s first mobile Internet store, which allows users to purchase bite-sized, application-specific, mobile service plans to fit their particular preferences and needs. On July 8, 2014 the Company announced that the Company s Virtual Series, the fully virtualized version of the Company s platform, is currently being used by multiple leading communications service providers around the globe in order to develop, test and deploy their virtualization strategies, leveraging all the features of the traditional Company platform while benefiting from the elasticity and efficiency of running virtual machines on commercial off-the-shelf hardware. On July 15, 2014 the Company announced that it had received more than $5 million USD of follow-on orders from two tier 1 service providers in its European Middle East and Africa sales region. The expansion orders represent growth to the operators deployments of Traffic Management and Network Analytics. On September 9, 2014 the Company released a third quarter revenue estimate of between $27.5 and $28.0 million USD. On September 9, 2014 the Company announced that the Board had approved the adoption of an open market stock buyback program for the purchase of up to approximately 13.9 million Common Shares over a one-year period, expected to commence in October, through a NCIB over the TSX. On September 9, 2014 the Company announced that it has received over $5 million USD in expansion orders from a global tier 1 mobile operator group for its properties located in the Caribbean and Latin American (CALA) region. With these orders, the tier 1 mobile operator group will grow the company s Network Policy Control solutions to over a dozen markets in CALA, which will allow the group to offer innovative new service plans to subscribers throughout the region. On September 10, 2014 the Company announced that its Managed Business Services was winner of the Network Appliances category as part of the Intel Network Builders Network Transformation Contest hosted at the Intel Developers Forum (IDF) in San Francisco, California. On September 16, 2014 the Company announced that Don Bowman, the Company s Chief Technology Officer, is one of seven industry thought leaders that have been invited to participate in the Federal Communications Commission s (FCC) Roundtable on the Technological Aspects of an Open Internet. On October 1, 2014 the Company announced the latest version of the Company s OutReach offering, a subscriber communications and interaction product that operators

13 with a powerful set of subscriber-friendly, device-agnostic tools to interact with subscribers to satisfy a range of use cases. On October 2, 2014 the Company announced that it has received approximately $7 million USD in orders from two tier-1 cable operators in North America, one existing customer and one new customer, through a competitive displacement. The order represents an initial deployment of the Company s Network Analytics software and a major expansion of the deployment of the Company s policy traffic switch hardware across the network, to support both Network Analytics and policy use cases that improve subscribers quality of experience. On October 9, 2014 the Company announced that it had received acceptance from the TSX of its notice of intention to make a Normal Course Issuer Bid, as announced on September 9, On October 29, 2014 the Company announced SpeedConnect, a Michigan-based operator of fixed and mobile wireless Internet access services, has purchased solutions from its Virtual Series. On November 3, 2014 the Company announced that it was working with I-New, its Mobile Virtual Network Enabler partner, to enable service innovation for a leading Mobile Virtual Network Operator brand in Latin America. On November 3, 2014 the Company announced that it has received $8 million USD in orders from three tier-1 operators. The orders reflect demand for various versions of the Company s Policy Traffic Switch platform, including more than 20 next generation 100GE PTS 32000s, as well as a variety of software licenses. On November 13, 2014 the Company announced that ClearSky has deployed the Company s Policy Traffic Switch Virtual Series, integrated with ClearSky s Total Traffic Manager solution, for a rural broadband communications service provider in New Mexico. On November 14, 2014 the Company announced that its Quota Manager was recognized as Best Real Time Charging Platform for Customers at the Global Broadband Traffic Management Congress in Barcelona, Spain. On November 20, 2014 the Company released its bi-annual Global Internet Phenomena Report, identifying key trends in internet traffic and consumer usage patterns based on data from a variety of broadband services providers around the world. COMPANY OVERVIEW NARRATIVE DESCRIPTION OF THE BUSINESS The Company develops and markets Network Policy Control solutions for high-speed, or broadband, Internet service providers. The Company s solutions provide the tools to help service providers better understand their networks and apply specific network policies that will improve the quality of service for their subscribers, support the creation of new revenue-generating services, mitigate malicious traffic, more efficiently manage network traffic and notify subscribers of important information

14 The Company currently has operations, including direct sales channels throughout the world. The Company has approximately 587 full-time employees and maintains its corporate head office and the majority of its administration in Waterloo, Ontario. The Company also has research and development operations in Bangalore, India. In December 2013 the Company determined to wind-down its research and development office in Jerusalem, Israel, which it had operated since its acquisition of Cablematrix Technologies in 2007 and transition the research and development activities of that office to the Company s other offices in Ontario and India. In addition to direct sales channels, the Company has several global tier 1 network equipment reseller arrangements and also has distribution agreements with regional value-added resellers. MARKET Sandvine s target market is broadband Internet service providers worldwide, including those which offer such services through mobile, DSL, cable, fixed wireless, and FTTx Internet access technologies. Within the fixed line component (DSL, cable and FTTx) of the market, Sandvine primarily targets the top 250 operators around the world, by subscriber count, which represent the vast majority of the global subscriber base. Industry analyst reports estimate that there were approximately 650 million fixed line broadband subscribers globally at the end of In the wireless market (mobile and fixed wireless), Sandvine primarily targets the top 350 service providers in the world. According to industry analysts there were approximately 2 billion mobile broadband users at the end of This figure is expected to grow rapidly over the next few years with ongoing adoption of smart devices. PRODUCTS AND SOLUTIONS The Company s Network Policy Control solutions typically comprise a hardware platform and proprietary software modules that are typically bundled together to provide a system for broadband Internet service providers to identify (e.g., video streams like Netflix, VoIP traffic like Skype, or online gaming), report on and take action on the data traversing their networks. The core of Sandvine s hardware platform is the Policy Traffic Switch (PTS). The PTS product line includes three hardware models, the PTS 22000, PTS 24000, and PTS 32000, each of which is available in a range of variants with different performance characteristics. Sandvine also offers the PTS Virtual Series, which is a software-only version of the PTS functionality that is available for NFV- and SDN ready network architectures. Sandvine s solutions provide the tools to help service providers understand and forecast network traffic, and apply specific network policies that will support the creation of new revenuegenerating services, improve the quality of experience for their subscribers, more efficiently manage their network, and mitigate malicious traffic

15 Business Intelligence In order to accurately model network operation at a business level, service providers need to combine application- and subscriber-aware network statistics with data from billing and other operational systems. With unique insight and advanced analysis capabilities such as trending, predictive modelling and statistical operations, the Company s Network Business Intelligence solutions aim to enable confident business decisions regarding service plans, traffic management policies and capital investments. Revenue Generation Subscribers use the Internet in different ways and to different extents. The Company s Revenue Generation solutions help service providers: Create new, innovative service plans that differentiate their businesses and let subscribers choose a plan that suits them the best; Host Sandvine s solutions to sell as a service to their customers. For example, Sandvine s network operators (or other hosting providers) can host Sandvine s products to offer their business customers the ability to gain insight into their network usage, gain control over application usage, protect their networks, or track and manage machine-to-machine communications; Offer sponsored data plans where third parties, rather than subscribers, pay the cost for transmitting certain traffic. For example a game developed or movie studio may be willing to pay the transmission cost of game downloads or movie trailers. Traffic Optimization In times of congestion, a relatively small number of users and applications can consume the majority of network resources. The Company s Traffic Optimization solutions aim to mitigate network congestion and ensure fairness and maximize the subscribers quality of experience through the optimal use of network resources. Control bandwidth to contain transit costs and to cap traffic peaks; Protect subscriber quality of experience with the world s most accurate congestion management solution; Optimize routing and media delivery to deliver superior subscriber quality of experience. Network Security Networks are exposed to a wide variety of security risks that threaten the subscriber quality of experience, harm the network s reputation and increase network costs. Sandvine s Network Security solutions are designed to help service providers address these issues by gaining actionable insight into the threats on their networks: Filter dangerous and illegal URLs; Stop outbound spam, block worm propagation, protect against distributed denial-of service attacks, and discover and intercept botnets;

16 Contact subscribers who have infected devices using a powerful, non-invasive, inbrowser notification overlay. To support the delivery and use of its solutions, the Company offers a variety of services: Professional Services The Company s professional services organization supports customer requirements with consultation, product installation, integration and training relating to the Company s products. Support and Software Maintenance Services The Company s support and software maintenance services consist of the provision of ongoing support and software maintenance services for the Company s customers by way of online and telephone based help-desk services, software patches and distribution of regularly scheduled product release updates. The Company s revenue in fiscal 2014 and 2013 was derived as follows: Fiscal year ended November 30, 2014 $ November 30, 2013 $ Amounts in USD thousands Product 80,322 72,782 Service Support and maintenance 29,240 23,219 Professional services 11,015 8,702 Training, installation and 2,817 1,837 other 43,072 33,758 Total 123, ,540 SALES AND MARKETING Sandvine distributes its products and services through a combination of direct and indirect sales channels in order to obtain global sales coverage and retain direct contact with the customer base. The direct sales channel is organized across four sales regions: (i) North America; (ii) Europe, the Middle East and Africa ( EMEA ); (iii) Asia-Pacific ( AsiaPac ); and (iv) Caribbean and Latin America ( CALA ). With direct sales, the ultimate end customer purchases products directly from the Company. The direct sales team is comprised of Sandvine employees and local area representatives, who generally have fixed and variable components to their compensation. The indirect sales channel utilizes reseller partners such as global network equipment vendors, systems integrators and regional value added resellers to market and sell Sandvine s products. Sales may be initiated by partners or initiated by Sandvine and then fulfilled and serviced through reseller partners. In all cases the partner purchases the Company s product for the purpose of reselling it to the ultimate end customer. The Company has general global distribution agreements with several major network equipment vendors including Alcatel-Lucent, Huawei Technologies and Nokia Siemens Networks. The Company also has global distribution agreements with several world-wide systems integrators. The Company also currently has active distribution agreements with regional value-added resellers throughout the world. These organizations provide an economical solution for local sales and local

17 product support presence and often have existing supply relationships with incumbent local network service providers. COMPETITIVE CONDITIONS The market for the Company s products is intensely competitive, rapidly evolving and subject to technological change. The historical direct competitors to the Company in the field of traffic management consist primarily of Cisco Systems, Allot Communications and Procera Networks. As the market has grown and the Company has expanded into other areas of Network Policy Control, such as Revenue Generation, Business Intelligence and Network Security, Sandvine has faced various other competitors, including some of the network equipment vendors that have in past or currently resell the Company s products. Customers are increasingly presented with numerous alternative approaches to achieve their Revenue Generation, Traffic Optimization, Business Intelligence and Network Security goals. The Company also faces competition from other independent hardware and software vendors who may offer more narrow solutions to meet specific requirements of an individual service provider as well as from in-house development personnel of broadband service providers. To maintain and improve its competitive position, the Company must continue to develop and introduce in a timely and cost-effective manner, new products, product features, and services that keep pace with offerings by its competitors. The principal competitive factors in the markets in which the Company operates are product attributes such as functionality, scalability, compatibility, performance and ease of use, and qualitative attributes such as reliability, components and architecture, customer support, reputation and cost effectiveness. ECONOMIC DEPENDENCE For the fiscal year ended November 30, 2014 the Company continues to be highly dependent on a small number of customers and/or resellers for a large percentage of its overall revenue, with 24% of total revenues in the year being attributable to just two customers, both of whom are global reseller partners. In addition, 62% of the Company s total revenues in fiscal 2014 are attributable to sales through the Company s reseller channel. The Company anticipates that it will continue to have a significant percentage of its total revenues derived from a small group of large customers and large reseller partners as it executes on its growth strategy. The Company has no fixed purchase commitments or exclusivity obligations from any of its customers or reseller partners beyond current orders on hand at any given time. For further details on the breakdown of the Company s revenues by access technologies, sales channel, regions and customers, please see the Company s FY 2014 Management s Discussion and Analysis dated January 15, 2015 as filed on SEDAR at

18 GROWTH STRATEGY The Company believes that it is at the forefront of an emerging market, and that investing in research, development, and sales and marketing activities are critical to increasing revenues in future periods and maximizing the long-term success of the Company. The Company continues to enhance and invest in all of its solutions sets, and is particularly focused on its Revenue Generation and Business Intelligence product portfolios, as well as next generation hardware products and their virtualized versions. The Company believes that the market will increasingly require innovative solutions that help service providers understand network trends in order to create innovative new service tiers that better meet subscribers needs. The Company has been increasing its sales and marketing efforts in strategic locations globally. The Company believes that it has built strong products in each solution area and needs to continue to increase sales coverage to leverage these product investments into increased sales globally, both to new customers and through accelerated expansion orders from its large existing customer base. The Company anticipates that throughout fiscal 2015 it will continue to selectively assess acquisition opportunities to strengthen its market position and augment its growth. The evaluation of potential acquisitions will include whether the target company has technology that will extend Sandvine s core technology, has a complementary customer base, has prospective growth rates commensurate with those of the Company, and has a compatible culture. RESEARCH AND DEVELOPMENT The majority of the research and development activities of the Company take place at, or under the direction of, its corporate home office in Waterloo, Ontario with a smaller research and development office located in Bangalore, India. The Company has also utilized the services of various outsourcing firms in certain lower cost jurisdictions for specific engineering development activities, product support and components of its professional services consulting work. Research and development expenses have historically been, and will continue to be, a significant portion of the Company s overall cost structure as investment will continue in new product features and new platforms to better serve the existing needs of customers and to address emerging requirements of tomorrow. The Company s product development plans and initiatives enjoy the benefit of being influenced by experiences and feedback within the Company s growing installed base of customers, helping the Company to prioritize development objectives and capitalize on new opportunities for which customers require solutions. INTELLECTUAL PROPERTY Since inception, the Company has had a proactive strategy for the development of its intellectual property portfolio and the protection of that portfolio through a combination of patents, trademarks and copyright. Patent law offers some protection for current and future products of the Company. The Company maintains an active program regarding patent protection for novel elements in its products. Effective patent protection may not be available in some countries in which the Company sells its products. To date, the Company has sixty-three (63) patent applications that have either been granted or are currently pending in respect of key inventions. The Company has generally sought registration of those patents in Canada, the United States, the United Kingdom, the European Union and, more recently, in India

19 There can be no assurance that the Company s products will not infringe the intellectual property rights of other persons and the Company does routinely provide indemnification covenants in its contracts with its customers in the event of third party intellectual property infringement claims. It is the Company s practice to enter into confidentiality and non-disclosure agreements with all employees, consultants, suppliers, resellers and others to attempt to limit access to and distribution of proprietary information. In addition, all of the Company s current employees have entered into agreements that include an assignment to the Company of all intellectual property developed in the course of employment with the Company. MANUFACTURING All final assembly and testing of the Company s hardware products is done at its manufacturing facility in Waterloo, Ontario. The Company relies on outside suppliers for the various components that comprise finished hardware units, including such items as integrated circuits, memory, hard drives, network interface cards and power supplies. The Company also relies on multiple subcontractors for various sub-assemblies which are used in final products. The majority of the components and subcontract assembly work is single-sourced, however, the Company believes that all of its suppliers and subcontractors could be replaced or second-sourced over a relatively short period of time. The Company manages finished inventory and raw materials inventory levels based on a forecasted sales pipeline, taking into account sub-assembly, final test and assembly lead times. The quality management system used in the Company s manufacturing process is certified as ISO 9001: 2008 compliant and the Company s environmental management system has received ISO certification. PERSONNEL The Company has approximately 587 full-time employees. None of the Company s employees are unionized. FOREIGN EXCHANGE The operation and activities of the Company in foreign markets creates both foreign currency translation and transaction exposure to changes in exchange rates, primarily to the U.S. dollar, the Canadian dollar, and Indian Rupee. In order to attempt to reduce its estimated net foreign currency transaction exposure, the Company maintains a hedging program to help partially mitigate the short-term impact of changes in exchange rates on the Company s operations. RISK FACTORS In addition to the other information contained in this AIF, prospective investors should give careful consideration to the following risk factors, which are qualified in their entirety by reference to, and must be read in conjunction with, the detailed information appearing elsewhere in this AIF and in the Management s Discussion and Analysis for the fiscal year ended November 30, Any of the matters highlighted in these risk factors could have a material adverse effect on the business, results of operations and financial condition of the Company, causing an investor to lose all, or part of, his or her investment. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that the Company is not aware of or focused

20 on, or that are currently deemed immaterial may also impair the Company s business operations and cause the trading price of its Common Shares to decline. RISKS RELATED TO THE BUSINESS OF THE COMPANY The Company s revenues may fluctuate The Company has historically derived a significant percentage of its annual revenues from several large customer orders within each fiscal year. Revenues are difficult to forecast and may fluctuate significantly from reporting period to reporting period as a result of factors that are largely outside of the Company s control, including such things as: delays and variability in customer buying decisions; competitive conditions in the industry and the Company s ability to win new business; the ability of the Company to maintain existing relationships with its indirect sales channels and develop new relationships; variations in size of orders; delays in customer deployment schedules; and the discretionary nature of capital expenditure and information technology related purchase decisions. Such fluctuations in revenues may have a material adverse effect on the Company s business, financial condition and results of operations. The Company is dependent on a small number of key customers and key reseller channels for a large percentage of its revenues The Company derives a significant percentage of its total revenues from a small group of large broadband service providers and key reseller relationships, and, in particular, has, in each of the past three fiscal years, been dependent on a few large individual customers and resellers for a significant portion of its revenues. Any change in the Company s relationship with these key customers, key resellers or any other customers that may represent a significant portion of the Company s revenue in the future, or any significant variation in the ordering patterns or deployment schedules of those customers or resellers, could have a material adverse effect on the business, financial condition and results of operations for the Company. The Company s dependence on a small number of key customers and key resellers also exposes it to credit risk in respect of those customers and/or resellers. The failure of the Company s customers or resellers to pay amounts owing, or their failure to pay promptly may have a material adverse effect on the Company s business, financial condition and results of operations. The Company is dependent upon its Resellers in certain countries to provide localized support and other local services which assist the Company in avoiding certain costs and investments. By selling its products in certain markets through resellers, the Company is able to avoid certain costs relating to operating in those markets including but not limited to local support costs, costs of maintaining a local legal entity, administration costs, logistics etc. Should the Company choose or be required to sell direct in these markets (due to customer preference, termination of a reseller relationship or other reasons) the cost advantages described will no longer be available to the Company which could results in an increase in operating costs