Barracuda Reports First Quarter Fiscal 2017 Results

Barracuda Networks, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

(Unaudited)

As of 

As of 

May 31, 2016

February 29, 2016

Assets

Current assets:

Cash and cash equivalents

$                                 126,982

$                                 118,654

Marketable securities

39,727

36,394

Accounts receivable, net of allowance for doubtful accounts 

35,501

36,520

Inventories, net

6,011

5,648

Deferred costs

32,072

31,943

Other current assets

13,255

12,450

Total current assets

253,548

241,609

Property and equipment, net

31,468

31,910

Deferred costs, non-current

26,989

27,019

Deferred income taxes, non-current

2,993

2,992

Other non-current assets

8,039

7,293

Intangible assets, net

37,516

39,386

Goodwill

70,160

69,595

Total assets

$                                 430,713

$                                 419,804

Liabilities and stockholders' deficit

Current liabilities:

Accounts payable

$                                   12,696

$                                   15,939

Accrued payroll and related benefits

12,521

12,371

Other accrued liabilities

20,031

19,495

Deferred revenue

236,856

235,411

Note payable

273

268

Total current liabilities

282,377

283,484

Long-term liabilities:

Deferred revenue, non-current

156,216

157,363

Deferred income taxes, non-current

2,678

2,478

Note payable, non-current

4,044

4,115

Other long-term liabilities

4,654

4,462

Stockholders' deficit:

Common stock

52

52

Additional paid-in capital

346,993

337,439

Accumulated other comprehensive loss

(3,838)

(4,509)

Accumulated deficit

(362,463)

(365,080)

Total stockholders' deficit

(19,256)

(32,098)

Total liabilities and stockholders' deficit

$                                 430,713

$                                 419,804

Barracuda Networks, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share information)

(Unaudited)

Three months ended May 31,

2016

2015

Revenue:

Appliance

$                                    21,333

$                                    23,682

Subscription

65,321

54,292

Total revenue

86,654

77,974

Cost of revenue

20,241

15,966

Gross profit

66,413

62,008

Operating expenses:

Research and development

19,207

18,000

Sales and marketing

31,330

34,132

General and administrative

10,772

10,698

Total operating expenses

61,309

62,830

Income (loss) from operations

5,104

(822)

Other income (expense), net

990

(568)

Income (loss) before income taxes

6,094

(1,390)

Provision for income taxes

(3,310)

(2,442)

Net income (loss)

$                                      2,784

$                                    (3,832)

Net income (loss) per share:

Basic

$                                         0.05

$                                      (0.07)

Diluted

$                                         0.05

$                                      (0.07)

Weighted-average shares used to compute net income (loss) per share:

Basic

52,285

52,996

Diluted

52,854

52,996

Barracuda Networks, Inc.

Reconciliation of Selected GAAP to Non-GAAP Financial Measures

(in thousands)

(Unaudited)

Three months ended May 31,

2016

2015

GAAP cost of revenue

$                            20,241

$                            15,966

Amortization of intangible assets ⁽¹⁾

1,276

404

Depreciation expense ⁽²⁾

1,612

1,032

Stock-based compensation expense ⁽³⁾

298

211

Non-GAAP cost of revenue

$                            17,055

$                            14,319

GAAP sales and marketing expense

$                            31,330

$                            34,132

Amortization of intangible assets ⁽¹⁾

600

174

Depreciation expense ⁽²⁾

53

26

Stock-based compensation expense ⁽³⁾

1,848

1,550

Acquisition and other non-recurring charges ⁽⁴⁾

-

(325)

Non-GAAP sales and marketing expense

$                            28,829

$                            32,707

GAAP research and development expense

$                            19,207

$                            18,000

Depreciation expense ⁽²⁾

153

169

Stock-based compensation expense ⁽³⁾

2,464

1,835

Acquisition and other non-recurring charges ⁽⁴⁾

217

1,105

Non-GAAP research and development expense

$                            16,373

$                            14,891

GAAP general and administrative expense

$                            10,772

$                            10,698

Depreciation expense ⁽²⁾

587

369

Stock-based compensation expense ⁽³⁾

3,327

2,948

Acquisition and other non-recurring charges ⁽⁴⁾

175

293

Non-GAAP general and administrative expense

$                               6,683

$                               7,088

GAAP total expense

$                            81,550

$                            78,796

Amortization of intangible assets ⁽¹⁾

1,876

578

Depreciation expense ⁽²⁾

2,405

1,596

Stock-based compensation expense ⁽³⁾

7,937

6,544

Acquisition and other non-recurring charges ⁽⁴⁾

392

1,073

Non-GAAP total expense

$                            68,940

$                            69,005

Depreciation expense ⁽²⁾

2,405

1,596

Non-GAAP total expense including depreciation

$                            71,345

$                            70,601

Barracuda Networks, Inc.

Reconciliation of Selected GAAP to Non-GAAP Financial Measures

(in thousands, except per share information)

(Unaudited)

Three months ended May 31,

2016

2015

GAAP operating income (loss)

$                            5,104

$                                (822)

Amortization of intangible assets ⁽¹⁾

1,876

578

Stock-based compensation expense ⁽³⁾

7,937

6,544

Acquisition and other non-recurring charges ⁽⁴⁾

392

1,073

Non-GAAP operating income

$                          15,309

$                               7,373

GAAP net income (loss) 

$                            2,784

$                             (3,832)

Amortization of intangible assets ⁽¹⁾

1,876

578

Stock-based compensation expense ⁽³⁾

7,937

6,544

Acquisition and other non-recurring charges ⁽⁴⁾

392

1,073

Income tax effect on non-GAAP exclusions ⁽⁵⁾

(1,287)

240

Other expense (income) adjustments ⁽⁶⁾

(977)

534

Non-GAAP net income

$                           10,725

$                               5,137

Non-GAAP diluted earnings per share ⁽⁷⁾

$                               0.20

$                                 0.09

Weighted-average shares used to compute diluted earnings per share

52,854

55,034

⁽¹⁾

Amortization of Intangible Assets.We provide non-GAAP information which excludes expenses for the amortization of intangible assets, as well as certain losses on disposal and impairment of such assets, that primarily relate to purchased intangible assets associated with our acquisitions. We believe that eliminating this expense from our non-GAAP measures is useful to investors, because the amortization of intangible assets can be inconsistent in amount and frequency and is significantly impacted by the timing and magnitude of our acquisition transactions, which also vary in frequency from period to period. Accordingly, we analyze the performance of our operations in each period without regard to such expenses.

⁽²⁾

Depreciation Expense. We provide non-GAAP information which excludes depreciation expense related to the amortization of property and equipment, as well as certain losses from disposal of such assets. We believe that eliminating this expense from our non-GAAP measures is useful to investors, because the acquisition of property and equipment, and the corresponding depreciation expense, can be inconsistent in amount and can vary from period to period.

⁽³⁾

Stock-Based Compensation Expense. We provide non-GAAP information which excludes expenses for stock-based compensation. We believe the exclusion of this item allows for financial results that are more indicative of our continuing operations. We believe that the exclusion of stock-based compensation expense provides for a better comparison of our operating results to prior periods and to our peer companies as the calculations of stock-based compensation vary from period to period and company to company due to different valuation methodologies, subjective assumptions and the variety of award types.

⁽⁴⁾

Acquisition and Other Non-Recurring Charges. We exclude certain expense items resulting from acquisitions and other non-recurring charges, which we do not expect to recur in our continuing operating results. We believe that adjusting for these charges allows us to better compare results from period to period in order to assess the ongoing operating results of our business. The charges include: (i) costs and settlements associated with an internal investigation of export control compliance and (ii)  legal, valuation consulting and other expenses incurred in connection with acquisitions, the fair value remeasurements of contingent considerations, the payments made under the terms of certain acquisition agreements and other non-recurring expenses.

⁽⁵⁾

Income Tax Effect of Non-GAAP Exclusions. We believe providing financial information with and without the income tax effect of excluding items related to our non-GAAP financial measures provide our management and users of the financial statements with better clarity regarding the ongoing performance and future liquidity of our business. Excluded items include, but are not limited to: (i) amortization expense of intangible assets, (ii) stock-based compensation expense, (iii) acquisition and other non-recurring charges, and (iv) quarterly changes to the valuation allowance previously established.

⁽⁶⁾

Other expense (income) adjustments. We provide non-GAAP information that excludes the effect of certain other income and losses. These adjustments consist of realized gains and losses from the sale of marketable securities and foreign currency remeasurement gains and losses. For all non-functional currency account balances, the remeasurement of such balances to the functional currency will result in either a foreign exchange gain or a loss which is recorded in other income (expense), net. We believe that eliminating these items from our non-GAAP measures is useful to investors, because foreign currency remeasurement adjustments can be inconsistent in amount and can vary from period to period.

⁽⁷⁾

Non-GAAP Diluted Earnings Per Share. We provide non-GAAP diluted earnings per share. The non-GAAP diluted earnings per share amount is calculated based on our non-GAAP net income divided by the weighted-average diluted shares outstanding for the period.

Barracuda Networks, Inc.

Reconciliation of GAAP Net Income (Loss) to Adjusted EBITDA

(in thousands)

(Unaudited)

Three months ended May 31,

2016

2015

GAAP net income (loss)

$                                        2,784

$                                     (3,832)

Deferred revenue, end of period

393,072

381,003

Less: Deferred revenue, beginning of period

(392,774)

(372,862)

Less: Deferred costs, end of period

(59,061)

(59,255)

Deferred costs, beginning of period

58,962

57,936

Other expense (income), net

(990)

568

Provision for income taxes

3,310

2,442

Acquisition and other non-recurring charges

392

1,073

Stock-based compensation expense

7,937

6,544

Amortization of intangible assets

1,876

578

Depreciation expense

2,405

1,596

Adjusted EBITDA ⁽¹⁾

$                                     17,913

$                                     15,791

⁽¹⁾

Adjusted EBITDA. We define adjusted EBITDA as net income (loss) plus increases in deferred revenue and increases in the associated deferred costs, plus non-cash and non-operating charges which include: (i) other expense (income), net, (ii) provision for income taxes, (iii) acquisition and other non-recurring charges, (iv) stock-based compensation expense, (v) amortization of intangible assets, including certain losses on disposal and impairment of intangible assets, and (vi) depreciation expense, including certain losses on disposal of fixed assets. The deferred revenue balances for the periods presented exclude any remaining acquisition date deferred revenue amounts assumed in connection with our acquisition of C2C Systems Limited, which closed in the second quarter of fiscal 2015. We believe adjusted EBITDA provides an indication of profitability from our operations, and provides a consistent measure of our performance from period to period.
 

Barracuda Networks, Inc.

Reconciliation of GAAP Cash Flows from Operating Activities to Adjusted Free Cash Flow

(in thousands)

(Unaudited)

Three months ended May 31,

2016

2015

GAAP cash flows from operating activities

$                                           12,114

$                                              6,302

Purchases of property and equipment

(1,949)

(1,876)

Acquisition and other non-recurring charges ⁽¹⁾

745

886

Adjusted free cash flow ⁽²⁾

$                                           10,910

$                                              5,312

⁽¹⁾

Acquisition and Other Non-Recurring Charges. We exclude the cash flow impact resulting from acquisitions and other non-recurring charges, which we do not expect to recur in our continuing operating results. We believe that adjusting for these cash outflows allows us to better compare results from period to period in order to assess the ongoing operating results of our business. The cash flows include: (i) payments associated with an internal investigation of export control compliance and (ii) payments related to legal, valuation consulting and other expenses incurred in connection with acquisitions, as well as the payments under the terms of certain acquisition agreements and other non-recurring expenses.

⁽²⁾

Adjusted Free Cash Flow. We define adjusted free cash flow as cash flows from operating activities less the purchases of property and equipment plus the cash flow effect of acquisition and other non-recurring charges. We believe that adjusting free cash flow to exclude these charges allows us to better compare results from period to period in order to assess the ongoing free cash flow of our business. We believe adjusted free cash flow is an important liquidity measure that reflects the cash generated by the business after the purchase of property and equipment that can then be used for, among other things, strategic acquisitions, investments in the business and funding ongoing operations.

Barracuda Networks, Inc.

Reconciliation of GAAP Revenue to Gross Billings

(in thousands)

(Unaudited)

Three months ended May 31,

2016

2015

GAAP Revenue

$                                   86,654

$                                   77,974

Total deferred revenue, end of period

393,072

381,003

Less:  total deferred revenue, beginning of period

(392,774)

(372,862)

Deferred revenue adjustments

11,249

8,159

Total change in deferred revenue and adjustments

11,547

16,300

Gross billings ⁽¹⁾⁽²⁾

$                                   98,201

$                                   94,274

⁽¹⁾

Gross Billings. We define gross billings as total revenue plus the change in deferred revenue and other adjustments, which primarily consist of returns and reserves with respect to the 30-day right of return we provide to customers, as well as rebates for certain channel partner activities. The deferred revenue balances for the periods presented exclude any remaining acquisition date deferred revenue amounts assumed in connection with our acquisition of C2C Systems Limited, which closed in the second quarter of fiscal 2015. We believe that gross billings provide insight into the sales of our solutions and performance of our business.

⁽²⁾

In order to determine how our business performed exclusive of the effect of foreign currency fluctuations, we compare the percentage change in our gross billings from one period to another using a constant currency. To present this gross billings information, the current and comparative prior period results for entities that operate in other than U.S. dollars are converted into U.S. dollars at constant exchange rates. For example, the rates in effect at May 31, 2015, which was the last day of our prior fiscal year's comparable quarter, were used to convert current and comparable prior period gross billings rather than the actual exchange rates in effect during the respective period.

Barracuda Networks, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

Three months ended May 31,

2016

2015

Operating activities

Net income (loss)

$                                  2,784

$                                (3,832)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation, amortization and impairment expense

4,281

2,174

Stock-based compensation expense

7,937

6,544

Excess tax benefits from equity compensation plans

(141)

(2,144)

Deferred income taxes

261

145

Other

(225)

337

Changes in operating assets and liabilities:

Accounts receivable, net

1,015

(2,339)

Inventories, net

(363)

(263)

Income taxes, net

1,452

2,289

Deferred costs

(26)

(1,379)

Other assets

(1,669)

283

Accounts payable 

(3,283)

(3,113)

Accrued payroll and related benefits

69

(61)

Other liabilities

(255)

(352)

Deferred revenue

277

8,013

Net cash provided by operating activities

12,114

6,302

Investing activities

Proceeds from the sale of marketable securities

5,351

3,203

Proceeds from the maturity of marketable securities

3,831

3,026

Purchases of marketable securities

(11,572)

(8,493)

Purchases of property and equipment

(1,949)

(1,876)

Purchases of non-marketable investments

(636)

-

Business combinations, net of cash acquired

(183)

-

Net cash used in investing activities

(5,158)

(4,140)

Financing activities

Proceeds from issuance of common stock

3,031

3,248

Taxes paid related to net share settlement of equity awards

(1,554)

(2,176)

Repurchases of common stock

(280)

-

Employee loans extended, net of repayment

(34)

(276)

Excess tax benefits from equity compensation plans

141

2,144

Repayment of note payable

(67)

(63)

Other

-

(156)

Net cash provided by financing activities

1,237

2,721

Effect of exchange rate changes on cash and cash equivalents

135

(194)

Net increase in cash and cash equivalents

8,328

4,689

Cash and cash equivalents at beginning of period

118,654

151,373

Cash and cash equivalents at end of period

$                              126,982

$                              156,062