Barracuda Reports Second Quarter Fiscal 2017 Results

Barracuda Networks, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

(Unaudited)

As of 

As of 

August 31, 2016

February 29, 2016

Assets

Current assets:

Cash and cash equivalents

$                        139,173

$                               118,654

Marketable securities

40,410

36,394

Accounts receivable, net of allowance for doubtful accounts 

34,028

36,520

Inventories, net

5,746

5,648

Deferred costs

32,049

31,943

Other current assets

10,862

12,450

Total current assets

262,268

241,609

Property and equipment, net

30,272

31,910

Deferred costs, non-current

26,782

27,019

Deferred income taxes, non-current

2,867

2,992

Other non-current assets

7,970

7,293

Intangible assets, net

35,660

39,386

Goodwill

70,163

69,595

Total assets

$                        435,982

$                               419,804

Liabilities and stockholders' deficit

Current liabilities:

Accounts payable

$                             9,429

$                                 15,939

Accrued payroll and related benefits

13,587

12,371

Other accrued liabilities

17,935

19,495

Deferred revenue

240,813

235,411

Note payable

4,251

268

Total current liabilities

286,015

283,484

Long-term liabilities:

Deferred revenue, non-current

158,065

157,363

Deferred income taxes, non-current

2,762

2,478

Note payable, non-current

-

4,115

Other long-term liabilities

4,901

4,462

Stockholders' deficit:

Common stock

52

52

Additional paid-in capital

353,352

337,439

Accumulated other comprehensive loss

(5,245)

(4,509)

Accumulated deficit

(363,920)

(365,080)

Total stockholders' deficit

(15,761)

(32,098)

Total liabilities and stockholders' deficit

$                        435,982

$                               419,804

Barracuda Networks, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share information)

(Unaudited)

Three months ended August 31,

Six months ended August 31,

2016

2015

2016

2015

Revenue:

Appliance

$    21,034

$     22,288

$     42,367

$     45,970

Subscription

66,896

56,083

132,217

110,375

Total revenue

87,930

78,371

174,584

156,345

Cost of revenue

20,240

15,935

40,481

31,901

Gross profit

67,690

62,436

134,103

124,444

Operating expenses:

Research and development

18,446

17,502

37,653

35,502

Sales and marketing

32,144

34,470

63,474

68,602

General and administrative

10,969

10,770

21,741

21,468

Total operating expenses

61,559

62,742

122,868

125,572

Income (loss) from operations

6,131

(306)

11,235

(1,128)

Other income (expense), net

1,515

97

2,505

(471)

Income (loss) before income taxes

7,646

(209)

13,740

(1,599)

Provision for income taxes

(5,209)

(2,030)

(8,519)

(4,472)

Net income (loss)

$       2,437

$     (2,239)

$        5,221

$     (6,071)

Net income (loss) per share:

Basic

$         0.05

$        (0.04)

$          0.10

$        (0.11)

Diluted

$         0.05

$        (0.04)

$          0.10

$        (0.11)

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

Basic

52,265

53,270

52,275

53,133

Diluted

53,321

53,270

53,088

53,133

Barracuda Networks, Inc.

Reconciliation of Selected GAAP to Non-GAAP Financial Measures

(in thousands)

(Unaudited)

Three months ended August 31,

Six months ended August 31,

2016

2015

2016

2015

GAAP cost of revenue

$     20,240

$     15,935

$       40,481

$       31,901

Amortization of intangible assets ⁽¹⁾

1,257

424

2,533

828

Depreciation expense ⁽²⁾

1,565

1,100

3,177

2,132

Stock-based compensation expense ⁽³⁾

338

255

636

466

Non-GAAP cost of revenue

$     17,080

$     14,156

$       34,135

$       28,475

GAAP sales and marketing expense

$     32,144

$     34,470

$       63,474

$       68,602

Amortization of intangible assets ⁽¹⁾

599

189

1,199

363

Depreciation expense ⁽²⁾

55

43

108

69

Stock-based compensation expense ⁽³⁾

1,943

1,639

3,791

3,189

Acquisition and other non-recurring charges ⁽⁴⁾

-

32

-

(293)

Non-GAAP sales and marketing expense

$     29,547

$     32,567

$       58,376

$       65,274

GAAP research and development expense

$     18,446

$     17,502

$       37,653

$       35,502

Depreciation expense ⁽²⁾

138

160

291

329

Stock-based compensation expense ⁽³⁾

2,608

2,000

5,072

3,835

Acquisition and other non-recurring charges ⁽⁴⁾

-

585

217

1,690

Non-GAAP research and development expense

$     15,700

$     14,757

$       32,073

$       29,648

GAAP general and administrative expense

$     10,969

$     10,770

$       21,741

$       21,468

Depreciation expense ⁽²⁾

572

379

1,159

748

Stock-based compensation expense ⁽³⁾

3,007

3,272

6,334

6,220

Acquisition and other non-recurring charges ⁽⁴⁾

409

10

584

303

Non-GAAP general and administrative expense

$       6,981

$       7,109

$       13,664

$       14,197

GAAP total expense

$     81,799

$     78,677

$     163,349

$     157,473

Amortization of intangible assets ⁽¹⁾

1,856

613

3,732

1,191

Depreciation expense ⁽²⁾

2,330

1,682

4,735

3,278

Stock-based compensation expense ⁽³⁾

7,896

7,166

15,833

13,710

Acquisition and other non-recurring charges ⁽⁴⁾

409

627

801

1,700

Non-GAAP total expense

$     69,308

$     68,589

$     138,248

$     137,594

Depreciation expense ⁽²⁾

2,330

1,682

4,735

3,278

Non-GAAP total expense including depreciation

$     71,638

$     70,271

$     142,983

$     140,872

Barracuda Networks, Inc.

Reconciliation of Selected GAAP to Non-GAAP Financial Measures

(in thousands, except per share information)

(Unaudited)

Three months ended August 31,

Six months ended August 31,

2016

2015

2016

2015

GAAP operating income (loss)

$        6,131

$         (306)

$       11,235

$       (1,128)

Amortization of intangible assets ⁽¹⁾

1,856

613

3,732

1,191

Stock-based compensation expense ⁽³⁾

7,896

7,166

15,833

13,710

Acquisition and other non-recurring charges ⁽⁴⁾

409

627

801

1,700

Non-GAAP operating income

$     16,292

$       8,100

$       31,601

$       15,473

GAAP net income (loss) 

$       2,437

$     (2,239)

$         5,221

$       (6,071)

Amortization of intangible assets ⁽¹⁾

1,856

613

3,732

1,191

Stock-based compensation expense ⁽³⁾

7,896

7,166

15,833

13,710

Acquisition and other non-recurring charges ⁽⁴⁾

409

627

801

1,700

Income tax effect on non-GAAP exclusions ⁽⁵⁾

316

(382)

(971)

(142)

Other expense (income) adjustments ⁽⁶⁾

(1,497)

(156)

(2,474)

378

Non-GAAP net income

$     11,417

$       5,629

$       22,142

$       10,766

Non-GAAP diluted earnings per share ⁽⁷⁾

$         0.21

$         0.10

$           0.42

$           0.20

Weighted-average shares used to compute diluted earnings per share

53,321

54,913

53,088

54,974

(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 stock-based compensation expense allows for financial results that are more indicative of our continuing operations. We also 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) 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, the legal expenses incurred in connection with a litigation matter related to a prior acquisition and other non-recurring expenses and (ii) costs and settlements associated with an internal investigation of export control compliance.

(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 these items 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 August 31,

Six months ended August 31,

2016

2015

2016

2015

GAAP net income (loss)

$         2,437

$      (2,239)

$         5,221

$       (6,071)

Deferred revenue, end of period

398,878

389,835

398,878

389,835

Less: Deferred revenue, beginning of period

(393,072)

(381,003)

(392,774)

(372,862)

Less: Deferred costs, end of period

(58,831)

(60,214)

(58,831)

(60,214)

Deferred costs, beginning of period

59,061

59,255

58,962

57,936

Other expense (income), net

(1,515)

(97)

(2,505)

471

Provision for income taxes

5,209

2,030

8,519

4,472

Acquisition and other non-recurring charges

409

627

801

1,700

Stock-based compensation expense

7,896

7,166

15,833

13,710

Amortization of intangible assets

1,856

613

3,732

1,191

Depreciation expense

2,330

1,682

4,735

3,278

Adjusted EBITDA ⁽¹⁾

$       24,658

$      17,655

$       42,571

$       33,446

(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 prior fiscal year's comparable periods presented exclude any amounts related to the acquisition date deferred revenue 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 August 31,

Six months ended August 31,

2016

2015

2016

2015

GAAP cash flows from operating activities

$    20,515

$    22,317

$     32,629

$     28,619

Purchases of property and equipment

(1,020)

(1,567)

(2,969)

(3,443)

Acquisition and other non-recurring charges ⁽¹⁾

776

380

1,521

1,266

Adjusted free cash flow ⁽²⁾

$    20,271

$    21,130

$     31,181

$     26,442

(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 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, the legal expenses incurred in connection with a litigation matter related to a prior acquisition and other non-recurring expenses, (ii) payments associated with an intellectual property settlement, and (iii) payments associated with an internal investigation of export control compliance.

(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 August 31,

Six months ended August 31,

2016

2015

2016

2015

GAAP Revenue

$       87,930

$      78,371

$     174,584

$     156,345

Total deferred revenue, end of period

398,878

389,835

398,878

389,835

Less:  total deferred revenue, beginning of period

(393,072)

(381,003)

(392,774)

(372,862)

Deferred revenue adjustments

6,562

11,242

17,811

19,401

Total change in deferred revenue and adjustments

12,368

20,074

23,915

36,374

Gross billings ⁽¹⁾⁽²⁾

$     100,298

$      98,445

$     198,499

$     192,719

(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. We believe that gross billings provide insight into the sales of our solutions and performance of our business. The deferred revenue balances for the prior fiscal year's comparable periods exclude amounts related to the deferred revenue assumed in connection with our acquisition of C2C Systems Limited, which closed in the second quarter of fiscal 2015.

(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 August 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 August 31,

Six months ended August 31,

2016

2015

2016

2015

Operating activities

Net income (loss)

$         2,437

$       (2,239)

$         5,221

$       (6,071)

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

Depreciation, amortization and impairment expense

4,186

2,295

8,467

4,469

Stock-based compensation expense

7,896

7,166

15,833

13,710

Excess tax benefits from equity compensation plans

(650)

(1,116)

(791)

(3,260)

Deferred income taxes

213

94

474

239

Other

(503)

333

(728)

670

Changes in operating assets and liabilities:

Accounts receivable, net

1,717

196

2,732

(2,143)

Inventories, net

280

(862)

(83)

(1,125)

Income taxes, net

2,146

1,730

3,598

4,019

Deferred costs

366

(905)

340

(2,284)

Other assets

1,094

(1,216)

(575)

(933)

Accounts payable 

(3,396)

5,338

(6,679)

2,225

Accrued payroll and related benefits

1,057

2,359

1,126

2,298

Other liabilities

(507)

405

(762)

53

Deferred revenue

4,179

8,739

4,456

16,752

Net cash provided by operating activities

20,515

22,317

32,629

28,619

Investing activities

Proceeds from the sale of marketable securities

4,943

3,974

10,294

7,177

Proceeds from the maturity of marketable securities

4,187

1,641

8,018

4,667

Purchases of marketable securities

(10,205)

(5,747)

(21,777)

(14,240)

Purchases of property and equipment

(1,020)

(1,567)

(2,969)

(3,443)

Purchases of intangible assets

(1,000)

-

(1,000)

-

Purchases of non-marketable investments

-

(350)

(636)

(350)

Business combinations, net of cash acquired

(60)

(749)

(243)

(749)

Net cash used in investing activities

(3,155)

(2,798)

(8,313)

(6,938)

Financing activities

Proceeds from issuance of common stock

1,838

1,052

4,869

4,300

Taxes paid related to net share settlement of equity awards

(990)

(1,850)

(2,544)

(4,026)

Repurchases of common stock

(6,961)

-

(7,241)

-

Employee loans extended, net of repayment

32

(2,208)

(2)

(2,484)

Excess tax benefits from equity compensation plans

650

1,116

791

3,260

Repayment of note payable

(66)

(62)

(133)

(125)

Other

-

(25)

-

(181)

Net cash provided by (used in) financing activities

(5,497)

(1,977)

(4,260)

744

Effect of exchange rate changes on cash and cash equivalents

328

79

463

(115)

Net increase in cash and cash equivalents

12,191

17,621

20,519

22,310

Cash and cash equivalents at beginning of period

126,982

156,062

118,654

151,373

Cash and cash equivalents at end of period

$    139,173

$     173,683

$    139,173

$     173,683