Barracuda Reports Second Quarter Fiscal 2016 Results

Barracuda Networks, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

(Unaudited)

August 31, 2015

February 28, 2015

Assets

Current assets:

Cash and cash equivalents

$                        173,683

$                               151,373

Marketable securities

44,066

40,754

Accounts receivable, net of allowance for doubtful accounts 

43,026

40,725

Inventories, net

5,579

4,454

Deferred costs

31,926

30,221

Deferred income taxes

152

479

Other current assets

12,494

12,260

Total current assets

310,926

280,266

Property and equipment, net

27,787

27,839

Deferred costs, non-current

28,288

27,715

Deferred income taxes, non-current

384

443

Other non-current assets

5,128

4,123

Intangible assets, net

8,748

9,217

Goodwill

40,063

39,742

Total assets

$                        421,324

$                               389,345

Liabilities and stockholders' deficit

Current liabilities:

Accounts payable

$                           18,530

$                                 16,356

Accrued payroll and related benefits

11,424

11,656

Other accrued liabilities

13,003

12,465

Deferred revenue

225,387

209,904

Deferred income taxes

362

563

Note payable

259

252

Total current liabilities

268,965

251,196

Long-term liabilities:

Deferred revenue, non-current

164,519

163,253

Deferred income taxes, non-current

2,250

2,396

Note payable, non-current

4,251

4,383

Other long-term liabilities

7,769

7,201

Stockholders' deficit:

Common stock

53

53

Additional paid-in capital

333,316

316,035

Accumulated other comprehensive loss

(2,789)

(4,233)

Accumulated deficit

(357,010)

(350,939)

Total stockholders' deficit

(26,430)

(39,084)

Total liabilities and stockholders' deficit

$                        421,324

$                               389,345

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,

2015

2014

2015

2014

Revenue:

Appliance

$  22,288

$  20,676

$  45,970

$  41,512

Subscription

56,083

47,976

110,375

93,349

Total revenue

78,371

68,652

156,345

134,861

Cost of revenue

15,935

14,044

31,901

28,450

Gross profit

62,436

54,608

124,444

106,411

Operating expenses:

Research and development

17,502

13,826

35,502

26,778

Sales and marketing

34,470

31,031

68,602

60,510

General and administrative

10,770

8,624

21,468

17,188

Total operating expenses

62,742

53,481

125,572

104,476

Income (loss) from operations

(306)

1,127

(1,128)

1,935

Other income (expense), net

97

(681)

(471)

(738)

Income (loss) before income taxes

(209)

446

(1,599)

1,197

Benefit from (provision for) income taxes

(2,030)

292

(4,472)

(308)

Net income (loss)

$  (2,239)

$        738

$  (6,071)

$        889

Net income (loss) per share:

Basic

$    (0.04)

$      0.01

$    (0.11)

$      0.02

Diluted

$    (0.04)

$      0.01

$    (0.11)

$      0.02

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

Basic

53,270

51,667

53,133

51,412

Diluted

53,270

53,743

53,133

53,675

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,

2015

2014

2015

2014

GAAP cost of revenue

$     15,935

$     14,044

$       31,901

$       28,450

Amortization of intangible assets (1)

424

673

828

1,346

Depreciation expense (2)

1,100

756

2,132

1,428

Stock-based compensation expense (3)

255

73

466

125

Non-GAAP cost of revenue

$     14,156

$     12,542

$       28,475

$       25,551

GAAP sales and marketing expense

$     34,470

$     31,031

$       68,602

$       60,510

Amortization of intangible assets (1)

189

438

363

741

Depreciation expense (2)

43

38

69

77

Stock-based compensation expense (3)

1,639

821

3,189

1,403

Acquisition and other non-recurring charges (4)

32

-

(293)

-

Non-GAAP sales and marketing expense

$     32,567

$     29,734

$       65,274

$       58,289

GAAP research and development expense

$     17,502

$     13,826

$       35,502

$       26,778

Depreciation expense (2)

160

156

329

307

Stock-based compensation expense (3)

2,000

902

3,835

1,650

Acquisition and other non-recurring charges (4)

585

383

1,690

755

Non-GAAP research and development expense

$     14,757

$     12,385

$       29,648

$       24,066

GAAP general and administrative expense

$     10,770

$        8,624

$       21,468

$       17,188

Depreciation expense (2)

379

274

748

523

Stock-based compensation expense (3)

3,272

1,940

6,220

3,640

Acquisition and other non-recurring charges (4)

10

257

303

274

Non-GAAP general and administrative expense

$        7,109

$        6,153

$       14,197

$       12,751

GAAP total expense

$     78,677

$     67,525

$     157,473

$     132,926

Amortization of intangible assets (1)

613

1,111

1,191

2,087

Depreciation expense (2)

1,682

1,224

3,278

2,335

Stock-based compensation expense (3)

7,166

3,736

13,710

6,818

Acquisition and other non-recurring charges (4)

627

640

1,700

1,029

Non-GAAP total expense

$     68,589

$     60,814

$     137,594

$     120,657

Depreciation expense (2)

1,682

1,224

3,278

2,335

Non-GAAP total expense including depreciation

$     70,271

$     62,038

$     140,872

$     122,992

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,

2015

2014

2015

2014

GAAP operating income (loss)

$         (306)

$        1,127

$       (1,128)

$          1,935

Amortization of intangible assets (1)

613

1,111

1,191

2,087

Stock-based compensation expense (3)

7,166

3,736

13,710

6,818

Acquisition and other non-recurring charges (4)

627

640

1,700

1,029

Non-GAAP operating income

$        8,100

$        6,614

$       15,473

$        11,869

GAAP net income (loss) 

$      (2,239)

$           738

$       (6,071)

$             889

Amortization of intangible assets (1)

613

1,111

1,191

2,087

Stock-based compensation expense (3)

7,166

3,736

13,710

6,818

Acquisition and other non-recurring charges (4)

627

640

1,700

1,029

Income tax effect of non-GAAP exclusions (5)

(382)

(2,243)

(142)

(3,186)

Other expense (income) adjustments (6)

(156)

569

378

516

Non-GAAP net income

$        5,629

$        4,551

$        10,766

$          8,153

Non-GAAP diluted earnings per share (7)

$          0.10

$          0.08

$            0.20

$            0.15

Weighted-average shares used to compute diluted earnings per share

54,913

53,743

54,974

53,675

(1)

Amortization of Intangible Assets. We provide non-GAAP information which excludes expenses for the amortization of intangible assets, as well as certain losses from disposal 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 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 most significantly consist of 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 August 31,

Six months ended August 31,

2015

2014

2015

2014

GAAP net income (loss)

$     (2,239)

$           738

$     (6,071)

$           889

Deferred revenue, end of period

389,835

342,663

389,835

342,663

Less: Deferred revenue, beginning of period

(381,003)

(328,488)

(372,862)

(313,157)

Less: Deferred costs, end of period

(60,214)

(54,582)

(60,214)

(54,582)

Deferred costs, beginning of period

59,255

52,549

57,936

50,279

Other expense (income), net

(97)

681

471

738

Provision for (benefit from) income taxes

2,030

(292)

4,472

308

Acquisition and other non-recurring charges

627

640

1,700

1,029

Stock-based compensation expense

7,166

3,736

13,710

6,818

Amortization of intangible assets

613

1,111

1,191

2,087

Depreciation expense

1,682

1,224

3,278

2,335

Adjusted EBITDA (1)

$     17,655

$     19,980

$     33,446

$     39,407

(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 (benefit from) income taxes, (iii) acquisition and other non-recurring charges, (iv) stock-based compensation expense, (v) amortization of intangible assets, including certain losses on disposal 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 August 31,

Six months ended August 31,

2015

2014

2015

2014

GAAP cash flows from operating activities

$  22,317

$  15,475

$  28,619

$  20,882

Purchase of property and equipment

(1,567)

(2,186)

(3,443)

(3,775)

Acquisition and other non-recurring charges (1)

380

390

1,266

775

Adjusted free cash flow (2)

$  21,130

$  13,679

$  26,442

$  17,882

(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 August 31,

Six months ended August 31,

2015

2014

2015

2014

GAAP Revenue

$   78,371

$   68,652

$  156,345

$  134,861

Total deferred revenue, end of period

389,835

342,663

389,835

342,663

Less:  total deferred revenue, beginning of period

(381,003)

(328,488)

(372,862)

(313,157)

Deferred revenue adjustments

11,242

6,208

19,401

12,268

Total change in deferred revenue and adjustments

20,074

20,383

36,374

41,774

Gross billings (1)(2)

$   98,445

$   89,035

$  192,719

$  176,635

(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 August 31, 2014, 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,

2015

2014

2015

2014

Operating activities

Net income (loss)

$       (2,239)

$             738

$       (6,071)

$             889

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

Depreciation and amortization expense

2,295

2,335

4,469

4,422

Stock-based compensation expense

7,166

3,736

13,710

6,818

Excess tax benefits from equity compensation plans

(1,116)

(2,566)

(3,260)

(4,338)

Deferred income taxes

94

(2,944)

239

(6,198)

Other

333

19

670

31

Changes in operating assets and liabilities:

Accounts receivable, net

196

(3,433)

(2,143)

(8,527)

Inventories, net

(862)

(267)

(1,125)

463

Income taxes, net

1,730

2,049

4,019

3,073

Deferred costs

(905)

(2,130)

(2,284)

(4,412)

Other assets

(1,216)

(117)

(933)

(147)

Accounts payable 

5,338

3,312

2,225

(1,267)

Accrued payroll and related benefits

2,359

(52)

2,298

(29)

Other liabilities

405

562

53

531

Deferred revenue

8,739

14,233

16,752

29,573

Net cash provided by operating activities

22,317

15,475

28,619

20,882

Investing activities

Proceeds from the sale of marketable securities

3,974

-

7,177

-

Proceeds from the maturity of marketable securities

1,641

-

4,667

-

Purchase of marketable securities

(5,747)

-

(14,240)

-

Purchase of property and equipment

(1,567)

(2,186)

(3,443)

(3,775)

Purchase of investments in non-marketable equity and debt securities

(350)

-

(350)

(600)

Business combinations, net of cash acquired

(749)

(4,791)

(749)

(4,791)

Net cash used in investing activities

(2,798)

(6,977)

(6,938)

(9,166)

Financing activities

Proceeds from issuance of common stock

1,052

4,906

4,300

7,246

Taxes paid related to net share settlement of equity awards

(1,850)

(1,215)

(4,026)

(2,340)

Employee loans extended, net of repayment

(2,208)

393

(2,484)

(70)

Excess tax benefits from equity compensation plans

1,116

2,566

3,260

4,338

Repayment of note payable

(62)

(58)

(125)

(118)

Other

(25)

-

(181)

-

Net cash provided by financing activities

(1,977)

6,592

744

9,056

Effect of exchange rate changes on cash and cash equivalents

79

(89)

(115)

(92)

Net increase in cash and cash equivalents

17,621

15,001

22,310

20,680

Cash and cash equivalents at beginning of period

156,062

141,558

151,373

135,879

Cash and cash equivalents at end of period

$     173,683

$     156,559

$     173,683

$     156,559