Barracuda Announces Third Quarter Fiscal 2014 Results

Barracuda Networks, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share information)

(Unaudited)

Three months ended
November 30,

Nine months ended
November 30,

2013

2012

2013

2012

Revenue

Appliance

$18,174

$15,424

$53,583

$43,199

Subscription

41,212

36,003

119,870

103,261

Total revenue

59,386

51,427

173,453

146,460

Cost of revenue

14,017

11,394

40,498

32,680

Gross profit

45,369

40,033

132,955

113,780

Operating expense

Research and development

12,083

8,925

34,563

25,015

Sales and marketing

28,785

25,471

86,013

74,773

General and administrative

7,513

9,198

22,018

22,080

Total operating expenses

48,381

43,594

142,594

121,868

Operating loss

(3,012)

(3,561)

(9,639)

(8,088)

Other income (expense),net

121

362

(329)

(526)

Loss before income taxes and non controlling interest

(2,891)

(3,199)

(9,968)

(8,614)

Benefit for income taxes

599

1,076

2,735

2,369

Consolidated net loss

(2,292)

(2,123)

(7,233)

(6,245)

Net loss attributable to non-controlling interest

199

150

561

612

Net loss attributable to Barracuda Networks, Inc.

($2,093)

($1,973)

($6,672)

($5,633)

Net loss per share attributable to Barracuda Networks, Inc.

Basic and diluted

$   (0.06)

$   (0.06)

$   (0.22)

$   (0.17)

Weighted-average shares used to compute net loss per share attributable to Barracuda Networks, Inc.:

Basic and diluted

34,256

30,441

30,179

33,360

Barracuda Networks, Inc.

Reconciliation of Selected GAAP to Non-GAAP Financial Measures

(in thousands)

(Unaudited)

Three months ended
November 30,

Nine months ended
November 30,

2013

2012

2013

2012

GAAP cost of revenue

$14,017

$11,394

$40,498

$32,680

Amortization of intangible assets (1)

889

905

3,018

2,714

Depreciation expense (2)

907

411

1,935

1,194

Stock based compensation expense (3)

58

53

146

129

Non-GAAP cost of revenue

$12,163

$10,025

$35,399

$28,643

GAAP sales and marketing expense

$28,785

$25,471

$86,013

$74,773

Amortization of intangible assets (1)

424

451

1,341

1,415

Depreciation expense (2)

55

48

172

143

Stock based compensation expense (3)

578

314

1,278

813

Acquisition and other non-recurring charges (4)

-

2

-

8

Non-GAAP sales and marketing expense

$27,728

$24,656

$83,222

$72,394

GAAP research and development expense

$12,083

$8,925

$34,563

$25,015

Amortization of intangible assets (1)

-

-

-

-

Depreciation expense (2)

146

111

410

305

Stock based compensation expense (3)

209

603

1,474

1,486

Acquisition and other non-recurring charges (4)

375

76

875

281

Non-GAAP research and development expense

$11,353

$8,135

$31,804

$22,943

GAAP general and administrative expense

$7,513

$9,198

$22,018

$22,080

Amortization of intangible assets (1)

6

5

23

26

Depreciation expense (2)

206

84

468

209

Stock based compensation expense (3)

1,578

753

4,653

3,929

Acquisition and other non-recurring charges (4)

212

3,617

579

6,206

Non-GAAP general and administrative expense

$5,511

$4,739

$16,295

$11,710

GAAP total expense

$62,398

$54,988

$183,092

$154,548

Amortization of intangible assets (1)

1,319

1,361

4,382

4,155

Depreciation expense (2)

1,314

654

2,985

1,851

Stock based compensation expense (3)

2,423

1,723

7,551

6,357

Acquisition and other non-recurring charges (4)

587

3,695

1,454

6,495

Non-GAAP total expense

$56,755

$47,555

$166,720

$135,690

Depreciation expense (2)

$1,314

$654

$2,985

$1,851

Non-GAAP total expense including depreciation

$58,069

$48,209

$169,705

$137,541

Barracuda Networks, Inc.

Reconciliation of Selected GAAP to Non-GAAP Financial Measures

(in thousands, except per share information)

(Unaudited)

Three months ended
November 30,

Nine months ended
November 30,

2013

2012

2013

2012

GAAP operating loss

($3,012)

($3,561)

($9,639)

($8,088)

Amortization of intangible assets (1)

1,319

1,361

4,382

4,155

Stock based compensation expense (3)

2,423

1,723

7,551

6,357

Acquisition and other non-recurring charges (4)

587

3,695

1,454

6,495

Non-GAAP operating income

$1,317

$3,218

$3,748

$8,919

GAAP net loss

($2,093)

($1,973)

($6,672)

($5,633)

Amortization of intangible assets (1)

1,319

1,361

4,382

4,155

Stock based compensation expense (3)

2,423

1,723

7,551

6,357

Acquisition and other non-recurring charges (4)

587

3,695

1,454

6,495

Income tax benefit of non-GAAP exclusions (5)

(1,277)

(2,242)

(3,986)

(5,326)

Other income adjustments (6)

(267)

(474)

(94)

356

Non-controlling interest (7)

(199)

(150)

(561)

(612)

Non-GAAP net income

$493

$1,940

$2,074

$5,792

Non-GAAP diluted earnings per share (8)

0.01

0.04

0.04

0.13

Weighted average shares used to compute non-GAAP diluted earnings per share

48,721

45,872

47,602

45,571

(1)

Amortization of Intangible Assets. We provide non-GAAP information which excludes expenses for the amortization of intangible assets which 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 of property and equipment. We provide non-GAAP information which excludes depreciation expense related to the amortization of property and equipment, as well as certain losses on disposal of fixed 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 Related Adjustments. 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 our CEO transition, (ii) costs associated with an internal investigation of export control compliance, and(iii) legal, accounting and advisory fees, to the extent associated with acquisitions, as well as contingent consideration payments under the terms of certain acquisition agreements.

(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: (i) amortization expense of intangible assets, (ii) stock based compensation expense, and (iii) acquisition and other non-recurring charges.

(6)

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

(7)

Non-controlling interest expense.  We provide non-GAAP information that includes all of the expenses related to entities in which we hold a minority interest.  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, including entities for which we own a minority interest.

(8)

Non-GAAP Diluted Earnings Per Share Item. 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 Loss to Adjusted EBITDA

(in thousands)

(Unaudited)

Three months ended
November 30,

Nine months ended
November 30,

2013

2012

2013

2012

GAAP net loss

($2,093)

($1,973)

($6,672)

($5,633)

Deferred revenue, end of period

298,823

250,163

298,823

250,163

Less: Deferred revenue, beginning of period

(286,792)

(241,734)

(261,243)

(217,209)

Less: Deferred costs, end of period

(48,270)

(37,299)

(48,270)

(37,299)

Deferred costs, beginning of period

46,058

35,347

39,470

29,254

Less:  Other (income) expense, net

(121)

(362)

329

526

Less: Benefit for income taxes

(599)

(1,076)

(2,735)

(2,369)

Acquisition and other non-recurring charges

587

3,695

1,454

6,495

Stock based compensation expense

2,423

1,723

7,551

6,357

Amortization of intangible assets

1,319

1,361

4,382

4,155

Depreciation expense

1,314

654

2,985

1,851

Adjusted EBITDA (1)

$12,649

$10,499

$36,074

$36,291

(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) acquisition and other non-recurring charges, (ii) stock based compensation expense, (iii) amortization of intangible assets, and (iv) depreciation expense, including certain losses on disposal of fixed assets.  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 Revenue to Gross Billings

(in thousands)

(Unaudited)

Three months ended
November 30,

Nine months ended
November 30,

2013

2012

2013

2012

GAAP Revenue

$59,386

$51,427

$173,453

$146,460

Total deferred revenue, end of period

298,823

250,163

298,823

250,163

Less:  total deferred revenue, beginning of period

(286,792)

(241,734)

(261,243)

(217,209)

Deferred revenue adjustments

6,054

5,191

16,926

15,286

Total change in deferred revenue and adjustments

18,085

13,620

54,506

48,240

Gross Billings (1)

$77,471

$65,047

$227,959

$194,700

(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 billing provides insight into the sales of our solutions and performance of our business.

Barracuda Networks, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

Three months ended
November 30,

Nine months ended
November 30,

2013

2012

2013

2012

Cash Flows from Operating activities:

Consolidated net loss

($2,292)

($2,123)

($7,233)

($6,245)

Adjustments to reconcile consolidated net loss to net cash provided by operating activities:

Depreciation and amortization

2,381

2,015

7,115

6,006

Amortization of deferred stock-based compensation expense

2,423

1,723

7,551

6,357

Excess tax benefits on stock options

(148)

-

(374)

(1,687)

Loss on disposal of fixed assets

260

2

296

113

Deferred Income Tax Expense (Benefit)

(2,873)

96

(8,340)

365

Changes in assets and liabilities:

Accounts receivable

(3,525)

47

(4,541)

121

Inventory

288

175

(1,227)

302

Income taxes, net

3,061

(1,327)

2,547

(6,179)

Deferred Costs

(2,213)

(1,952)

(8,801)

(8,045)

Other Current Assets

919

(918)

17

(1,892)

Other Non-Current Assets

172

728

383

(202)

Accounts payable 

(2,043)

294

(2,307)

(2,492)

Accrued compensation

454

3,944

(1,429)

5,769

Other accrued liabilities

1,514

3,824

1,211

5,121

Other Long term liabilities

260

63

331

88

Deferred revenue

11,955

8,302

37,477

33,111

Net cash provided by operating activities

10,593

14,893

22,676

30,611

Cash Flows from Investing activities:

Proceeds from sales of marketable securities

-

388

-

388

Purchase of property and equipment

(1,328)

(1,508)

(5,857)

(3,051)

Purchase of Intangible Assets

-

-

(28)

-

Purchase of investment in nonmarketable equity

-

-

(310)

-

Business Combinations, net of assets acquired

-

-

(8,475)

(4,356)

Net cash used in investing activities

(1,328)

(1,120)

(14,670)

(7,019)

Cash Flows from Financing activities

Net proceeds from initial public offering, net of issuance costs

78,154

-

78,007

-

Proceeds from issuance of common stock

1,488

(37)

1,929

2,452

Proceeds from issuance of Series B preferred stock, net of issuance costs

-

125,732

-

125,732

Issuance costs on line of credit

-

(313)

-

(313)

Repurchase of common stock

-

(127,543)

(723)

(127,612)

Dividends Paid

-

(128,385)

(1,419)

(128,385)

Repayment of employee loans, nets of loans extended

(733)

-

1,195

-

Excess tax benefits from employee stock-based option plan

148

-

374

1,687

Payments of note payable

(55)

(45)

(166)

(139)

Net cash provided by (used in) financing activities

79,002

(130,591)

79,197

(126,578)

Effect of exchange rate changes on cash and cash equivalents

(14)

86

(49)

(72)

Net increase (decrease) in cash and cash equivalents

88,253

(116,732)

87,154

(103,058)

Cash and cash equivalents at beginning of period

28,996

140,181

30,095

126,507

Cash and cash equivalents at end of period

$117,249

$23,449

$117,249

$23,449

Barracuda Networks, Inc.

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

(in thousands)

(Unaudited)

Three months ended
November 30,

Nine months ended
November 30,

2013

2012

2013

2012

GAAP cash flows from operating activities

$10,593

$14,893

$22,676

$30,611

Purchase of property and equipment

(1,328)

(1,508)

(5,857)

(3,051)

Acquisition and other non-recurring charges (1)

447

1,480

3,916

3,396

Adjusted free cash flow (2)

$9,712

$14,865

$20,735

$30,956

(1)

Acquisition and Other Non-Recurring Related Adjustments. 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 our CEO transition, (ii) payments associated with an internal investigation of export control compliance, and (iii) legal, accounting and advisory fee payments, to the extent associated with acquisitions, as well as contingent consideration payments under the terms of certain acquisition agreements.

(2)

Adjusted Free Cash Flow. We define 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 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.

Condensed Consolidated Balance Sheets

(in thousands)

(Unaudited)

November 30, 2013

February 28, 2013

Assets

Current assets:

Cash and cash equivalents

$117,249

$30,095

Marketable securities

1,231

1,550

Accounts receivable, net of allowance for doubtful accounts 

28,781

24,066

Inventories

6,365

5,138

Deferred costs

24,461

20,119

Deferred income taxes

29,717

26,158

Other current assets

3,550

4,336

Total current assets

211,354

111,462

Property and equipment

20,299

16,972

Deferred costs, noncurrent

23,809

19,351

Deferred income taxes, noncurrent

25,265

21,065

Other noncurrent assets

1,724

1,637

Intangible assets, net

9,383

7,983

Goodwill

36,026

33,778

Total assets

$327,860

$212,248

Liabilities, redeemable convertible preferred stock, and stockholders' deficit

Current liabilities:

Accounts payable

$13,688

$12,756

Accrued payroll and related benefits

6,388

9,967

Other accrued liabilities

11,439

9,925

Deferred revenue

159,578

146,257

Deferred income taxes

132

132

Note payable

233

222

Total current liabilities

191,458

179,259

Long-term liabilities:

Deferred revenue, noncurrent

139,245

114,986

Deferred income taxes, noncurrent

672

660

Note payable, noncurrent

4,695

4,872

Other long-term liabilities

4,873

4,537

Redeemable convertible preferred stock

0

167,554

Stockholders' deficit

Common Stock

51

28

Additional paid-in capital

277,139

23,080

Accumulated other comprehensive loss

(868)

(1,112)

Accumulated deficit

(286,359)

(279,131)

Total stockholders' deficit controlling interest

(10,037)

(257,135)

Non-controlling interest in subsidiary

(3,046)

(2,485)

Total stockholders' deficit

(13,083)

(259,620)

Total liabilities, redeemable convertible preferred stock, and stockholders' deficit

$327,860

$212,248