Gigamon Reports Third Quarter 2013 Financial Results

Gigamon Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

Three Months Ended

Nine Months Ended

September 28,

September 30,

September 28,

September 30,

2013

2012

2013

2012

Revenue:

   Product

$          29,146

$          18,700

$          70,019

$    45,806

   Service

9,840

6,994

27,189

19,057

Total revenue

38,986

25,694

97,208

64,863

Cost of revenue:

   Product

6,744

4,524

18,566

11,975

   Service

993

557

3,557

1,502

Cost of revenue (1), (2)

7,737

5,081

22,123

13,477

Gross profit

31,249

20,613

75,085

51,386

Operating expenses:

   Research and development (1), (2)

8,958

4,809

31,726

12,324

   Sales and marketing (1), (2)

15,485

9,963

54,020

27,298

   General and administrative (1), (2)

4,696

3,720

20,893

7,761

         Total operating expenses

29,139

18,492

106,639

47,383

Income (loss) from operations

2,110

2,121

(31,554)

4,003

Other income (expense):

   Interest income

32

55

35

61

   Other expense, net

(52)

(17)

(77)

(50)

Income (loss) before income taxes

2,090

2,159

(31,596)

4,014

Income tax (expense) benefit (3)

(704)

(37)

23,838

(128)

Net income (loss)  

1,386

2,122

3,886

Accretion of preferred stock

-

(564)

(1,088)

(1,661)

(Earnings) loss attributable to preferred stock holders

-

(497)

1,107

(710)

Net income (loss) to common stock holders

$            1,386

$            1,061

$      1,515

Net income (loss) per share attributable to common stock holders:

      Basic

$              0.04

$              0.06

$            (0.34)

$        0.09

      Diluted

$              0.04

$              0.06

$            (0.34)

$        0.09

Weighted-average number of shares used in per share amounts:

      Basic

30,933

17,300

22,529

17,300

      Diluted

32,554

17,307

22,529

17,300

(1) Includes stock-based compensation expenses, as follows:

   Cost of revenue

$               340

$               132

$            3,049

$         134

   Research and development

2,468

328

8,846

360

   Sales and marketing

2,735

473

8,427

559

   General and administrative

1,524

760

5,035

1,276

         Total stock-based compensation expenses

$            7,067

$            1,693

$          25,357

$      2,329

(2) Includes performance unit plan compensation expenses, as follows:

   Cost of revenue

$                  -

$                  -

$               353

$            -

   Research and development

-

-

5,188

-

   Sales and marketing

-

-

7,991

-

   General and administrative

-

-

6,839

-

         Total performance unit plan compensation expenses

$                  -

$                  -

$          20,371

$            -

(3) Includes tax benefit upon conversion of LLC to a C Corporation on May 31, 2013

$                  -

$                  -

$          14,811

$            -

Gigamon Inc.

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

September 28,

December 31,

2013

2012

Assets

Current assets:

     Cash and cash equivalents

$          65,057

$         18,675

     Short-term investments

40,347

-

     Accounts receivable, net

27,035

20,677

     Inventories

1,247

3,736

     Deferred income tax asset

4,447

-

     Prepaid expenses and other current assets

5,357

3,407

          Total current assets

143,490

46,495

     Property and equipment, net

3,541

2,686

     Deferred income tax asset, non-current

19,535

-

     Other assets

574

2,316

               Total assets

$        167,140

$         51,497

Liabilities and Stockholders' Equity (Deficit)

Current liabilities:

     Accounts payable

$            1,477

$           3,221

     Accrued and other current liabilities

17,745

18,710

     Deferred revenue

32,240

23,917

          Total current liabilities

51,462

45,848

Deferred revenue, non-current

8,705

6,903

Other liabilities

274

447

Commitments and contingencies

Series A preferred stock

-

28,344

Stockholders' equity (deficit):

Common stock

3

1,625

Treasury stock

(12,469)

(12,469)

Additional paid in capital

126,310

1,522

Accumulated other comprehensive income

5

-

Accumulated deficit

(7,150)

(20,723)

          Total stockholders' equity (deficit)

106,699

                Total liabilities, preferred stock and stockholders' equity (deficit)

$        167,140

$         51,497

Gigamon Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Three Months Ended

Nine Months Ended

September 28,

September 30,

September 28,

September 30,

2013

2012

2013

2012

Operating activities:

Net income (loss) 

$            1,386

$          2,122

$        (7,758)

$           3,886

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

     Depreciation and amortization

766

340

1,964

878

     Stock-based compensation expense

7,067

1,693

25,357

2,329

     Deferred income taxes

603

-

(23,982)

-

     Inventory (recovery) write-offs

(242)

205

(382)

1,587

     Loss on disposal of fixed assets

-

51

14

51

     Changes in operating assets and liabilities:

        Accounts receivable, net

(9,127)

318

(6,358)

5,078

        Inventories

2,555

1,624

4,207

1,976

        Prepaid expenses and other assets

(2,499)

698

(2,269)

1,382

        Accounts payable

(1,558)

170

(1,643)

(1,118)

        Accrued and other liabilities

(17,515)

999

1,770

4,943

        Deferred revenue

4,644

2,783

10,125

4,893

            Net cash (used in) provided by operating activities

(13,920)

11,003

1,045

25,885

Investing activities:

     Purchases of available-for-sale investments

(40,342)

-

(40,342)

-

     Purchases of property and equipment

(626)

(265)

(2,826)

(1,505)

            Net cash used in investing activities

(40,968)

(265)

(43,168)

(1,505)

Financing activities:

     (Offering costs for) proceeds from initial public offering, net

(1,677)

(572)

95,391

(572)

     Proceeds from exercise of stock options

100

-

111

-

     Distribution of income to LLC members

-

(5,760)

(6,997)

(13,200)

            Net cash (used in) provided by financing activities

(1,577)

(6,332)

88,505

(13,772)

     Net (decrease) increase in cash and cash equivalents

(56,465)

4,406

46,382

10,608

     Cash and cash equivalents at beginning of period

121,522

19,304

18,675

13,102

     Cash and cash equivalents at end of period

$          65,057

$        23,710

$       65,057

$         23,710

Gigamon Inc.

Reconciliation of Non-GAAP Financial Measures

(in thousands, except per share data)

(unaudited)

Three Months Ended

Nine Months Ended

September 28,

September 30,

September 28,

September 30,

2013

2012

2013

2012

Reconciliation of Gross Profit and Gross Margin on a GAAP Basis to Gross Profit and Gross Margin on a Non-GAAP Basis:

Gross profit on a GAAP basis

$                    31,249

$                    20,613

$                   75,085

$                    51,386

    Stock-based compensation expense

340

132

3,049

134

    Performance unit plan compensation expense

-

-

353

-

Gross profit on a Non-GAAP basis

$                    31,589

$                   20,745

$                   78,487

$                    51,520

Revenue

$                   38,986

$                   25,694

$                   97,208

$                   64,863

    Gross margin on a GAAP basis

80%

80%

77%

79%

    Gross margin on a Non-GAAP basis

81%

81%

81%

79%

Reconciliation of Operating Income (Loss) and Operating Margin on a GAAP Basis to Operating Income and Operating Margin on a Non-GAAP Basis:

Operating (loss) income on a GAAP basis

$                        2,110

$                        2,121

$                  (31,554)

$                      4,003

    Stock-based compensation expense

7,067

1,693

25,357

2,329

    Performance unit plan compensation expense

-

-

20,371

-

Operating income on a Non-GAAP basis

$                       9,177

$                       3,814

$                     14,174

$                      6,332

    Operating margin on a GAAP basis

5%

8%

-32%

6%

    Operating margin on a Non-GAAP basis

24%

15%

15%

10%

Reconciliation of Net Income (Loss) Attributable To Common Stockholders on a GAAP Basis to Net Income Attributable To Common Stockholders on a Non-GAAP Basis:

Net income (loss) attributable to common stock holders on a GAAP basis

$                       1,386

$                        1,061

$                    (7,739)

$                        1,515

     Accretion of preferred stock

-

564

1,088

1,661

     Earnings (loss) attributable to preferred stock holders

-

497

(1,107)

710

   Stock-based compensation expense

7,067

1,693

25,357

2,329

    Performance unit plan compensation expense

-

-

20,371

-

    Tax benefit upon conversion of LLC to a C Corporation

-

-

14,811

-

    Income tax effect of Non-GAAP adjustments

(2,670)

-

(42,967)

-

Net income on a Non-GAAP basis

$                      5,783

$                       3,815

$                       9,814

$                       6,215

Gigamon Inc.

Reconciliation of Non-GAAP Financial Measures (continued)

(in thousands, except per share data)

(unaudited)

Three Months Ended

 Nine Months Ended 

September 28,

September 30,

September 28,

September 30,

2013

2012

2013

2012

Reconciliation of Diluted Net Income (Loss) per Share on a GAAP Basis to Diluted Net Income per Share on a Non-GAAP Basis:

Diluted net income (loss) per share on a GAAP basis

$              0.04

$              0.06

$            (0.34)

$              0.09

     Accretion of preferred stock

-

0.03

0.05

0.10

     Earnings (loss) attributable to preferred stock holders 

-

0.03

(0.05)

0.04

    Stock-based compensation expense

0.22

0.10

1.13

0.13

    Performance unit plan compensation expense

-

-

0.90

-

     Tax benefit upon conversion of LLC to a C corporation

-

-

0.66

-

     Income tax effect on non-GAAP adjustments

(0.08)

-

(1.91)

-

     Impact of difference in number of GAAP and non-GAAP diluted shares

-

-

(0.10)

-

Diluted net income per share on a Non-GAAP basis

$              0.18

$              0.22

$              0.34

$              0.36

Reconciliation of GAAP Diluted Weighted-Average Number of Shares to Non-GAAP Diluted Weighted-Average Number of Shares:

GAAP diluted weighted-average number of shares

32,554

17,307

22,529

17,300

    Dilutive impact due to stock options, restricted stock units and employee stock purchase plan purchase rights

223

234

6,288

122

Non-GAAP diluted weighted-average number of shares

32,777

17,541

28,817

17,422

Condensed Non-GAAP Consolidated Income Statements

Impact of Non-GAAP Adjustments on Reported Net Income (Loss) 

For the Three and Nine Months Ended September 28, 2013 and September 30, 2012

(In thousands, except per share amounts)

(unaudited)

Three Months Ended September 28, 2013

Three Months Ended September 30, 2012

Nine Months Ended September 28, 2013

Nine Months Ended September 30, 2012

As Reported

Adjustments

Non-GAAP

As Reported

Adjustments

Non-GAAP

As Reported

Adjustments

Non-GAAP

As Reported

Adjustments

Non-GAAP

Revenue:

    Product

$        29,146

$                -

$        29,146

$        18,700

$                -

$        18,700

$        70,019

$            -

$    70,019

$    45,806

$               -

$       45,806

    Service

9,840

-

9,840

6,994

-

6,994

27,189

-

27,189

19,057

-

19,057

Total revenue

38,986

-

38,986

25,694

-

25,694

97,208

-

97,208

64,863

-

64,863

Cost of revenue:

    Product (1), (2)

6,744

(129)

6,615

4,524

(33)

4,491

18,566

(2,093)

16,473

11,975

(35)

11,940

    Service (1), (2)

993

(211)

782

557

(99)

458

3,557

(1,309)

2,248

1,502

(99)

1,403

Cost of revenue

7,737

(340)

7,397

5,081

(132)

4,949

22,123

(3,402)

18,721

13,477

(134)

13,343

Gross profit

31,249

340

31,589

20,613

132

20,745

75,085

3,402

78,487

51,386

134

51,520

Product Gross Margin

77%

77%

76%

76%

73%

76%

74%

74%

Service Gross Margin

90%

92%

92%

93%

87%

92%

92%

93%

Total Gross Margin

80%

81%

80%

81%

77%

81%

79%

79%

Operating expenses:

     Research and development (1), (2)

8,958

(2,468)

6,490

4,809

(328)

4,481

31,726

(14,034)

17,692

12,324

(360)

11,964

     Sales and marketing (1), (2)

15,485

(2,735)

12,750

9,963

(473)

9,490

54,020

(16,418)

37,602

27,298

(559)

26,739

     General and administrative (1), (2)

4,696

(1,524)

3,172

3,720

(760)

2,960

20,893

(11,874)

9,019

7,761

(1,276)

6,485

          Total operating expenses

29,139

(6,727)

22,412

18,492

(1,561)

16,931

106,639

(42,326)

64,313

47,383

(2,195)

45,188

Income (loss) from operations

2,110

7,067

9,177

2,121

1,693

3,814

45,728

14,174

4,003

2,329

6,332

Other income (expense):

     Interest income

32

-

32

55

-

55

35

-

35

61

-

61

     Other expense, net

(52)

-

(52)

(17)

-

(17)

(77)

-

(77)

(50)

-

(50)

Income (Loss) before income taxes

2,090

7,067

9,157

2,159

1,693

3,852

(31,596)

45,728

14,132

4,014

2,329

6,343

Income tax (expense) benefit (3), (4)

(704)

(2,670)

(3,374)

(37)

-

(37)

23,838

(28,156)

(4,318)

(128)

-

(128)

Net income (loss)

1,386

4,397

5,783

2,122

1,693

3,815

17,572

9,814

3,886

2,329

6,215

Accretion of preferred stock

-

-

-

(564)

564

-

(1,088)

1,088

-

(1,661)

1,661

-

Loss (earnings) attributable to preferred stock holders

-

-

-

(497)

497

-

1,107

(1,107)

-

(710)

710

-

Net income (loss) to common stock holders

$          1,386

$          4,397

$          5,783

$          1,061

$          2,754

$          3,815

$    17,553

$      9,814

$      1,515

$         4,700

$         6,215

Net income (loss) per share attributable to common stockholders:

   Basic

$            0.04

$            0.15

$            0.19

$            0.06

$            0.16

$            0.22

$          (0.34)

$        0.78

$        0.44

$        0.09

$           0.27

$           0.36

   Diluted

$            0.04

$            0.14

$            0.18

$            0.06

$            0.16

$            0.22

$          (0.34)

$        0.68

$        0.34

$        0.09

$           0.27

$           0.36

Weighted-average number of shares used in per share amounts:

   Basic

30,933

-

30,933

17,300

-

17,300

22,529

-

22,529

17,300

-

17,300

   Diluted

32,554

223

32,777

17,307

234

17,541

22,529

6,288

28,817

17,300

122

17,422

Notes:

(1) Includes stock-based compensation in the three and nine months ended September 28, 2013 and September 30, 2012.

(2) Includes performance unit plan compensation related expenses in the nine months ended September 28, 2013.

(3) Amount for the nine months ended September 28, 2013 includes tax benefit upon conversion from an LLC to a C Corporation on May 31, 2013.

(4) Includes income tax effect on non-GAAP adjustments for the three and nine months ended September 28, 2013.

Generally, a non-GAAP financial measure is a numerical measure of a company's performance, financial position or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the United States of America, or GAAP. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. These non-GAAP financial measures do not reflect a comprehensive system of accounting, differ from GAAP measures with the same captions and may differ from non-GAAP financial measures with the same or similar captions that are used by other companies.

Gigamon's management uses the non-GAAP financial measures to gain an understanding of Gigamon's comparative operating performance and future prospects, and utilizes these measures in its internal financial statements for purposes of its internal budgets and financial goals. Management also believes that the exclusion of the non-GAAP items provides an additional measure of the company's operating results and facilitates comparisons of the company's core operating performance against prior periods and business model objectives. Management believes that investors should have access to the same set of tools that management uses to analyze Gigamon's results. These non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP. Gigamon endeavors to compensate for the limitation of the non-GAAP measures presented by also providing the most directly comparable GAAP measures and descriptions of the reconciling items and adjustments to derive the non-GAAP measures.

For periods presented:
- Non-GAAP gross margin is calculated as non-GAAP gross profit divided by GAAP revenue. Non-GAAP gross profit consists of GAAP gross profit excluding the effects of stock-based compensation expense and any performance unit plan compensation.
- Non-GAAP operating margin is calculated as non-GAAP income (loss) from operations divided by GAAP revenue. Non-GAAP income (loss) from operations consists of GAAP income (loss) from operations excluding the effects of stock-based compensation expense and any performance unit compensation expenses.
- Non-GAAP net income is calculated as GAAP net income (loss) excluding the effects of stock-based compensation expense and tax provision adjustments related to non-GAAP income. For the nine months ended September 28, 2013, non-GAAP net income also excludes the effects of performance unit plan compensation, and a tax benefit for the conversion of LLC to C Corporation.
- Non-GAAP net income per diluted share is calculated as non-GAAP net income divided by non-GAAP weighted average diluted shares outstanding for the three and nine months ended September 28, 2013 and September 30, 2012. Non-GAAP weighted-average diluted shares outstanding is calculated as GAAP weighted-average diluted shares outstanding including the dilutive impact due to stock options, employee stock purchase plan's purchase rights and restricted stock units.