Barracuda Reports Third Quarter Fiscal 2017 Results

Barracuda Networks, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

(Unaudited)

As of November
30, 2016

As of February
29, 2016

Assets

Current assets:

Cash and cash equivalents

$

121,113

$

118,654

Marketable securities

73,220

36,394

Accounts receivable, net of allowance for doubtful accounts

39,555

36,520

Inventories, net

4,711

5,648

Deferred costs

32,076

31,943

Other current assets

12,501

12,450

Total current assets

283,176

241,609

Property and equipment, net

29,429

31,910

Deferred costs, non-current

26,475

27,019

Deferred income taxes, non-current

2,759

2,992

Other non-current assets

8,158

7,293

Intangible assets, net

33,904

39,386

Goodwill

69,817

69,595

Total assets

$

453,718

$

419,804

Liabilities and stockholders' deficit

Current liabilities:

Accounts payable

$

11,288

$

15,939

Accrued payroll and related benefits

14,020

12,371

Other accrued liabilities

20,079

19,495

Deferred revenue

237,433

235,411

Note payable

4,184

268

Total current liabilities

287,004

283,484

Long-term liabilities:

Deferred revenue, non-current

163,867

157,363

Deferred income taxes, non-current

2,472

2,478

Note payable, non-current

—

4,115

Other long-term liabilities

5,332

4,462

Stockholders' deficit:

Common stock

53

52

Additional paid-in capital

362,204

337,439

Accumulated other comprehensive loss

(5,088)

(4,509)

Accumulated deficit

(362,126)

(365,080)

Total stockholders' deficit

(4,957)

(32,098)

Total liabilities and stockholders' deficit

$

453,718

$

419,804

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,

2016

2015

2016

2015

Revenue:

Appliance

$

20,457

$

21,655

$

62,824

$

67,625

Subscription

68,349

58,432

200,566

168,807

Total revenue

88,806

80,087

263,390

236,432

Cost of revenue

21,098

18,352

61,579

50,253

Gross profit

67,708

61,735

201,811

186,179

Operating expenses:

Research and development

18,627

18,629

56,280

54,131

Sales and marketing

33,368

36,218

96,842

104,820

General and administrative

10,217

14,872

31,958

36,340

Total operating expenses

62,212

69,719

185,080

195,291

Income (loss) from operations

5,496

(7,984)

16,731

(9,112)

Other income (expense), net

(2,374)

(395)

131

(866)

Income (loss) before income taxes

3,122

(8,379)

16,862

(9,978)

Benefit from (provision for) income taxes

(1,329)

6,793

(9,848)

2,321

Net income (loss)

$

1,793

$

$

7,014

$

Net income (loss) per share:

Basic

$

0.03

$

(0.03)

$

0.13

$

(0.14)

Diluted

$

0.03

$

(0.03)

$

0.13

$

(0.14)

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

Basic

52,457

53,268

52,336

53,178

Diluted

53,995

53,268

53,391

53,178

Barracuda Networks, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

Three Months Ended November 30,

Nine Months Ended November 30,

2016

2015

2016

2015

Operating activities

Net income (loss)

$

1,793

$

(1,586)

$

7,014

$

(7,657)

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

Depreciation, amortization and impairment expense

3,975

3,458

12,442

7,927

Stock-based compensation expense

9,217

7,706

25,050

21,416

Excess tax benefits from equity compensation plans

(1,232)

(130)

(2,023)

(3,390)

Deferred income taxes

(83)

(4,166)

391

(3,927)

Other

173

224

(555)

894

Changes in operating assets and liabilities:

Accounts receivable, net

(5,786)

1,070

(3,054)

(1,073)

Inventories, net

1,014

(539)

931

(1,664)

Income taxes, net

(460)

(3,136)

3,138

883

Deferred costs

227

787

567

(1,497)

Other assets

106

(866)

(469)

(1,799)

Accounts payable

1,790

(3,902)

(4,889)

(1,677)

Accrued payroll and related benefits

(228)

1,423

898

3,721

Other liabilities

116

3,727

(646)

3,780

Deferred revenue

4,460

1,182

8,916

17,934

Net cash provided by operating activities

15,082

5,252

47,711

33,871

Investing activities

Proceeds from the sale of marketable securities

1,236

2,025

11,530

9,202

Proceeds from the maturity of marketable securities

5,572

9,860

13,590

14,527

Purchases of marketable securities

(37,784)

(4,800)

(59,561)

(19,040)

Purchases of property and equipment

(1,296)

(2,057)

(4,265)

(5,500)

Purchases of intangible assets

(374)

—

(1,374)

—

Purchases of non-marketable investments

—

(1,050)

(636)

(1,400)

Business combinations, net of cash acquired

—

(56,113)

(243)

(56,862)

Net cash used in investing activities

(32,646)

(52,135)

(40,959)

(59,073)

Financing activities

Proceeds from issuance of common stock

2,556

412

7,425

4,712

Taxes paid related to net share settlement of equity awards

(3,459)

(1,943)

(6,003)

(5,969)

Repurchases of common stock

—

(8,000)

(7,241)

(8,000)

Employee loans extended, net of repayment

(120)

(4)

(122)

(2,488)

Excess tax benefits from equity compensation plans

1,232

130

2,023

3,390

Repayment of note payable

(67)

(96)

(200)

(221)

Other

—

(74)

—

(255)

Net cash provided by (used in) financing activities

142

(9,575)

(4,118)

(8,831)

Effect of exchange rate changes on cash and cash equivalents

(638)

(152)

(175)

(267)

Net increase (decrease) in cash and cash equivalents

(18,060)

(56,610)

2,459

(34,300)

Cash and cash equivalents at beginning of period

139,173

173,683

118,654

151,373

Cash and cash equivalents at end of period

$

121,113

$

117,073

$

121,113

$

117,073

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,

2016

2015

2016

2015

GAAP cost of revenue

$

21,098

$

18,352

$

61,579

$

50,253

Amortization of intangible assets ⁽¹⁾

1,219

858

3,752

1,686

Depreciation expense ⁽²⁾

1,467

1,380

4,644

3,512

Stock-based compensation expense ⁽³⁾

323

286

959

752

Non-GAAP cost of revenue

$

18,089

$

15,828

$

52,224

$

44,303

GAAP sales and marketing expense

$

33,368

$

36,218

$

96,842

$

104,820

Amortization of intangible assets ⁽¹⁾

536

436

1,735

799

Depreciation expense ⁽²⁾

74

160

182

229

Stock-based compensation expense ⁽³⁾

2,211

1,812

6,002

5,001

Acquisition and other charges ⁽⁴⁾

—

(24)

—

(317)

Non-GAAP sales and marketing expense

$

30,547

$

33,834

$

88,923

$

99,108

GAAP research and development expense

$

18,627

$

18,629

$

56,280

$

54,131

Depreciation expense ⁽²⁾

126

215

417

544

Stock-based compensation expense ⁽³⁾

3,737

2,271

8,809

6,106

Acquisition and other charges ⁽⁴⁾

—

531

217

2,221

Non-GAAP research and development expense

$

14,764

$

15,612

$

46,837

$

45,260

GAAP general and administrative expense

$

10,217

$

14,872

$

31,958

$

36,340

Depreciation expense ⁽²⁾

553

409

1,712

1,157

Stock-based compensation expense ⁽³⁾

2,946

3,337

9,280

9,557

Acquisition and other charges ⁽⁴⁾

166

4,220

750

4,523

Non-GAAP general and administrative expense

$

6,552

$

6,906

$

20,216

$

21,103

GAAP total expense

$

83,310

$

88,071

$

246,659

$

245,544

Amortization of intangible assets ⁽¹⁾

1,755

1,294

5,487

2,485

Depreciation expense ⁽²⁾

2,220

2,164

6,955

5,442

Stock-based compensation expense ⁽³⁾

9,217

7,706

25,050

21,416

Acquisition and other charges ⁽⁴⁾

166

4,727

967

6,427

Non-GAAP total expense

$

69,952

$

72,180

$

208,200

$

209,774

Depreciation expense ⁽²⁾

2,220

2,164

6,955

5,442

Non-GAAP total expense including depreciation

$

72,172

$

74,344

$

215,155

$

215,216

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,

2016

2015

2016

2015

GAAP operating income (loss)

$

5,496

$

(7,984)

$

16,731

$

(9,112)

Amortization of intangible assets ⁽¹⁾

1,755

1,294

5,487

2,485

Stock-based compensation expense ⁽³⁾

9,217

7,706

25,050

21,416

Acquisition and other charges ⁽⁴⁾

166

4,727

967

6,427

Non-GAAP operating income

$

16,634

$

5,743

$

48,235

$

21,216

GAAP net income (loss)

$

1,793

$

(1,586)

$

7,014

$

(7,657)

Amortization of intangible assets ⁽¹⁾

1,755

1,294

5,487

2,485

Stock-based compensation expense ⁽³⁾

9,217

7,706

25,050

21,416

Acquisition and other charges ⁽⁴⁾

166

4,727

967

6,427

Income tax effect on non-GAAP exclusions ⁽⁵⁾

(3,662)

(8,500)

(4,633)

(8,642)

Other expense (income) adjustments ⁽⁶⁾

2,378

340

(96)

718

Non-GAAP net income

$

11,647

$

3,981

$

33,789

$

14,747

Non-GAAP diluted earnings per share ⁽⁷⁾

$

0.22

$

0.07

$

0.63

$

0.27

Weighted-average shares used to compute diluted earnings per share

53,995

54,283

53,391

54,743

⁽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 Charges. We exclude certain expense items resulting from acquisitions and other charges, which we believe are non-recurring, infrequent and/or unusual in nature, can vary significantly in amount and frequency and are unrelated to our ongoing operating performance. 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) acquisition-related expenses for legal, accounting, and other professional fees, integration costs, fair value remeasurements of contingent consideration obligations and contingent consideration payments made under the terms of acquisition agreements, and (ii) other costs that are non-recurring, infrequent and/or unusual in nature, such as expenses incurred in connection with litigation, export compliance, intellectual property settlement and other matters.

⁽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 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. Non-GAAP diluted earnings per share 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 November 30,

Nine Months Ended November 30,

2016

2015

2016

2015

GAAP net income (loss)

$

1,793

$

(1,586)

$

7,014

$

(7,657)

Other expense (income), net

2,374

395

(131)

866

Provision for (benefit from) income taxes

1,329

(6,793)

9,848

(2,321)

Acquisition and other charges

166

4,727

967

6,427

Stock-based compensation expense

9,217

7,706

25,050

21,416

Amortization of intangible assets

1,755

1,294

5,487

2,485

Depreciation expense

2,220

2,164

6,955

5,442

Adjusted EBITDA ⁽¹⁾

$

18,854

$

7,907

$

55,190

$

26,658

⁽¹⁾

Adjusted EBITDA. Beginning in the third quarter of fiscal 2017, we modified our reporting practices to comply with recent SEC interpretations on the use of non-GAAP measures. As a result, we have modified our historical presentation of adjusted EBITDA and will no longer adjust for changes in deferred revenue and associated deferred costs in our calculation of adjusted EBITDA. These changes do not impact our current and historical presentation of GAAP results. Prior period information has been recast to conform to the adjusted calculation. We define adjusted EBITDA as net income (loss) 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 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. 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 Free Cash Flow

(in thousands)

(Unaudited)

Three Months Ended November 30,

Nine Months Ended November 30,

2016

2015

2016

2015

GAAP cash flows from operating activities

$

15,082

$

5,252

$

47,711

$

33,871

Purchases of property and equipment

(1,296)

(2,057)

(4,265)

(5,500)

Free cash flow ⁽¹⁾

$

13,786

$

3,195

$

43,446

$

28,371

⁽¹⁾

Free Cash Flow. Beginning in the third quarter of fiscal 2017, we modified our reporting practices to comply with recent SEC interpretations on the use of non-GAAP measures. As a result, we have modified our historical presentation of adjusted free cash flow and will no longer adjust free cash flow for the cash payment impact of acquisition and other charges. These changes do not impact our current and historical presentation of GAAP results. Prior period information has been recast to conform to the adjusted calculation. We define free cash flow as cash flows from operating activities less the purchases of property and equipment. 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.

Reconciliation of GAAP Revenue to Gross Billings

(in thousands)

(Unaudited)

Three Months Ended November 30,

Nine Months Ended November 30,

2016

2015

2016

2015

GAAP Revenue

$

88,806

$

80,087

$

263,390

$

236,432

Total deferred revenue, end of period

401,300

391,617

401,300

391,617

Less: total deferred revenue, beginning of period

(398,878)

(389,835)

(392,774)

(372,862)

Deferred revenue adjustments

9,171

7,139

26,982

26,540

Total change in deferred revenue and adjustments

11,593

8,921

35,508

45,295

Gross billings ⁽¹⁾⁽²⁾

$

100,399

$

89,008

$

298,898

$

281,727

⁽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 November 30, 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.