Barracuda Reports Third Quarter Fiscal 2018 Results

Barracuda Networks, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

(Unaudited)

As of November
30, 2017 (1)

As of February
28, 2017

Assets

Current assets:

Cash and cash equivalents

$

96,894

$

120,194

Marketable securities

80,850

79,915

Accounts receivable, net of allowance for doubtful accounts

45,229

40,560

Inventories, net

8,259

5,847

Deferred costs

34,352

32,598

Other current assets

10,208

16,295

Total current assets

275,792

295,409

Property and equipment, net

30,824

29,979

Deferred costs, non-current

30,502

27,285

Deferred income taxes, non-current

704

1,554

Other non-current assets

21,646

8,607

Intangible assets, net

52,111

32,145

Goodwill

98,135

69,795

Total assets

$

509,714

$

464,774

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$

11,243

$

11,439

Accrued payroll and related benefits

12,803

13,593

Other accrued liabilities

19,089

12,942

Deferred revenue

247,330

239,796

Note payable

—

4,115

Total current liabilities

290,465

281,885

Long-term liabilities:

Deferred revenue, non-current

170,415

167,286

Deferred income taxes, non-current

3,293

2,803

Other long-term liabilities

7,394

6,377

Stockholders' equity:

Common stock

54

53

Additional paid-in capital

393,048

370,745

Accumulated other comprehensive loss

(3,199)

(5,226)

Accumulated deficit

(351,756)

(359,149)

Total stockholders' equity

38,147

6,423

Total liabilities and stockholders' equity

$

509,714

$

464,774

______________________

(1)

As of March 1, 2017, we adopted ASU 2016-09 which allowed for an accounting policy election to either estimate the number of share-based awards that are expected to vest or account for forfeitures when they occur. We elected to account for forfeitures when they occur and adopted this change on a modified retrospective basis. As a result, we recorded the cumulative effect of the change as a $0.4 million increase to the March 1, 2017 opening accumulated deficit balance on the condensed consolidated balance sheets.

Barracuda Networks, Inc.

Condensed Consolidated Statements of Income

(in thousands, except per share information)

(Unaudited)

Three Months Ended November 30,

Nine Months Ended November 30,

2017

2016

2017

2016

Revenue:

Appliance

$

17,459

$

20,457

$

56,071

$

62,824

Subscription

77,288

68,349

227,180

200,566

Total revenue

94,747

88,806

283,251

263,390

Cost of revenue

22,098

21,098

70,944

61,579

Gross profit

72,649

67,708

212,307

201,811

Operating expenses:

Research and development

20,616

18,627

59,412

56,280

Sales and marketing

34,988

33,368

109,769

96,842

General and administrative

12,366

10,217

33,648

31,958

Total operating expenses

67,970

62,212

202,829

185,080

Income from operations

4,679

5,496

9,478

16,731

Other income, net

7,714

(2,374)

10,022

131

Income before income taxes

12,393

3,122

19,500

16,862

Provision for income taxes

(4,610)

(1,329)

(7,491)

(9,848)

Net income

$

7,783

$

1,793

$

12,009

$

7,014

Net income per share:

Basic

$

0.15

$

0.03

$

0.23

$

0.13

Diluted

$

0.14

$

0.03

$

0.22

$

0.13

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

Basic

53,378

52,457

53,098

52,336

Diluted

54,995

53,995

54,645

53,391

Barracuda Networks, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

Three Months Ended November 30,

Nine Months Ended November 30,

2017

2016 (2)

2017

2016 (2)

Operating activities

Net income

$

7,783

$

1,793

$

12,009

$

7,014

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation, amortization and impairment expense

4,171

3,975

12,716

12,442

Stock-based compensation expense

9,332

9,217

26,343

25,050

Excess tax benefits from equity compensation plans ⁽¹⁾

—

(1,232)

—

(2,023)

Deferred income taxes

354

(83)

1,158

391

Gain on sale of business

(7,382)

—

(7,382)

—

Other

349

173

88

(555)

Changes in operating assets and liabilities:

Accounts receivable, net

(1,213)

(5,786)

(1,531)

(3,054)

Inventories, net

(1,741)

1,014

(2,485)

931

Income taxes, net

2,472

(460)

10,594

3,138

Deferred costs

(556)

227

(5,294)

567

Other assets

(1,362)

106

(6,389)

(469)

Accounts payable

2,980

1,790

(63)

(4,889)

Accrued payroll and related benefits

1,270

(228)

629

898

Other liabilities

2,438

116

1,957

(646)

Deferred revenue

4,810

4,460

12,565

8,916

Net cash provided by operating activities

23,705

15,082

54,915

47,711

Investing activities

Purchases of marketable securities

(11,041)

(37,784)

(32,810)

(59,561)

Proceeds from the sale of marketable securities

8,570

1,236

20,820

11,530

Proceeds from the maturity of marketable securities

2,685

5,572

11,027

13,590

Purchases of non-marketable investments

(56)

—

(4,056)

(636)

Purchases of property and equipment

(1,329)

(1,296)

(9,145)

(4,265)

Purchases of intangible assets

—

(374)

—

(1,374)

Business combinations, net of cash acquired

(51,162)

—

(51,668)

(243)

Sale of business

2,000

—

2,000

—

Payment for the sale of net liabilities

—

—

(800)

—

Net cash used in investing activities

(50,333)

(32,646)

(64,632)

(40,959)

Financing activities

Proceeds from issuance of common stock

1,353

2,556

4,362

7,425

Taxes paid related to net share settlement of equity awards

(3,349)

(3,459)

(7,823)

(6,003)

Repurchases of common stock

—

—

(6,546)

(7,241)

Excess tax benefits from equity compensation plans ⁽¹⁾

—

1,232

—

2,023

Repayment of employee loans, net of loans extended

(53)

(120)

(23)

(122)

Repayment of note payable

—

(67)

(4,115)

(200)

Payments of acquisition-related liabilities

—

—

(742)

—

Net cash provided by (used in) financing activities

(2,049)

142

(14,887)

(4,118)

Effect of exchange rate changes

2

(638)

1,337

(175)

Net increase (decrease) in cash, cash equivalents and restricted cash

(28,675)

(18,060)

(23,267)

2,459

Cash, cash equivalents and restricted cash at beginning of period

126,245

139,173

120,837

118,654

Cash, cash equivalents and restricted cash at end of period

$

97,570

$

121,113

$

97,570

$

121,113

 ______________________

⁽¹⁾

As of March 1, 2017, we adopted ASU 2016-09 which required any excess tax benefits to be classified as an operating activity. Prior to the new standard, we were required to present excess tax benefits as a cash inflow from financing activities with a corresponding cash outflow from operating activities. We elected to apply the amendment related to the presentation of excess tax benefits on the statements of cash flows prospectively, while the prior period presented has not been adjusted.

⁽²⁾

We early adopted ASU 2016-18 which requires that a statement of cash flows explain the change during the period for the total of cash, cash equivalents and restricted cash. Therefore, restricted cash has been included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented and has been applied retrospectively to the prior period presented. Net cash flows for the three and nine months ended November 30, 2016 did not significantly change as a result.

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,

2017

2016

2017

2016

GAAP cost of revenue

$

22,098

$

21,098

$

70,944

$

61,579

Amortization of intangible assets ⁽¹⁾

1,105

1,219

3,546

3,752

Depreciation expense ⁽²⁾

1,869

1,467

5,375

4,644

Stock-based compensation expense ⁽³⁾

550

323

1,472

959

Acquisition and other charges ⁽⁴⁾

(865)

—

(18)

—

Non-GAAP cost of revenue

$

19,439

$

18,089

$

60,569

$

52,224

GAAP sales and marketing expense

$

34,988

$

33,368

$

109,769

$

96,842

Amortization of intangible assets ⁽¹⁾

491

536

1,503

1,735

Depreciation expense ⁽²⁾

91

74

250

182

Stock-based compensation expense ⁽³⁾

2,426

2,211

7,960

6,002

Non-GAAP sales and marketing expense

$

31,980

$

30,547

$

100,056

$

88,923

GAAP research and development expense

$

20,616

$

18,627

$

59,412

$

56,280

Depreciation expense ⁽²⁾

122

126

427

417

Stock-based compensation expense ⁽³⁾

4,272

3,737

10,081

8,809

Acquisition and other charges ⁽⁴⁾

—

—

(160)

217

Non-GAAP research and development expense

$

16,222

$

14,764

$

49,064

$

46,837

GAAP general and administrative expense

$

12,366

$

10,217

$

33,648

$

31,958

Depreciation expense ⁽²⁾

495

553

1,615

1,712

Stock-based compensation expense ⁽³⁾

2,083

2,946

6,830

9,280

Acquisition and other charges ⁽⁴⁾

1,746

166

2,833

750

Non-GAAP general and administrative expense

$

8,042

$

6,552

$

22,370

$

20,216

GAAP total expense

$

90,068

$

83,310

$

273,773

$

246,659

Amortization of intangible assets ⁽¹⁾

1,596

1,755

5,049

5,487

Depreciation expense ⁽²⁾

2,577

2,220

7,667

6,955

Stock-based compensation expense ⁽³⁾

9,331

9,217

26,343

25,050

Acquisition and other charges ⁽⁴⁾

881

166

2,655

967

Non-GAAP total expense

$

75,683

$

69,952

$

232,059

$

208,200

Depreciation expense ⁽²⁾

2,577

2,220

7,667

6,955

Non-GAAP total expense including depreciation

$

78,260

$

72,172

$

239,726

$

215,155

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,

2017

2016

2017

2016

GAAP operating income

$

4,679

$

5,496

$

9,478

$

16,731

Amortization of intangible assets ⁽¹⁾

1,596

1,755

5,049

5,487

Stock-based compensation expense ⁽³⁾

9,331

9,217

26,343

25,050

Acquisition and other charges ⁽⁴⁾

881

166

2,655

967

Non-GAAP operating income

$

16,487

$

16,634

$

43,525

$

48,235

GAAP net income

$

7,783

$

1,793

$

12,009

$

7,014

Amortization of intangible assets ⁽¹⁾

1,596

1,755

5,049

5,487

Stock-based compensation expense ⁽³⁾

9,331

9,217

26,343

25,050

Acquisition and other charges ⁽⁴⁾

881

166

2,655

967

Income tax effect on non-GAAP exclusions ⁽⁵⁾

(353)

(3,662)

(5,663)

(4,633)

Other income adjustments ⁽⁶⁾

(7,658)

2,378

(9,702)

(96)

Non-GAAP net income

$

11,580

$

11,647

$

30,691

$

33,789

Non-GAAP diluted earnings per share ⁽⁷⁾

$

0.21

$

0.22

$

0.56

$

0.63

Weighted-average shares used to compute diluted earnings per share

54,995

53,995

54,645

53,391

 ______________________

⁽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, losses and gains that are non-recurring, infrequent, and/or unusual in nature, such as expenses incurred in connection with litigation, export compliance, intellectual property settlement, indirect tax costs, and other matters, as well as a gain resulting from the disposition of net liabilities related to our CudaCam product offerings.

⁽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 Income Adjustments. We provide non-GAAP information that excludes the effect of certain other income and losses. These adjustments may consist of realized gains and losses from the sale of marketable securities, foreign currency remeasurement gains and losses, impairment charges related to non-marketable investments and gains or losses from divestiture of our business unit; specifically, a gain of $7.4 million that resulted from the sale of our SignNow business during the third quarter of fiscal 2018. 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, 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 to Adjusted EBITDA

(in thousands)

(Unaudited)

Three Months Ended November 30,

Nine Months Ended November 30,

2017

2016

2017

2016

GAAP net income

$

7,783

$

1,793

$

12,009

$

7,014

Other income, net

(7,714)

2,374

(10,022)

(131)

Provision for income taxes

4,610

1,329

7,491

9,848

Acquisition and other charges

881

166

2,655

967

Stock-based compensation expense

9,331

9,217

26,343

25,050

Amortization of intangible assets

1,596

1,755

5,049

5,487

Depreciation expense

2,577

2,220

7,667

6,955

Adjusted EBITDA ⁽¹⁾

$

19,064

$

18,854

$

51,192

$

55,190

 ______________________

⁽¹⁾

Adjusted EBITDA. Beginning in the third quarter of fiscal 2017, we modified our reporting practices and our historical presentation of adjusted EBITDA by no longer adjusting for changes in deferred revenue and associated deferred costs. 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 plus non-cash and non-operating charges which include: (i) other income, net, (ii) provision for 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. The other income, net includes a gain of $7.4 million that resulted from the sale of our SignNow business during the third quarter of fiscal 2018

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,

2017

2016

2017

2016

GAAP cash flows from operating activities

$

23,705

$

15,082

$

54,915

$

47,711

Purchases of property and equipment

(1,329)

(1,296)

(9,145)

(4,265)

Free cash flow ⁽¹⁾

$

22,376

$

13,786

$

45,770

$

43,446

 ______________________

⁽¹⁾

Free Cash Flow. Beginning in the third quarter of fiscal 2017, we modified our reporting practices and our historical presentation of adjusted free cash flow by no longer adjusting 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,

2017

2016

2017

2016

GAAP Revenue

$

94,747

$

88,806

$

283,251

$

263,390

Total deferred revenue, end of period

417,745

401,300

417,745

401,300

Less: total deferred revenue, beginning of period

(413,665)

(398,878)

(407,082)

(392,774)

Deferred revenue adjustments

11,806

9,171

30,441

26,982

Total change in deferred revenue and adjustments

15,886

11,593

41,104

35,508

Gross billings ⁽¹⁾⁽²⁾

$

110,633

$

100,399

$

324,355

$

298,898

 ______________________

⁽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.

⁽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 average exchange rates for the second quarter of fiscal 2018 were used to convert current and comparable prior period gross billings rather than the actual exchange rates in effect during the respective period.