Barracuda Reports Fourth Quarter and Fiscal 2017 Results

Barracuda Networks, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

(Unaudited)

As of February
28, 2017

As of February
29, 2016

Assets

Current assets:

Cash and cash equivalents

$

120,194

$

118,654

Marketable securities

79,915

36,394

Accounts receivable, net of allowance for doubtful accounts

40,560

36,520

Inventories, net

5,847

5,648

Deferred costs

32,598

31,943

Other current assets

16,295

12,450

Total current assets

295,409

241,609

Property and equipment, net

29,979

31,910

Deferred costs, non-current

27,285

27,019

Deferred income taxes, non-current

1,554

2,992

Other non-current assets

8,607

7,293

Intangible assets, net

32,145

39,386

Goodwill

69,795

69,595

Total assets

$

464,774

$

419,804

Liabilities and stockholders' equity (deficit)

Current liabilities:

Accounts payable

$

11,439

$

15,939

Accrued payroll and related benefits

13,593

12,371

Other accrued liabilities

12,942

19,495

Deferred revenue

239,796

235,411

Note payable

4,115

268

Total current liabilities

281,885

283,484

Long-term liabilities:

Deferred revenue, non-current

167,286

157,363

Deferred income taxes, non-current

2,803

2,478

Note payable, non-current

—

4,115

Other long-term liabilities

6,377

4,462

Stockholders' equity (deficit):

Common stock

53

52

Additional paid-in capital

370,745

337,439

Accumulated other comprehensive loss

(5,226)

(4,509)

Accumulated deficit

(359,149)

(365,080)

Total stockholders' equity (deficit)

6,423

(32,098)

Total liabilities and stockholders' equity (deficit)

$

464,774

$

419,804

Barracuda Networks, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share information)

(Unaudited)

Three Months Ended February
28/29,

Twelve Months Ended February
28/29,

2017

2016

2017

2016

Revenue:

Appliance

$

19,908

$

21,650

$

82,732

$

89,275

Subscription

69,351

62,076

269,917

230,883

Total revenue

89,259

83,726

352,649

320,158

Cost of revenue

22,193

19,879

83,772

70,132

Gross profit

67,066

63,847

268,877

250,026

Operating expenses:

Research and development

18,790

17,120

75,070

71,251

Sales and marketing

32,865

33,504

129,707

138,324

General and administrative

10,084

10,998

42,042

47,338

Total operating expenses

61,739

61,622

246,819

256,913

Income (loss) from operations

5,327

2,225

22,058

(6,887)

Other income (expense), net

(201)

604

(70)

(262)

Income (loss) before income taxes

5,126

2,829

21,988

(7,149)

Benefit from (provision for) income taxes

(1,905)

406

(11,753)

2,727

Net income (loss)

$

3,221

$

3,235

$

10,235

$

Net income (loss) per share:

Basic

$

0.06

$

0.06

$

0.20

$

(0.08)

Diluted

$

0.06

$

0.06

$

0.19

$

(0.08)

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

Basic

52,818

52,746

52,456

53,070

Diluted

54,117

53,118

53,572

53,070

Barracuda Networks, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

Three Months Ended February
28/29,

Twelve Months Ended February
28/29,

2017

2016

2017

2016

Operating activities

Net income (loss)

$

3,221

$

3,235

$

10,235

$

(4,422)

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

Depreciation, amortization, and impairment expense

3,989

5,373

16,431

13,300

Stock-based compensation expense

7,655

7,430

32,705

28,846

Excess tax benefits from equity compensation plans

114

(398)

(1,909)

(3,788)

Deferred income taxes

1,251

(2,665)

1,642

(6,592)

Other

62

(1,759)

(493)

(865)

Changes in operating assets and liabilities:

Accounts receivable, net

(1,049)

5,500

(4,103)

4,427

Inventories, net

(1,133)

471

(202)

(1,193)

Income taxes, net

(1,207)

1,873

1,931

2,756

Deferred costs

(1,292)

385

(725)

(1,112)

Other assets

(419)

(388)

(888)

(2,187)

Accounts payable

(499)

957

(5,388)

(720)

Accrued payroll and related benefits

135

(382)

1,033

3,339

Other liabilities

1,043

(5,306)

397

(1,526)

Deferred revenue

5,621

1,069

14,537

19,003

Net cash provided by operating activities

17,492

15,395

65,203

49,266

Investing activities

Purchases of marketable securities

(14,966)

(6,981)

(74,527)

(26,021)

Proceeds from the sale of marketable securities

1,931

1,108

13,461

10,310

Proceeds from the maturity of marketable securities

4,007

5,520

17,597

20,047

Purchases of non-marketable investments

(600)

—

(1,236)

(1,400)

Purchases of property and equipment

(2,070)

(2,318)

(6,335)

(7,818)

Purchases of intangible assets

—

—

(1,374)

—

Business combinations, net of cash acquired

(6,707)

—

(6,950)

(56,862)

Net cash used in investing activities

(18,405)

(2,671)

(59,364)

(61,744)

Financing activities

Proceeds from issuance of common stock

1,474

133

8,899

4,845

Taxes paid related to net share settlement of equity awards

(1,058)

(765)

(7,061)

(6,734)

Repurchases of common stock

(355)

(11,216)

(7,596)

(19,216)

Excess tax benefits from equity compensation plans

(114)

398

1,909

3,788

Repayment of employee loans, net of loans extended

122

24

—

(2,464)

Repayment of note payable

(68)

(64)

(268)

(285)

Other

—

(75)

—

(330)

Net cash provided by (used in) financing activities

1

(11,565)

(4,117)

(20,396)

Effect of exchange rate changes on cash and cash equivalents

(7)

422

(182)

155

Net increase (decrease) in cash and cash equivalents

(919)

1,581

1,540

(32,719)

Cash and cash equivalents at beginning of period

121,113

117,073

118,654

151,373

Cash and cash equivalents at end of period

$

120,194

$

118,654

$

120,194

$

118,654

Barracuda Networks, Inc.

Reconciliation of Selected GAAP to Non-GAAP Financial Measures

(in thousands)

(Unaudited)

Three Months Ended February
28/29,

Twelve Months Ended February
28/29,

2017

2016

2017

2016

GAAP cost of revenue

$

22,193

$

19,879

$

83,772

$

70,132

Amortization of intangible assets ⁽¹⁾

1,252

1,561

5,004

3,247

Depreciation expense ⁽²⁾

1,511

1,550

6,155

5,062

Stock-based compensation expense ⁽³⁾

408

310

1,367

1,062

Non-GAAP cost of revenue

$

19,022

$

16,458

$

71,246

$

60,761

GAAP sales and marketing expense

$

32,865

$

33,504

$

129,707

$

138,324

Amortization of intangible assets ⁽¹⁾

507

1,544

2,242

2,343

Depreciation expense ⁽²⁾

64

(69)

246

160

Stock-based compensation expense ⁽³⁾

2,072

1,565

8,074

6,566

Acquisition and other charges ⁽⁴⁾

—

(1,029)

—

(1,346)

Non-GAAP sales and marketing expense

$

30,222

$

31,493

$

119,145

$

130,601

GAAP research and development expense

$

18,790

$

17,120

$

75,070

$

71,251

Depreciation expense ⁽²⁾

111

113

528

657

Stock-based compensation expense ⁽³⁾

2,842

2,141

11,651

8,247

Acquisition and other charges ⁽⁴⁾

(419)

(536)

(202)

1,685

Non-GAAP research and development expense

$

16,256

$

15,402

$

63,093

$

60,662

GAAP general and administrative expense

$

10,084

$

10,998

$

42,042

$

47,338

Depreciation expense ⁽²⁾

544

674

2,256

1,831

Stock-based compensation expense ⁽³⁾

2,333

3,414

11,613

12,971

Acquisition and other charges ⁽⁴⁾

64

126

814

4,649

Non-GAAP general and administrative expense

$

7,143

$

6,784

$

27,359

$

27,887

GAAP total expense

$

83,932

$

81,501

$

330,591

$

327,045

Amortization of intangible assets ⁽¹⁾

1,759

3,105

7,246

5,590

Depreciation expense ⁽²⁾

2,230

2,268

9,185

7,710

Stock-based compensation expense ⁽³⁾

7,655

7,430

32,705

28,846

Acquisition and other charges ⁽⁴⁾

(355)

(1,439)

612

4,988

Non-GAAP total expense

$

72,643

$

70,137

$

280,843

$

279,911

Depreciation expense ⁽²⁾

2,230

2,268

9,185

7,710

Non-GAAP total expense including depreciation

$

74,873

$

72,405

$

290,028

$

287,621

Barracuda Networks, Inc.

Reconciliation of Selected GAAP to Non-GAAP Financial Measures

(in thousands, except per share information)

(Unaudited)

Three Months Ended February
28/29,

Twelve Months Ended February
28/29,

2017

2016

2017

2016

GAAP operating income (loss)

$

5,327

$

2,225

$

22,058

$

(6,887)

Amortization of intangible assets ⁽¹⁾

1,759

3,105

7,246

5,590

Stock-based compensation expense ⁽³⁾

7,655

7,430

32,705

28,846

Acquisition and other charges ⁽⁴⁾

(355)

(1,439)

612

4,988

Non-GAAP operating income

$

14,386

$

11,321

$

62,621

$

32,537

GAAP net income (loss)

$

3,221

$

3,235

$

10,235

$

(4,422)

Amortization of intangible assets ⁽¹⁾

1,759

3,105

7,246

5,590

Stock-based compensation expense ⁽³⁾

7,655

7,430

32,705

28,846

Acquisition and other charges ⁽⁴⁾

(355)

(1,439)

612

4,988

Income tax effect on non-GAAP exclusions ⁽⁵⁾

(2,396)

(3,793)

(7,029)

(12,435)

Other expense (income) adjustments ⁽⁶⁾

154

(631)

58

87

Non-GAAP net income

$

10,038

$

7,907

$

43,827

$

22,654

Non-GAAP diluted earnings per share ⁽⁷⁾

$

0.19

$

0.15

$

0.82

$

0.42

Weighted-average shares used to compute diluted earnings per share

54,117

53,118

53,572

54,337

⁽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, foreign currency remeasurement gains and losses and impairment charges related to non-marketable investments. 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 February
28/29,

Twelve Months Ended February
28/29,

2017

2016

2017

2016

GAAP net income (loss)

$

3,221

$

3,235

$

10,235

$

(4,422)

Other expense (income), net

201

(604)

70

262

Provision for (benefit from) income taxes

1,905

(406)

11,753

(2,727)

Acquisition and other charges

(355)

(1,439)

612

4,988

Stock-based compensation expense

7,655

7,430

32,705

28,846

Amortization of intangible assets

1,759

3,105

7,246

5,590

Depreciation expense

2,230

2,268

9,185

7,710

Adjusted EBITDA ⁽¹⁾

$

16,616

$

13,589

$

71,806

$

40,247

⁽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.

Three Months Ended February
28/29,

Twelve Months Ended February
28/29,

2017

2016

2017

2016

Increase in deferred revenue

$

5,782

$

1,157

$

14,308

$

19,912

Increase (decrease) in deferred costs

$

1,332

$

(293)

$

921

$

1,026

Barracuda Networks, Inc.

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

(in thousands)

(Unaudited)

Three Months Ended February
28/29,

Twelve Months Ended February
28/29,

2017

2016

2017

2016

GAAP cash flows from operating activities

$

17,492

$

15,395

$

65,203

$

49,266

Purchases of property and equipment

(2,070)

(2,318)

(6,335)

(7,818)

Free cash flow ⁽¹⁾

$

15,422

$

13,077

$

58,868

$

41,448

⁽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 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 February
28/29,

Twelve Months Ended February
28/29,

2017

2016

2017

2016

GAAP Revenue

$

89,259

$

83,726

$

352,649

$

320,158

Total deferred revenue, end of period

407,082

392,774

407,082

392,774

Less: total deferred revenue, beginning of period

(401,300)

(391,617)

(392,774)

(372,862)

Deferred revenue adjustments

8,178

10,905

35,160

37,445

Total change in deferred revenue and adjustments

13,960

12,062

49,468

57,357

Gross billings ⁽¹⁾⁽²⁾

$

103,219

$

95,788

$

402,117

$

377,515

⁽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 February 29, 2016, 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.