Blue Coat Reports Financial Results for Second Fiscal Quarter Ended October 31, 2009: Financial News

Blue Coat Reports Financial Results for Second Fiscal Quarter Ended October 31, 2009
Tuesday November 24, 4:05 pm ET

SUNNYVALE, Calif.--(BUSINESS WIRE)--Blue Coat Systems, Inc. (Nasdaq:BCSI - News), the technology leader in Application Delivery Networking, today reported its financial results for its second fiscal quarter ended October 31, 2009. Total net revenue for the second quarter of fiscal 2010 was $120.4 million, an increase of 1% compared with net revenue of $119.0 million in the second quarter of fiscal 2009, and an increase of 4% compared with net revenue of $116.0 million in the first quarter of fiscal 2010.

“I am very pleased with Blue Coat’s financial performance in the second quarter, and believe it further validates that our unique Application Delivery Network strategy is resonating strongly in the market,” said Brian NeSmith, president and chief executive officer, Blue Coat Systems. “In the quarter, we experienced solid sequential revenue growth in North America and in Europe. We saw strong demand in both the U.S. Federal and enterprise segments of our business for Application Delivery Network solutions, which help contain network and bandwidth costs, enhance business productivity, and mitigate exposure to evolving threat environments.”

On a GAAP basis, the Company reported net income of $8.4 million, or $0.19 per diluted share, in the second quarter of fiscal 2010, compared with net loss of $0.3 million, or $(0.01) per diluted share, in the second quarter of fiscal 2009, and net income of $4.0 million, or $0.09 per diluted share, in the first quarter of fiscal 2010.

The Company reported non-GAAP net income of $13.1 million, or $0.29 per diluted share, in the second quarter of fiscal 2010, compared with non-GAAP net income of $11.6 million, or $0.27 per diluted share, in the second quarter of fiscal 2009, and non-GAAP net income of $10.1 million, or $0.23 per diluted share, in the first quarter of fiscal 2010.

“Blue Coat’s second quarter results featured strong improvement in operating profitability, which is an important initiative for the company in Fiscal 2010,” said Gordon Brooks, senior vice president and chief financial officer, Blue Coat Systems. “In the quarter, our non-GAAP operating margin percentage increased sequentially 300 basis points to 15.5% compared with 12.5% in the prior quarter. This improvement further highlights our commitment to increasing operating profitability.”

Non-GAAP net income excludes charges related to the fair value write-up of acquired inventory sold, stock-based compensation expense, amortization of intangible assets, expenses for matters related to the stock option investigation, and restructuring expenses, and assumes a long-term effective tax rate of 30% on non-GAAP pre-tax income. A discussion of non-GAAP financial measures is provided under the section “About Non-GAAP Financial Measures” later in this press release. A detailed reconciliation of the GAAP to non-GAAP financial measures is included in Table 2 of this press release.

The Company ended the quarter on October 31, 2009, with cash, cash equivalents, and restricted cash of $142.5 million, an increase of $19.8 million from the prior quarter. Cash flow provided by operations in the second quarter of fiscal 2010 was $18.2 million.

Financial Outlook

For the third fiscal quarter ending January 31, 2010, the Company currently expects net revenue in the range of $121 to $126 million. On a GAAP basis, the Company currently expects net income of $0.01 to $0.12 per diluted share. On a non-GAAP basis, the Company currently expects net income of $0.31 to $0.36 per diluted share. For the third quarter of fiscal 2010, the Company is assuming a diluted share count of approximately 46.5 million shares. The increased range in GAAP net income per diluted share is due to the variability of the timing of restructuring expenses.

About Non-GAAP Financial Measures

The Company uses non-GAAP financial measures of income for internal evaluation and to report the results of its business. These non-GAAP financial measures include non-GAAP gross profit, non-GAAP operating income, non-GAAP net income, and non-GAAP diluted net income per share. These measures are not in accordance with, nor an alternative to, U.S. generally accepted accounting principles or GAAP. These measures are intended to supplement GAAP financial information, and may be different from non-GAAP financial measures used by other companies. The Company believes that these measures provide useful information to its management, board of directors and investors regarding its ongoing operating activities and business trends related to its financial condition and results of operations. The Company believes that it is useful to provide investors with information to understand how specific line items in the statement of operations are affected by certain items, such as the fair value write-up of acquired inventory sold, stock-based compensation expense, amortization of intangible assets, expenses for matters related to the stock option investigation, restructuring expenses, and related income tax adjustments. In addition, the Company’s management and board of directors use these non-GAAP financial measures in developing operating budgets and in reviewing the Company’s financial results of operations, since items such as expense related to the fair value write-up of acquired inventory sold, stock-based compensation expense, amortization of intangible assets, expenses for matters related to the stock option investigation, restructuring expenses, and related income tax adjustments do not impact its current resource allocation decisions. Additionally, the Company believes that inclusion of these non-GAAP financial measures provides consistency and comparability with its past reports of financial results. However, investors should be aware that non-GAAP measures have inherent limitations and should be read in conjunction with the Company’s consolidated financial statements prepared in accordance with GAAP. Refer to the accompanying tables for a detailed reconciliation of GAAP to non-GAAP gross profit, operating income, net income and net income per share.

Conference Call & Webcast

Blue Coat will hold its quarterly conference call to discuss results for the second quarter of fiscal 2010 and the outlook for the third quarter of fiscal 2010 on Tuesday, November 24, 2009 at 5:00 p.m. ET (2:00 p.m. PT). Participants in the United States should call (800) 230-1092. International participants should call (612) 234-9959. The passcode for the call is: 122333. The conference call can also be accessed through an audio webcast from the Company’s website, www.bluecoat.com/company/investorrelations. A replay of the call will be available starting on Tuesday, November 24, 2009 at 8:00 p.m. ET (5:00 p.m. PT), and can be accessed by calling (800) 475-6701 for U.S. participants and (320) 365-3844 for international participants. The passcode for the replay is 122333. An audio Webcast of the call will also be available at www.bluecoat.com/company/investorrelations

Click here to download Blue Coat Financial Statements

About Blue Coat Systems

Blue Coat Systems is the technology leader in Application Delivery Networking. Blue Coat offers an Application Delivery Network Infrastructure that provides the visibility, acceleration and security required to optimize and secure the flow of information to any user, on any network, anywhere. This application intelligence enables enterprises to tightly align network investments with business requirements, speed decision making and secure business applications for long-term competitive advantage. For additional information, please visit www.bluecoat.com.

FORWARD LOOKING STATEMENTS: This document contains certain forward looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements including: statements regarding our business outlook, future financial and operating results; any statements of expectation or belief; any statements regarding plans, strategies and objectives of management for future operations; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the risks that are described from time to time in the Securities and Exchange Commission reports filed by the Company, including but not limited to the risks described in the Company’s most recent reports on Form 10-K and Form 10-Q, particularly under the heading “Risk Factors.” Accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what impact they will have on the results of operations or financial condition of the Company. The Company assumes no obligation and does not intend to update these forward-looking statements except as required by applicable law after the date on which it was made.

Blue Coat and the Blue Coat logo are registered trademarks or trademarks of Blue Coat Systems, Inc. and/or its affiliates in the United States and certain other countries. All other trademarks mentioned in this document are the property of their respective owners.

BLUE COAT SYSTEMS, INC.

Table 1

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended Six Months Ended

October 31, July 31, October 31, October 31,

2009 2009 2008 2009 2008

Net revenue:

Product $ 76,502 $ 73,692 $ 84,797 $ 150,194 $ 158,726

Service 43,934 42,297 34,227 86,231 62,801

Total net revenue 120,436 115,989 119,024 236,425 221,527

Cost of net revenue:

Product 19,261 19,483 25,120 38,744 47,234

Service 12,947 12,037 12,017 24,984 21,970

Total cost of net revenue 32,208 31,520 37,137 63,728 69,204

Gross profit 88,228 84,469 81,887 172,697 152,323

Operating expenses:

Sales and marketing 45,608 45,576 44,952 91,184 88,600

Research and development 19,568 19,836 20,171 39,404 38,358

General and administrative 11,176 12,716 13,281 23,892 24,314

Amortization of intangible assets 1,822 1,821 1,862 3,643 3,024

Restructuring - - - - 1,546

Total operating expenses 78,174 79,949 80,266 158,123 155,842

Operating income (loss) 10,054 4,520 1,621 14,574 (3,519 )

Interest income 72 101 349 173 851

Interest expense (227 ) (228 ) (232 ) (455 ) (389 )

Other income (expense), net 155 (16 ) (1,353 ) 139 (1,540 )

Income (loss) before income taxes 10,054 4,377 385 14,431 (4,597 )

Provision for income taxes 1,687 381 636 2,068 1,489

Net income (loss) $ 8,367 $ 3,996 $ (251 ) $ 12,363 $ (6,086 )

Basic net income (loss) per share $ 0.19 $ 0.09 $ (0.01 ) $ 0.28 $ (0.16 )

Diluted net income (loss) per share $ 0.19 $ 0.09 $ (0.01 ) $ 0.28 $ (0.16 )

Weighted average shares used in computing basic

net income (loss) per share 43,777 43,193 38,432 43,485 38,224

Weighted average shares used in computing diluted

net income (loss) per share 45,202 44,594 38,432 44,777 38,224

BLUE COAT SYSTEMS, INC.

Table 2

Reconciliation of GAAP to Non-GAAP Financial Measures

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended Six Months Ended

October 31, July 31, October 31, October 31,

2009 2009 2008 2009 2008

Gross Profit Reconciliation:

GAAP gross profit $ 88,228 $ 84,469 $ 81,887 $ 172,697 $ 152,323

Fair value write-up of acquired inventory sold A 985 1,325 7,214 2,310 13,290

Stock-based compensation expense included in cost of revenue B 815 590 491 1,405 900

Amortization of intangible assets C 1,347 1,348 1,386 2,695 2,352

Non-GAAP gross profit $ 91,375 $ 87,732 $ 90,978 $ 179,107 $ 168,865

Operating Income Reconciliation:

GAAP operating income (loss) $ 10,054 $ 4,520 $ 1,621 $ 14,574 $ (3,519 )

Fair value write-up of acquired inventory sold A 985 1,325 7,214 2,310 13,290

Stock-based compensation expense B 5,527 4,811 5,094 10,338 9,343

Amortization of intangible assets C 3,169 3,169 3,249 6,338 5,377

Expenses (reversals) for matters related to the stock option investigation D (1,052 ) 702 653 (350 ) 1,356

Restructuring E - - - - 1,546

Non-GAAP operating income $ 18,683 $ 14,527 $ 17,831 $ 33,210 $ 27,393

Net Income Reconciliation:

GAAP net income (loss) $ 8,367 $ 3,996 $ (251 ) $ 12,363 $ (6,086 )

Fair value write-up of acquired inventory sold A 985 1,325 7,214 2,310 13,290

Stock-based compensation expense B 5,527 4,811 5,094 10,338 9,343

Amortization of intangible assets C 3,169 3,169 3,249 6,338 5,377

Expenses (reversals) for matters related to the stock option investigation D (1,052 ) 702 653 (350 ) 1,356

Restructuring E - - - - 1,546

Income tax adjustments F (3,917 ) (3,934 ) (4,342 ) (7,851 ) (6,405 )

Non-GAAP net income $ 13,079 $ 10,069 $ 11,617 $ 23,148 $ 18,421

Net Income (Loss) per Share Reconciliation:

GAAP diluted net income (loss) per share $ 0.19 $ 0.09 $ (0.01 ) $ 0.28 $ (0.16 )

Fair value write-up of acquired inventory sold A 0.02 0.03 0.17 0.05 0.31

Stock-based compensation expense B 0.12 0.11 0.12 0.23 0.22

Amortization of intangible assets C 0.07 0.07 0.07 0.14 0.13

Expenses (reversals) for matters related to the stock option investigation D (0.02 ) 0.02 0.01 - 0.03

Restructuring E - - - - 0.04

Income tax adjustments F (0.09 ) (0.09 ) (0.10 ) (0.18 ) (0.15 )

Anti-dilution adjustment for GAAP-based net loss

- - 0.01 - 0.01

Non-GAAP diluted net income per share $ 0.29 $ 0.23 $ 0.27 $ 0.52 $ 0.43

Shares used in computing GAAP diluted net income (loss) per share 45,202 44,594 38,432 44,777 38,224

Effect of dilutive securities G - - 5,180 - 4,601

Shares used in computing non-GAAP diluted net income per share 45,202 44,594 43,612 44,777 42,825

Notes:

(A) Purchase accounting rules require that the inventory we acquired in the Packeteer acquisition be written-up to its estimated fair market value. The

fair value write-up increases the cost of revenue, essentially eliminating the profit that would normally have been recognized at the time such

inventory is sold. To facilitate comparability of gross margin between periods, the fair value write-up related to acquired inventory sold has been

excluded on a non-GAAP basis.

(B) Stock-based compensation expense consists of non-cash charges for employee stock options, restricted stock awards, restricted stock units, and

employee stock purchase plan awards.

Results include stock-based compensation expense as follows (unaudited):

Three Months Ended Six Months Ended

October 31, July 31, October 31, October 31,

2009 2009 2008 2009 2008

Cost of revenue $ 815 $ 590 $ 491 $ 1,405 $ 900

Sales and marketing 2,070 1,687 1,730 3,757 3,251

Research and development 1,457 1,532 1,384 2,989 2,501

General and administrative 1,185 1,002 1,489 2,187 2,691

Total $ 5,527 $ 4,811 $ 5,094 $ 10,338 $ 9,343

(C) Amortization of intangible assets associated with acquisitions.

(D)
Current period activity includes the reversal of accruals related to the settlement of stock option payroll taxes due in Canada, offset by expenses for matters related to the Company's stock option investigation, including professional fees.

(E) Restructuring includes severance costs for Blue Coat employees terminated in connection with the Packeteer acquisition.

(F) Income tax adjustment is used to reconcile the GAAP tax provision to a non-GAAP tax provision utilizing an expected long-term effective tax rate of 30%.

(G)
The effect of dilutive securities was excluded from GAAP diluted weighted average shares due to the reported net loss under GAAP, but are included for non-GAAP diluted weighted average shares since we have non-GAAP net income.

BLUE COAT SYSTEMS, INC.

Table 3

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

October 31, April 30,

2009 2009

(unaudited)

ASSETS

Current assets:

Cash and cash equivalents $ 141,521 $ 114,163

Accounts receivable, net 75,677 77,161

Inventory 6,869 5,700

Prepaid expenses and other current assets 14,247 13,113

Current portion of deferred income tax assets 7,941 7,941

Total current assets 246,255 218,078

Property and equipment, net 37,944 34,955

Restricted cash 962 850

Goodwill 238,082 238,466

Identifiable intangible assets, net 42,436 48,774

Non-current portion of deferred income tax assets 19,412 19,412

Other assets 3,791 1,758

Total assets $ 588,882 $ 562,293

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable $ 19,080 $ 24,105

Accrued payroll and related benefits 15,553 18,374

Deferred revenue 90,710 96,656

Other accrued liabilities 8,856 12,299

Total current liabilities 134,199 151,434

Deferred revenue, less current portion 41,877 33,923

Deferred rent, less current portion 6,405 5,703

Long-term income taxes payable 15,948 12,677

Other non-current liabilities 437 600

Zero Coupon Convertible Senior Notes, due in 2013 76,794 76,347

Commitments and contingencies

Stockholders' equity:

Common stock 2 2

Additional paid-in capital 1,188,125 1,168,106

Treasury stock (2,398 ) (1,629 )

Accumulated deficit (872,507 ) (884,870 )

Total stockholders' equity 313,222 281,609

Total liabilities and stockholders' equity $ 588,882 $ 562,293

BLUE COAT SYSTEMS, INC.

Table 4

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

Six Months Ended October 31,

2009 2008

Operating Activities

Net income (loss) $ 12,363 $ (6,086 )

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

Depreciation 6,528 4,799

Amortization 6,476 5,376

Stock-based compensation 10,338 9,343

Accretion of warrants and issuance costs related to convertible senior notes 447 372

Stock-based compensation related to restructuring - 88

Tax benefit of stock option deduction 235 197

Excess tax benefit from stock-based compensation (792 ) (156 )

Loss on disposition of equipment 474 39

Changes in operating assets and liabilities:

Accounts receivable, net
1,484 (9,870 )

Inventory (1,169 ) 14,431

Prepaid expenses and other current assets (1,134 ) 604

Other assets (1,420 ) 498

Accounts payable (5,025 ) 4,498

Accrued payroll and related benefits (2,821 ) (1,994 )

Accrued restructuring (101 ) 200

Other accrued liabilities 156 (12,020 )

Deferred rent 696 (727 )

Deferred income taxes - (393 )

Deferred revenue 2,008 19,665

Net cash provided by operating activities 28,743 28,864

Investing Activities

Purchases of property and equipment (9,991 ) (11,300 )

Restricted cash (112 ) -

Proceeds from sale and maturities of investment securities - 1,204

Purchase of intangible assets (751 ) -

Acquisitions, net of cash acquired and prior investment - (169,327 )

Net cash used in investing activities (10,854 ) (179,423 )

Financing Activities

Net proceeds from issuance of common stock 8,677 6,716

Excess tax benefit from stock-based compensation 792 156

Net proceeds from issuance of convertible senior notes - 79,657

Net cash provided by financing activities 9,469 86,529

Net increase (decrease) in cash and cash equivalents 27,358 (64,030 )

Cash and cash equivalents at beginning of period 114,163 160,974

Cash and cash equivalents at end of period $ 141,521 $ 96,944

BLUE COAT SYSTEMS, INC.

Table 5

RECONCILIATION OF PROJECTED GAAP TO

PROJECTED NON-GAAP FINANCIAL MEASURES

(In thousands, except per share amounts)

Three Months Ended

January 31, 2010

Low High

Projected GAAP Net Income $ 400 $ 5,800

Add back:

Fair value write-up of acquired inventory sold A 300 300

Stock-based compensation expense B 5,000 5,000

Amortization of intangible assets C 3,100 3,100

Expenses for matters related to the stock option investigation D 500 500

Restructuring E 11,000 8,000

Income tax adjustments F (6,000) (5,900)

Projected Non-GAAP net income $ 14,300 $ 16,800

Projected GAAP Diluted Net Income per Share $ 0.01 $ 0.12

Add back:

Fair value write-up of acquired inventory sold A 0.01 0.01

Stock-based compensation expense B 0.11 0.11

Amortization of intangible assets C 0.07 0.07

Expenses for matters related to the stock option investigation D 0.01 0.01

Restructuring E 0.23 0.17

Income tax adjustments F (0.13) (0.13)

Projected Non-GAAP diluted net income per share $ 0.31 $ 0.36

(A)
Purchase accounting rules require that the inventory we acquired in the Packeteer acquisition be written-up to its estimated fair market value. The fair value write-up increases the cost of revenue, essentially eliminating the profit that would normally have been recognized at the time such inventory is sold. To facilitate comparability of gross margin between periods, the fair value write-up related to acquired inventory sold has been excluded on a non-GAAP basis.

(B)
Stock-based compensation expense consists of non-cash charges for employee stock options, restricted stock awards, restricted stock units, and employee stock purchase plan awards.

(C) Amortization of intangible assets associated with acquisitions.

(D) Includes expenses for matters related to the Company's stock option investigation, including professional fees.

(E) Restructuring includes severance costs associated with the November 3, 2009 restructuring plan.

(F)
Income tax adjustment is used to reconcile the GAAP tax provision to a non-GAAP tax provision utilizing an expected long-term effective tax rate of 30%.