NetScreen Technologies, Inc. Reports Record Fiscal Third Quarter Financial Results
Sunnyvale, CA - July 23, 2003—NetScreen Technologies, Inc. (Nasdaq: NSCN), today announced financial results for its third fiscal quarter and nine months ended June 30, 2003.
Revenue in the quarter ended June 30, 2003 was a record $64.3 million, an increase of 76.7 percent over revenue of $36.4 million in the same quarter last year and an increase of 10.3 percent over revenue of $58.3 million in the quarter ended March 31, 2003. Revenues for the first nine months of fiscal 2003 were $173.8 million, an increase of 78.4 percent over revenues of $97.4 million recorded in the same period last year.
Net income calculated on the basis of generally accepted accounting principles (GAAP) for the quarter ended June 30, 2003 was $35.3 million, or $0.44 per basic and $0.41 per diluted share, compared to a net loss of $2.4 million, or ($0.03) per basic and diluted share, in the same period last year. GAAP net income in the quarter ended June 30, 2003 includes a non-cash net tax benefit of $23.5 million resulting from the non-recurring recognition of previously reserved deferred tax assets such as net operating losses. GAAP net income also includes the effect of a non-cash charge of $6.1 million for stock-based compensation associated primarily with stock options granted prior to the company’s initial public offering and approximately $245,000 for amortization of intangible assets associated with the September 2002 acquisition of OneSecure Inc. GAAP net loss in the same period last year includes the effect of a non-cash charge of $6.1 million for stock-based compensation associated with stock options. GAAP net income applicable to common stockholders for the first nine months of fiscal 2003 was $44.4 million, or $0.57 per basic and $0.53 per diluted share, compared to a net loss applicable to common stockholders of $40.2 million, or ($0.71) per basic and diluted share in the same period last year.
Pro forma net income for the quarter ended June 30, 2003 was a record $15.4 million, or $0.19 per basic and $0.18 per diluted share, compared to pro forma net income of $3.7 million, or $0.05 per basic and diluted share, in the same quarter last year and pro forma net income of $13.0 million, or $0.17 per basic and $0.15 per diluted share, in the quarter ended March 31, 2003. Pro forma net income and per share information in the quarter ended June 30, 2003 exclude the recognition of a net tax benefit relating to deferred tax assets and reflects our previously normalized pro forma tax rate of 15 percent. Additionally, pro forma net income and per share information excludes non-cash, stock-based compensation associated with stock options and amortization of intangible assets.
“During the quarter we continued to extend our penetration into large enterprise accounts both domestically and internationally,” said Robert Thomas, president and chief executive officer. “We saw revenue growth in each of our geographic regions in the June quarter as security continues to be a primary focus area. We also experienced another robust quarter of sales to the government sector, educational institutions and financial institutions.”
Remo Canessa, NetScreen’s chief financial officer, stated, “Stronger sales in North America helped us achieve our seventh consecutive quarter of double-digit sequential revenue growth since our initial public offering in December 2001. The strength of our products and lower service and maintenance costs led to an increase in our pro forma gross margin and efficient spending helped us post record pro forma operating profit margin. We were operating cash flow positive for the eighth consecutive quarter generating $17.4 million, bringing our cash, cash equivalents and short-term investments balance up to $315.2 million as of June 30, 2003.”
Recent Company Highlights
- Expanded alliance with Trend Micro, Inc. to deliver a new best-of-breed integrated security gateway for remote sites that combines antivirus, firewall, VPN and intrusion prevention in a single platform.
- Introduced the NetScreen-5GT low-end appliance, which provides firewall, VPN, denial of service protection and has added memory and CPU power to accommodate future security capabilities, including intrusion detection and prevention as well as Trend Micro’s award-winning network antivirus functionality.
- Maintained No. 1 position in unit market share of the high-end (greater than $30,000) price-banded category of VPN and firewall appliances in the March quarter, according to Infonetics Research. In addition, according to this report, NetScreen passed a competitor and moved into second place in unit market share in the mid-range ($10,000 to $30,000) price-banded category and reached third place for overall revenue in the Worldwide Total VPN and Firewall Appliance Hardware and Software Market Share category in the March quarter.
- Named Chris Andrews to the new position of vice president of North American sales.
- Achieved Common Criteria Evaluation Assurance Level 4 (EAL4) certification for certain firewall and VPN appliances and systems, an important worldwide evaluation standard for security products.
- Defined a phased IPv6 development plan and executed the first phase delivery: availability of a NetScreen ScreenOS technology release that demonstrates IPv6 support for both firewall and VPN.
- Received Open Security Evaluation Criteria (OSEC) verification for the NetScreen-IDP 100, the first in-line device to offer accurate attack detection with real-time intrusion prevention capabilities.
- Announced new large enterprise, government and service provider customer wins including New York State Psychiatric Institute, Japan’s NTT-ME, PUMA AG, TELUS and the University of Buffalo.
- Expanded our Global Alliance Program to include Alcatel, a provider of end-to-end communications solutions, and Certicom Corp., a provider of wireless security solutions.
- Launched new corporate web site that features enhanced navigation and data accessibility for customers, partners, and prospects worldwide, as well as a new online customer service and support center.
Outlook
The following statements are based on information the company has available today, and will be the company’s only statements of this nature until updated in the future. NetScreen assumes no duty to update this information at any time. These statements are forward-looking, and actual results may differ materially.
During the second half of the June quarter the SARS epidemic resulted in a slowdown in our business in certain countries in Asia Pacific and we expect some follow-on impact in the September 2003 quarter. For the quarter ending September 30, 2003, NetScreen currently expects to achieve revenue growth of between 4 and 6 percent over the June 2003 quarter. On a GAAP basis, gross margins are expected to be between 75 and 76 percent and operating expenses are expected to increase by 4 to 6 percent in the September 2003 quarter. Our GAAP effective tax rate is expected to be approximately 50 percent in the September 2003 quarter. Pro forma gross margins are expected to be between 76 and 77 percent. In addition, the company expects pro forma operating expenses for the September 2003 quarter to increase by 6 to 8 percent over the June 2003 quarter. Our pro forma effective tax rate is expected to be approximately 39 percent going forward. Pro forma operating expense, pro forma gross margin and pro forma effective tax rate expectations exclude stock-based compensation and the amortization of intangible assets.
Conference Call
NetScreen will host a public conference call to discuss the third quarter results and current business developments, and to provide guidance for the fourth quarter and fiscal 2003 today at 5:00 p.m. Eastern Time (2:00 p.m. Pacific Time). A live webcast of the call can be accessed at: http://ir.netscreen.com/ireye/ir_site.zhtml?ticker=nscn&script=2100. A replay of the webcast will be available at the same web address starting approximately two hours after the conclusion of the live webcast and running through August 23, 2003.
Institutional investors and research analysts can access the live conference by calling 800-309-8225 (U.S. and Canada) or 706-634-0672 (International). A taped replay of this call will be available for one week following the call. The dial-in numbers for the replay are 800-642-1687 (U.S. and Canada) and 706-645-9291 (International). The call’s ID number is: 1664896. The replay will be available starting approximately two hours after the conclusion of the live call and running through July 31, 2003.
About NetScreen Technologies
NetScreen Technologies, Inc., is a leading developer of integrated network security solutions that offer the security, performance and total cost of ownership required by enterprises and carriers. NetScreen's innovative solutions provide key security technologies, such as virtual private network, denial of service protection, firewall and intrusion prevention, in a line of easy-to-manage security appliances and systems. NetScreen is located at 805 11th Ave, Sunnyvale, CA 94089. More information on NetScreen's products can be found at http://www.netscreen.com or by calling toll free at 1-800-638-8296.
(tables to follow)
NETSCREEN TECHNOLOGIES, INC.
GAAP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
2003 2002 2003 2002
Revenues:
Product $52,573 $30,091 $142,961 $80,684
Maintenance and
service 11,767 6,320 30,791 16,737
Total revenues 64,340 36,411 173,752 97,421
Cost of revenues:
Product (1) (2) 11,728 7,292 31,641 21,148
Maintenance and
service (1) 3,177 2,129 8,825 5,294
Total cost of
revenues 14,905 9,421 40,466 26,442
Gross margin 49,435 26,990 133,286 70,979
Operating expenses:
Research and
development (1) (2) 11,161 8,578 32,020 24,192
Sales and
marketing (1) (2) 22,707 16,338 62,906 45,929
General and
administrative (1) 4,883 4,214 13,932 12,648
Total operating
expenses 38,751 29,130 108,858 82,769
Income (loss)
from operations 10,684 (2,140) 24,428 (11,790)
Interest and
other income, net 1,090 948 3,157 2,233
Income (loss)
before taxes 11,774 (1,192) 27,585 (9,557)
Benefit (provision)
for income taxes 23,496 (1,250) 16,788 (1,889)
Net income (loss) 35,270 (2,442) 44,373 (11,446)
Deemed dividend on
Series E and F
redeemable
convertible
preferred stock -- -- -- (28,743)
Net income (loss)
applicable
to common
stockholders $35,270 $(2,442) $44,373 $(40,189)
Basic net income
(loss) per
share
applicable to
common
stockholders $0.44 $ (0.03) $0.57 $(0.71)
Shares used in
computing basic
net income (loss)
per share applicable
to common
stockholders 79,935 71,317 78,438 56,486
Diluted net income
(loss) per share
applicable to
common stockholders $0.41 $ (0.03) $0.53 $(0.71)
Shares used in
computing diluted
net income (loss)
per share applicable
to common
stockholders 85,180 71,317 84,128 56,486
(1) Includes stock-based compensation of the following:
Cost of product
revenues $387 $411 $1,209 $1,232
Cost of maintenance
and service revenues 276 274 830 742
Research and
development 1,908 1,928 5,856 5,695
Sales and marketing 2,763 2,794 7,620 8,386
General and
administrative 720 742 2,100 2,082
Total stock-based
compensation $ 6,054 $ 6,149 $17,615 $18,137
(2) Includes amortization of intangible assets of the
following:
Cost of product
revenues $186 $-- $558 $--
Research and
development 23 -- 69 --
Sales and marketing 36 -- 107 --
Total amortization
of intangible
assets $245 $-- $734 $--
Certain amounts have been reclassified to conform to the current
presentation.
NETSCREEN TECHNOLOGIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(excludes net tax benefit relating to recognition of deferred tax assets,
stock-based compensation, amortization of intangible assets and deemed
dividends on preferred stock)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
2003 2002 2003 2002
Revenues:
Product $52,573 $30,091 $142,961 $80,684
Maintenance and
service 11,767 6,320 30,791 16,737
Total revenues 64,340 36,411 173,752 97,421
Cost of revenues:
Product (1) (2) 11,155 6,881 29,874 19,916
Maintenance and
service (1) 2,901 1,855 7,995 4,552
Total cost of
revenues 14,056 8,736 37,869 24,468
Gross margin 50,284 27,675 135,883 72,953
Operating expenses:
Research and
development (1) (2) 9,230 6,650 26,095 18,497
Sales and marketing
(1) (2) 19,908 13,544 55,179 37,543
General and
administrative (1) 4,163 3,472 11,832 10,566
Total operating
expenses 33,301 23,666 93,106 66,606
Pro forma income
from operations 16,983 4,009 42,777 6,347
Interest and other
income, net 1,090 948 3,157 2,233
Pro forma income
before taxes 18,073 4,957 45,934 8,580
Benefit (provision)
for income taxes (2,711) (1,250) (6,664) (1,889)
Pro forma net
income (3) $15,362 $3,707 $39,270 $6,691
Basic pro forma net
income per share $0.19 $0.05 $0.50 $0.12
Shares used in
computing basic pro
forma net income per
share 79,935 71,317 78,438 56,486
Diluted pro forma
net income per share $0.18 $0.05 $0.47 $0.09
Shares used in
computing diluted
pro forma net
income per share 85,180 76,394 84,128 73,963
(1) Excludes stock-based compensation of the following:
Cost of product
revenues $387 $411 $1,209 $1,232
Cost of maintenance
and service
revenues 276 274 830 742
Research and
development 1,908 1,928 5,856 5,695
Sales and
marketing 2,763 2,794 7,620 8,386
General and
administrative 720 742 2,100 2,082
Total stock-
based
compensation $6,054 $6,149 $ 17,615 $18,137
(2) Excludes amortization of intangible assets of thefollowing:
Cost of product
revenues $186 $-- $558 $--
Research and
development 23 -- 69 --
Sales and marketing 36 -- 107 --
Total amortization
of intangible
assets $245 $-- $734 $--
(3) Excludes deemed dividends on Series E and F
convertible preferred
stock $-- $-- $-- $28,743
Certain amounts have been reclassified to conform to the current
presentation.
NETSCREEN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, September 30,
2003 2002*
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $76,649 $11,153
Short-term investments 238,559 238,711
Restricted cash 308 1,611
Accounts receivable, net 28,518 18,046
Refundable income taxes 243 --
Inventories 3,195 2,249
Deferred taxes 35,771 --
Other current assets 4,324 5,231
Total current assets 387,567 277,001
Property and equipment 9,969 6,264
Restricted cash 827 --
Intangible assets 5,025 5,759
Goodwill 54,522 56,807
Other assets 540 853
Total assets $458,450 $346,684
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $6,329 $5,027
Accrued expenses 15,319 11,452
Accrued compensation 10,028 6,909
Accrued income taxes -- 1,865
Deferred revenue 47,375 26,15
Current portion of restructuring liabilities 682 541
Current portion of debt and
capital lease obligations 114 1,761
Total current liabilities 79,847 53,705
Restructuring liabilities,
less current portion 2,154 2,577
Long-term portion of debt and capital
lease obligations -- 1,513
Total stockholders' equity 376,449 288,889
Total liabilities and stockholders'
equity $458,450 $346,684
Certain amounts have been reclassified to conform to the current
presentation.
NETSCREEN TECHNOLOGIES, INC.
Reconciliation of Pro Forma to GAAP Numbers (Unaudited)
$ in 000s
Three Months Three Months Three Months
Ended Ended Ended
June 30, March 31 June 30,
2003 2003 2002
% of % of % of
$ Revenue $ Revenue $ Revenue
Revenues - GAAP and Pro
forma 64,340 100.0% 58,342 100.0% 36,411 100.0%
Pro forma gross margin 50,284 78.2% 45,355 77.7% 27,675 76.0%
Stock based compensation
- cost of product
revenues (387) -0.6% (411) -0.7% (411) -1.1%
Amortization of
intangible assets -
cost of product
revenues (186) -0.3% (186) -0.3% -- 0.0%
Stock based compensation
- cost of maintenance
and service (276) -0.5% (277) -0.5% (274) -0.8%
GAAP gross margin 49,435 76.8% 44,481 76.2% 26,990 74.1%
Pro forma research and
development operating
expenses 9,230 14.3% 9,089 15.6% 6,650 18.3%
Stock based compensation 1,908 3.0% 1,965 3.4% 1,928 5.3%
Amortization of
intangible assets 23 0.0% 23 0.0% -- 0.0%
GAAP research and
development operating
expenses 11,161 17.3% 11,077 19.0% 8,578 23.6%
Pro forma sales and
marketing operating
expenses 19,908 30.9% 17,841 30.5% 13,544 37.2%
Stock based
compensation 2,763 4.3% 2,160 3.7% 2,794 7.7%
Amortization of
intangible assets 36 0.1% 36 0.1% -- 0.0%
GAAP sales and marketing
operating expenses 22,707 35.3% 20,037 34.3% 16,338 44.9%
Pro forma general and
administrative operating
expenses 4,163 6.5% 4,202 7.2% 3,472 9.6%
Stock based compensation 720 1.1% 656 1.1% 742 2.0%
GAAP general and
administrative operating
expenses 4,883 7.6% 4,858 8.3% 4,214 11.6%
Pro forma operating
expenses 33,301 51.8% 31,132 53.4% 23,666 65.0%
Stock based compensation 5,391 8.3% 4,781 8.2% 5,464 15.0%
Amortization of
intangible assets 59 0.1% 59 0.1% -- 0.0%
GAAP operating expenses 38,751 60.2% 35,972 61.7% 29,130 80.0%
Pro forma income from
operations 16,983 26.4% 14,223 24.4% 4,009 11.0%
Stock based
compensation (6,054) -9.4% (5,469) -9.4% (6,149) -16.9%
Amortization of
intangible assets (245) -0.4% (245) -0.4% -- 0.0%
GAAP income (loss) from
operations 10,684 16.6% 8,509 14.6% (2,140) -5.9%
Pro forma net income 15,362 23.9% 12,986 22.3% 3,707 10.2%
Stock based compensation (6,054) -9.4% (5,469) -9.4% (6,149) -16.9%
Amortization of
intangible assets (245) -0.4% (245) -0.4% -- 0.0%
GAAP adjustment to
provision for income
taxes relating to
stock-based
compensation and
amortization of
intangible assets (1,636) -2.5% (1,381) -2.4% -- 0.0%
Tax benefit relating to
recognition of
deferred
tax assets 27,843 43.2% -- 0.0% -- 0.0%
GAAP net income (loss) 35,270 54.8% 5,891 10.1% (2,442) -6.7%
Components of gross
margin:
Product revenue - GAAP and
Pro forma 52,573 100.0% 47,937 100.0% 30,091 100.0%
Pro forma product gross
margin 41,418 78.8% 37,904 79.1% 23,210 77.1%
Stock based compensation
- cost of product
revenues (387) -0.7% (411) -0.9% (411) -1.3%
Amortization of
intangible assets -
cost of product
revenues (186) -0.4% (186) -0.4% -- 0.0%
GAAP product gross margin 40,845 77.7% 37,307 77.8% 22,799 75.8%
Maintenance and service
revenue - GAAP and Pro
forma 11,767 100.0% 10,405 100.0% 6,320 100.0%
Pro forma service gross
margin 8,866 75.3% 7,451 71.6% 4,465 70.6%
Stock based compensation
- cost of maintenance
and service (276) -2.3% (277) -2.7% (274) -4.3%
GAAP service gross margin 8,590 73.0% 7,174 68.9% 4,191 66.3%
NETSCREEN TECHNOLOGIES, INC.
Reconciliation of Pro Forma to GAAP Tax Provision (Unaudited)
$ in 000s
Three Months Ended Nine Months Ended
June 30, June 30,
2003 2002 2003 2002
Pro forma income before taxes $18,073 $4,957 $45,934 $8,580
Pro forma provision for income taxes (2,711) (1,250) (6,664) (1,889)
Pro forma effective tax rate 15.0% 25.2% 14.5% 22.0%
Pro forma net income $15,362 $3,707 $39,270 $6,691
Pro forma income before taxes $18,073 $4,957 $45,934 $8,580
Stock-based compensation (6,054) (6,149) (17,615) (18,137)
Amortization of intangible assets (245) -- (734) --
GAAP income (loss) before taxes 11,774 (1,192) 27,585 (9,557)
Pro forma provision for income taxes (2,711) (1,250) (6,664) (1,889)
GAAP adjustment to provision for
income taxes relating to stock-based
compensation and amortization of
intangibles (1,636) (4,391)
Tax benefit relating to recognition
of deferred tax assets 27,843 -- 27,843 --
GAAP benefit (provision) for income
taxes 23,496 (1,250) 16,788 (1,889)
GAAP effective tax rate -199.6% (A) -60.9% (A)
GAAP net income (loss) $35,270 $(2,442) $44,373 $(11,446)
(A) Taxes paid for foreign jurisdiction purposes
NETSCREEN TECHNOLOGIES, INC.
Guidance Summary
Reconciliation of Pro Forma to GAAP Gross Margin, Operating Expenses and
Income Taxes
(Unaudited)
$ in 000s
Three Months Ended Sept. 30, 2003
Low(1) High(2)
% of % of
$ Revenue $ Revenue
Revenues - GAAP and Pro forma 66,950 100.0% 68,200 100.0%
Pro forma gross margin 50,880 76.0% 52,515 77.0%
Stock based compensation - cost of
product revenues (355) -0.5% (355) -0.5%
Amortization of intangible assets
- cost of product revenues (186) -0.3% (186) -0.3%
Stock based compensation - cost of
maintenance and service (269) -0.4% (269) -0.4%
GAAP gross margin 50,070 74.8% 51,705 75.8%
Pro forma operating expenses 35,965 53.7% 35,300 51.8%
Stock based compensation 5,086 7.6% 5,086 7.5%
Amortization of intangible assets 59 0.1% 59 0.1%
GAAP operating expenses 41,110 61.4% 40,445 59.3%
Pro forma income before taxes $15,915 $18,215
Pro forma provision for income taxes (6,207) (7,104)
Pro forma effective tax rate 39.0% 39.0%
Proforma net income $9,708 $11,111
Pro forma income before taxes $15,915 $18,215
Stock-based compensation (5,710) (5,710)
Amortization of intangible assets (245) (245)
GAAP income before taxes 9,960 12,260
Pro forma provision for income taxes (6,207) (7,104)
GAAP adjustment to provision for
income taxes relating to stock-
based compensation and amortization
of intangibles 1,227 974
GAAP provision for income taxes (4,980) (6,130)
GAAP effective tax rate 50.0% 50.0%
GAAP net income $4,980 $6,130
Notes:
(1) Low guidance reflects 4% revenue increase over the prior quarter, 76%
gross margin and 8% operating expense increase over the prior
quarter.
(2) High guidance reflects 6% revenue increase over the prior quarter,
77% gross margin and 6% operating expense increase over the prior
quarter.
NetScreen and the NetScreen logo are trademarks of NetScreen Technologies, Inc. in the United States and other countries. Other trademarks are the property of their respective owners.
This press release contains forward-looking statements about events and circumstances that have not yet occurred. For example, words such as “will”, “can”, “provide”, “enabling” and “continue”, or other statements in the future tense, are forward-looking statements. Actual outcomes and results may differ materially from expectations in this press release due to a number of risks and uncertainties. Such risks and uncertainties include whether the market for security products will grow as projected, if at all, whether demand for NetScreen products will continue, whether new products, if and when introduced, will be successful and whether products will perform as expected.
NetScreen Technologies
- David Gennarelli
- Phone: 408-543-8125
- E-mail: dgennarelli@netscreen.com
