Secure Computing Corporation (NASDAQ: SCUR), a leading enterprise
security company, today announced third quarter GAAP revenue of
$63.0 million. This represents a 5% increase in revenue compared to
$60.0 million in the same quarter last year. Third quarter non-GAAP
revenue was $64.7 million. This represents a 1% decrease compared
to the same quarter last year. On a GAAP basis, net income was
$47.4 million for the quarter or $0.63 per fully diluted share.
Third quarter non-GAAP net income was $5.5 million or $0.07 per
fully diluted share.
SafeWord Divestiture Outlook Adjustments:
Our third quarter outlook guidance provided on July 28, 2008
included our expectations for our SafeWord product line for the
full quarter. Adjusted to reflect this divestiture as of the
closing date of September 4, 2008, our GAAP revenue outlook would
have been between $58 and $62 million, our GAAP net loss outlook
would have been between $7 and $9 million, our non-GAAP revenue
outlook would have been between $61 and 65 million, and our
non-GAAP earnings per share outlook would have been between $0.02
and $0.04 per share, respectively.
Third Quarter Financial Highlights:
-- Total cash and restricted cash was $50.3 million at September 30,
2008. Cash generated from operations in the quarter was $11.3 million.
-- GAAP revenue for the third quarter was $63.0 million, which is a 5%
increase compared to $60.0 million in the same quarter last year. Non-GAAP
revenue for the third quarter was $64.7 million and represents a 1%
decrease compared to the same quarter last year.
-- GAAP gross profit in the third quarter was 69% of revenue or $43.7
million compared to 72% of revenue or $43.1 million in the same quarter
last year. Non-GAAP gross profit in the third quarter was 73% of revenue
or $47.4 million. These non-GAAP results compare to 77% of non-GAAP
revenue, or $50.0 million, in the year ago quarter and 70% of non-GAAP
revenue, or $48.6 million, in the prior quarter.
-- GAAP operating expenses for the third quarter were $61.4 million, or
98% of revenue, which includes a goodwill impairment charge of $15.4
million. These GAAP results compare to $47.9 million or 80% of revenue in
the same quarter last year. Non-GAAP operating expenses for the third
quarter were $41.2 million or 64% of non-GAAP revenue. These non-GAAP
results compare to 63% of non-GAAP revenue in both the year ago and prior
quarter.
-- GAAP operating loss for the third quarter was $17.6 million compared
to $4.9 million in the same quarter last year. Non-GAAP operating income
for the third quarter was $6.2 million or 10% of non-GAAP revenue, compared
to 13% in the same quarter last year and 7% in the prior quarter.
-- GAAP net income for the third quarter was $46.4 million, or $0.63 per
fully diluted share, which includes a goodwill impairment charge of $15.4
million and the gain on the divestiture of the SafeWord product line of
$68.3 million, net of tax. These GAAP results compare to GAAP net loss of
$11.0 million or $0.17 per share in the same quarter last year. Non-GAAP
net income for the third quarter was $5.5 million or $0.07 per fully
diluted share, compared to non-GAAP net income of $6.4 million or $0.09 per
fully-diluted share in the year ago quarter.
-- Deferred revenue decreased $10.3 million, or 6%, in the third quarter
bringing the total deferred revenue balance to $175.1 million at the end of
September. The SafeWord divestiture accounted for an $11.3 million
decrease in deferred revenue for the third quarter.
-- Days sales outstanding (DSOs) were 77 days. As we have experienced
in previous quarters, the change in DSOs from the prior quarter correlates
to the change in deferred revenue. Excluding the impact of the increase in
deferred revenue, DSOs were 75 days.
About Secure Computing
Secure Computing (NASDAQ: SCUR), a leading provider of
enterprise gateway security, delivers a comprehensive set of
solutions that help customers protect their critical Web, email and
network assets. Over half of the Fortune 50 and Fortune 500 are
part of our more than 22,000 global customers, supported by a
worldwide network of more than 2,000 partners. The company is
headquartered in San Jose, Calif., and has offices worldwide. For
more information, see http://www.securecomputing.com.
Use of Non-GAAP Financial Measures
Secure Computing provides financial statements that are prepared
in accordance with GAAP. In addition, this press release also
provides financial measures of results of operations that are not
calculated in accordance with GAAP. Our non-GAAP results are not
meant to be considered in isolation or as a substitute for
comparable GAAP measures and should be read only in conjunction
with our condensed consolidated financial statements prepared in
accordance with GAAP. Our management regularly uses our
supplemental non-GAAP financial measures internally to understand,
manage and evaluate our historical and prospective financial
performance and make operating decisions. Management also believes
that these non-GAAP financial measures enhance investors' ability
to evaluate the company's operating results and to compare current
operating results to historical operating results. A reconciliation
of the GAAP to non-GAAP financial measures for the third quarter,
along with the use and economic substance of each non-GAAP
financial measure, are provided at the end of this press
release.
Condensed Consolidated Statement of Operations
(Unaudited, in thousands, except for per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
--------- --------- --------- ---------
Revenues:
Products $ 30,244 $ 31,006 $ 88,011 $ 91,899
Services 19,462 18,992 60,435 54,901
Other (See Note) 13,250 10,020 36,917 24,638
--------- --------- --------- ---------
Total revenues 62,956 60,018 185,363 171,438
Cost of revenues:
Products 11,150 9,570 32,902 28,127
Services 3,968 4,020 12,604 12,151
Other (See Note) 2,168 1,446 5,985 3,934
Amortization of purchased
intangibles 1,923 1,924 5,771 5,905
--------- --------- --------- ---------
Total cost of revenues 19,209 16,960 57,262 50,117
--------- --------- --------- ---------
Gross profit 43,747 43,058 128,101 121,321
Operating expenses:
Selling and marketing 26,673 29,692 88,036 87,794
Research and development 12,432 11,207 37,163 32,932
General and administrative 4,670 4,310 15,619 11,702
Amortization of purchased
intangibles 2,197 2,712 6,711 8,265
Litigation settlement --- --- 9,180 ---
Goodwill impairment 15,424 --- 15,424 ---
--------- --------- --------- ---------
Total operating expenses 61,396 47,921 172,133 140,693
--------- --------- --------- ---------
Operating loss (17,649) (4,863) (44,032) (19,372)
Gain on sale of SafeWord
product line 70,701 --- 70,701 ---
Other expense (2,866) (1,576) (4,722) (5,593)
--------- --------- --------- ---------
Income/(loss) before income tax 50,186 (6,439) 21,947 (24,965)
Income tax expense (2,832) (3,613) (4,018) (6,610)
--------- --------- --------- ---------
Net income/(loss) 47,354 (10,052) 17,929 (31,575)
Preferred stock accretion (989) (943) (2,921) (2,781)
--------- --------- --------- ---------
Net income/(loss) applicable to
common shareholders $ 46,365 $ (10,995) $ 15,008 $ (34,356)
========= ========= ========= =========
Basic earnings/(loss) per
share $ 0.68 $ (0.17) $ 0.22 $ (0.52)
Weighted average shares
outstanding - basic 68,241 66,268 67,859 65,772
Diluted earnings/(loss) per
share $ 0.63 $ (0.17) $ 0.24 $ (0.52)
Weighted average shares
outstanding - basic and
diluted 74,803 66,268 74,843 65,772
NOTE: For certain multiple-element arrangements we are unable to establish
vendor specific objective evidence (VSOE) of fair value for the undelivered
bundled elements and are therefore unable to allocate the value of the
arrangement between Products and Services Revenue and have reported these
revenues and corresponding cost of revenues as 'Other.'
Condensed Consolidated Balance Sheets
(In thousands)
Sep. 30, Dec. 31,
2008 2007
--------- ---------
Assets
Cash and cash equivalents $ 40,633 $ 12,084
Restricted cash 9,664 507
Accounts receivable, net 53,851 64,056
Inventory, net 5,505 6,725
Other current assets 16,737 16,464
--------- ---------
Total current assets 126,390 99,836
Property and equipment, net 20,013 18,595
Goodwill 512,865 528,264
Intangibles, net 49,262 61,494
Other assets, net of current portion 12,209 10,560
--------- ---------
Total assets $ 720,739 $ 718,749
========= =========
Liabilities and stockholders' equity
Accounts payable 9,243 12,567
Accrued payroll 9,829 9,886
Accrued expenses 15,725 7,891
Acquisition reserves 464 1,012
Deferred revenue 118,716 98,751
--------- ---------
Total current liabilities 153,977 130,107
Acquisition reserves, net of current portion 569 721
Deferred revenue, net of current portion 56,380 69,429
Deferred tax liability 9,957 8,729
Debt, net of fees - 41,461
Other liabilities 2,583 1,359
--------- ---------
Total liabilities 223,466 251,806
Convertible preferred stock 72,202 69,281
Stockholders' equity
Common stock 685 673
Additional paid-in capital 576,641 564,108
Accumulated deficit (151,020) (166,028)
Accumulated other comprehensive loss (1,235) (1,091)
--------- ---------
Total stockholders' equity 425,071 397,662
--------- ---------
Total liabilities and stockholders' equity $ 720,739 $ 718,749
========= =========
Condensed Consolidated Statement of Cash Flows
(Unaudited, in thousands)
Nine months ended
September 30,
2008 2007
--------- ---------
Operating activities
Net income/(loss) $ 17,929 $ (31,575)
Adjustments to reconcile net income/(loss) from
continuing operations to net cash provided by
operating activities:
Depreciation 7,567 5,327
Amortization of intangible assets 13,110 14,768
Loss on disposals of property and equipment and
intangible assets 104 160
Gain on divestiture of SafeWord product line (71,104) ---
Amortization of debt fees 2,539 348
Deferred income taxes (290) 3,701
Share-based compensation 9,783 12,361
Goodwill impairment 15,424 ---
Changes in operating assets and liabilities,
excluding effects of acquisitions:
Accounts receivable 10,195 4,007
Inventories 7 (1,291)
Other operating assets (1,976) (2,103)
Accounts payable (2,927) 272
Accrued payroll (57) (1,440)
Accrued expenses 8,888 2,281
Acquisition reserves (255) (867)
Deferred revenue 18,233 31,487
--------- ---------
Net cash provided by operating activities 27,170 37,436
Investing activities
Proceeds from divestiture of SafeWord product line 63,020 ---
Purchase of property and equipment, net (9,828) (8,896)
Increase in intangibles and other assets (1,127) (3,400)
Purchases of investments, net (9,163) (8)
--------- ---------
Net cash provided by/(used) in investing
activities 42,902 (12,304)
Financing activities
Proceeds from issuance of common stock 2,580 7,344
Repayment of term debt (44,000) (32,000)
--------- ---------
Net cash used in financing activities (41,420) (24,656)
Effect of exchange rates (103) 1,445
--------- ---------
Net increase in cash and cash equivalents 28,549 1,921
Cash and cash equivalents, beginning of period 12,084 8,249
--------- ---------
Cash and cash equivalents, end of period $ 40,633 $ 10,170
========= =========
Reconciliation of Consolidated GAAP Financial
Measures to Non-GAAP Financial Measures
(Unaudited, in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2008 2007 2008 2007
--------- --------- --------- ---------
NET REVENUES:
GAAP net revenues $ 62,956 $ 60,018 $ 185,363 $ 171,438
Fair value adjustment to
acquired deferred
revenue (A) 909 1,952 3,267 8,693
VSOE adjustments to
bundled product revenue (B) 877 3,266 10,946 9,313
--------- --------- --------- ---------
Non-GAAP net revenues $ 64,742 $ 65,236 $ 199,576 $ 189,444
========= ========= ========= =========
GROSS PROFIT:
GAAP gross profit $ 43,747 $ 43,058 $ 128,101 $ 121,321
Fair value adjustment to
acquired deferred
revenue (A) 909 1,952 3,267 8,693
VSOE adjustments to
bundled product revenue (B) 583 2,761 7,084 6,700
Stock-based compensation (C) 275 277 669 881
Amortization of acquired
intangible assets (D) 1,923 1,924 5,771 5,905
Non-recurring expenses (E) - - 189 -
--------- --------- --------- ---------
Non-GAAP gross profit $ 47,437 $ 49,972 $ 145,081 $ 143,500
========= ========= ========= =========
OPERATING EXPENSES:
GAAP operating expenses $ 61,396 $ 47,921 $ 172,133 $ 140,693
Stock-based compensation (C) (2,550) (4,027) (9,114) (11,480)
Amortization of acquired
intangible assets (D) (2,197) (2,712) (6,711) (8,265)
Non-recurring expenses (E) - - (3,897) -
Litigation (F) - - (9,180) -
Goodwill impairment (G) (15,424) - (15,424) -
--------- --------- --------- ---------
Non-GAAP operating
expenses $ 41,225 $ 41,182 $ 127,807 $ 120,948
========= ========= ========= =========
OPERATING (LOSS)/INCOME:
GAAP operating loss $ (17,649) $ (4,863) $ (44,032) $ (19,372)
Fair value adjustment to
acquired deferred
revenue (A) 909 1,952 3,267 8,693
VSOE adjustments to
bundled product revenue (B) 583 2,761 7,084 6,700
Stock-based compensation (C) 2,825 4,304 9,783 12,361
Amortization of acquired
intangible assets (D) 4,120 4,636 12,482 14,170
Non-recurring expenses (E) - - 4,086 -
Litigation (F) - - 9,180 -
Goodwill impairment (G) 15,424 - 15,424 -
--------- --------- --------- ---------
Non-GAAP operating income $ 6,212 $ 8,790 $ 17,274 $ 22,552
========= ========= ========= =========
NET (LOSS)/INCOME:
GAAP net income/(loss) $ 47,354 $ (10,052) $ 17,929 $ (31,575)
Fair value adjustment to
acquired deferred
revenue (A) 909 1,952 3,267 8,693
VSOE adjustments to
bundled product revenue (B) 583 2,761 7,084 6,700
Stock-based compensation (C) 2,825 4,304 9,783 12,361
Amortization of acquired
intangible assets (D) 4,120 4,636 12,482 14,170
Non-recurring expenses (E) 2,359 - 6,445 -
Litigation (F) - - 9,180 -
Goodwill impairment (G) 15,424 - 15,424 -
Impact of SafeWord
divestiture (H) (68,332) - (68,332) -
Non-cash tax expense (I) 266 2,833 1,196 4,519
--------- --------- --------- ---------
Non-GAAP net income $ 5,508 $ 6,434 $ 14,458 $ 14,868
========= ========= ========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Weighted average shares
outstanding - basic 68,241 66,268 67,859 65,772
Common stock equivalents (J) 272 1,456 694 1,266
Preferred stock as-if
converted to common
stock (K) 6,290 5,987 6,290 5,987
--------- --------- --------- ---------
Shares used to compute
net income per share -
diluted 74,803 73,711 74,843 73,025
========= ========= ========= =========
Non-GAAP net income per
share - diluted (L) $ 0.07 $ 0.09 $ 0.19 $ 0.20
Our management regularly uses these non-GAAP financial measures
internally to understand, manage and evaluate our historical and
prospective financial performance and make operating decisions. We
believe that presentation of the non-GAAP financial measures
presented above is useful to an investor's ability to evaluate the
company's operating results from management's perspective and to
compare current operating results to historical operating results.
Disclosure of these non-GAAP financial measures also facilitates
comparisons of our operating performance with the performance of
other companies in our industry that supplement their GAAP results
with non-GAAP financial measures that are calculated in a similar
manner. Our management adjusts for each of the items noted above
for the reasons described below.
(A) Fair value adjustment to acquired deferred revenue. Non-GAAP
revenues and gross profit include revenues associated with acquired
deferred revenue that were excluded from GAAP revenue and gross
profit as a result of purchase accounting adjustments to fair
value. In our non-GAAP measures we have included these revenues and
costs because we believe they are most reflective of our ongoing
operating results and are useful for comparisons to historical
operating performance. We further believe the impact of these
purchase accounting adjustments will become immaterial in the
near-term.
(B) VSOE adjustment to bundled product revenue. GAAP revenue and
gross profit is negatively impacted by product billings that were
deferred because we were unable to establish VSOE of fair value of
the undelivered elements that were sold with the product. Non-GAAP
revenues and gross profit presented above have been adjusted to
include revenues and gross profits that would have been reported
had we been able to establish VSOE of fair value of the undelivered
elements that were sold with those product billings. We believe
these adjustments are most reflective of our ongoing operations in
the current period and are useful for comparisons to historical
operating performance. We further believe the impact of this item
on our GAAP revenues and gross profit will become immaterial in the
future.
(C) Share-based compensation. Consists of expenses for employee
stock options, restricted stock awards, and employee stock purchase
plan determined in accordance with SFAS 123(R). We exclude these
share-based compensation expenses when we review our operating
performance because they represent compensation expense in the form
of equity, rather than cash, and are not indicative of how we view
our historical and prospective operational performance. Further, we
believe it is useful to investors to understand the impact of the
application of SFAS 123(R) to our results of operations. For the
three and nine months ended September 30, 2008 and 2007,
share-based compensation was allocated as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
2008 2007 2008 2007
--------- --------- -------- --------
Cost of revenues $ 275 $ 277 $ 669 $ 881
Selling and marketing 1,133 2,490 4,653 6,907
Research and development 769 838 2,723 2,773
General and administrative 648 699 1,738 1,800
--------- --------- -------- --------
Total stock-based compensation
expense $ 2,825 $ 4,304 $ 9,783 $ 12,361
========= ========= ======== ========
(D) Amortization of purchased intangible assets. The amounts
recorded as amortization of purchased intangible assets arise from
prior acquisitions and are non-cash in nature. We exclude these
expenses when we review our operating performance because we
believe that although these assets contribute to our revenue
generating activities, they can be inconsistent in amount and
frequency and are impacted by the timing and magnitude of our
acquisitions. Further, they are not indicative of how we view our
operating performance in the period incurred and in comparison to
historical and prospective periods. For the three and nine months
ended September 30, 2008 and 2007, amortization of purchased
intangibles was allocated as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
2008 2007 2008 2007
--------- --------- -------- --------
Cost of revenues $ 1,923 $ 1,924 $ 5,771 $ 5,905
Operating expenses 2,197 2,712 6,711 8,265
--------- --------- -------- --------
Total amortization of intangible
assets $ 4,120 $ 4,636 $ 12,482 $ 14,170
========= ========= ======== ========
(E) Non-recurring expenses. These amounts arise from severance
due to corporate organization restructurings, legal fees incurred
defending a patent lawsuit, and the write-off of deferred financing
fees associated with the term debt. We exclude these amounts
because we believe they are not reflective of how we view our
operating performance in the period incurred, are not recurring in
nature and are not meaningful in evaluating our operating
performance in comparison to historical operating performance.
There were no non-recurring expenses incurred for the three and
nine months ended September 30, 2007. For the three and nine months
ended September 30, 2008, non-recurring (income)/expenses were
allocated as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2008 2007 2008 2007
--------- --------- --------- ---------
Cost of revenues $ - $ - $ 189 $ -
Selling and marketing - - 876 -
Research and development - - 316 -
General and administrative - - 2,705 -
Other (income)/expense 2,359 - 2,359 -
--------- --------- --------- ---------
Total non-recurring
(income)/expense $ 2,359 $ - $ 6,445 $ -
========= ========= ========= =========
(F) Litigation. This amount represents the estimated royalty
damages approved in the jury's verdict for the Finjan patent
lawsuit. We exclude this expense in our non-GAAP operating results
because we believe it is not reflective of how we view our
operating performance in the period incurred and is not recurring
in nature.
(G) Goodwill impairment. This amount represents the estimated
goodwill impairment charge determined by management as a result of
the FAS 142 impairment analysis performed during the third quarter
which was based on McAfee's purchase price as noted in the
definitive agreement to be acquired by McAfee. We exclude this
expense in our non-GAAP operating results because we believe it is
not reflective of how we view our operating performance in the
period incurred and is not recurring in nature.
(H) Impact of SafeWord divestiture. This amount represents the
tax affected gain on the divestiture of the SafeWord product line.
We exclude this amount in our non-GAAP results because we believe
it is not reflective of how we view our operating performance in
the period recognized and it is not recurring in nature.
(I) Non-cash tax expense. These amounts represent the impact
from the utilization of purchased net operating loss carry forwards
and an increase in the valuation allowance that has been
established against our net deferred tax asset. We exclude these
expenses because they are non-cash expenses that we believe are not
reflective of how we view our operating performance
(J) Common stock equivalents. Represents the common stock
equivalents for stock options and restricted stock outstanding at
the end of the reported period.
(K) Preferred stock as-if converted to common stock. Represents
the as-if conversion of outstanding preferred shares to common
shares at the end of the reported period.
(L) Non-GAAP net income per share. Excludes the impact of
preferred stock accretion.
Material Limitations Associated with Use of Non-GAAP Financial
Measures
The non-GAAP financial measures provided in this press release
may have limitations as analytical tools, and these measures should
not be considered in isolation or as a substitute for analysis of
our results as reported under GAAP. Some of the limitations in
relying on these non-GAAP measures are:
-- Items such as fair value adjustments to acquired deferred revenue and
VSOE adjustments to our product revenue, do not generate additional cash
and therefore should not be considered in analyzing cash flows.
-- Items such as non-recurring expenses, litigation expenses, and non-
recurring tax expenses that are excluded from non-GAAP operating results
can have a material impact on cash flows and earnings per share.
-- The adjustments for items such as stock-based compensation,
amortization of acquired intangible assets, and tax impact of NOL
utilization, though not directly affecting our cash position, do affect
earnings per share.
-- Other companies may calculate these non-GAAP measures differently than
we do, limiting the usefulness of those measures for comparative purposes.
Compensation for Limitations Associated with Use of Non-GAAP
Financial Measures
We compensate for the limitations on our use of non-GAAP
financial measures by primarily relying on our GAAP results and
using non-GAAP financial measures only supplementally. We also
provide detailed reconciliations of each non-GAAP financial measure
to its most directly comparable GAAP measure within this press
release and we encourage investors to carefully review those
reconciliations.
Editorial Contact: Ally Zwahlen Email Contact 925-207-4573
Investor Contact: Jane Underwood Email Contact 408-979-6186
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