SOURCE: ArcSight

June 19, 2008 16:05 ET

ArcSight Achieves Record Revenues for Fourth Quarter and Fiscal Year Ended April 30, 2008

Company Posts Total Revenues of $29.4M for Fiscal Fourth Quarter and Guides Annual Revenue Growth of 22 - 26% for Fiscal 2009

For the Fourth Quarter:

-- Total Revenue: $29.4M, a 37% increase year-over-year (on a VSOE-adjusted basis)

-- Total Current Deferred Revenue: $36.5M, a 47% increase year-over-year

-- GAAP Net Loss: $1.1M or $0.04 per diluted share

-- Non-GAAP Net Income: $0.6M or $0.02 per diluted share

-- Commission expense on unusually large deferred sales: $1.9M or $0.06 per diluted share

CUPERTINO, CA--(Marketwire - June 19, 2008) - ArcSight, Inc. (NASDAQ: ARST), a leading global provider of compliance and security management solutions that protect enterprises and government agencies, today announced financial results for the fourth quarter and fiscal year ended April 30, 2008.

For the fourth quarter of fiscal 2008, ArcSight reported total revenues of $29.4 million compared to total revenues of $25.4 million reported in the fourth quarter of fiscal 2007. Net loss on a GAAP basis for the fourth quarter of fiscal 2008 was $1.1 million, or $0.04 per diluted share, including $143,000 in amortization of intangible assets and $1.5 million in stock-based compensation expense. This compares to a GAAP net income of $3.4 million, or $0.13 per diluted share, reported in the fourth quarter of fiscal 2007, including $130,000 in amortization of intangible assets and $688,000 in stock-based compensation expense. To understand the year-over-year results, the impact of the historical VSOE-related revenue adjustments needs to be considered. In the fourth quarter of fiscal 2007, revenue was favorably impacted by $4.2 million of historical VSOE adjustments, whereas the fourth quarter of fiscal 2008 only included $0.2 million of such adjustments. The impact of these adjustments needs to be considered when comparing both revenue results as well as the net income results for the fourth quarters of fiscal 2007 and 2008.

Non-GAAP net income for the fourth quarter of fiscal 2008 was $0.6 million, or $0.02 per diluted share, excluding the above-mentioned amortization and stock-based compensation charges. This compares to a non-GAAP net income of $4.2 million, or $0.16 per diluted share, reported in the fourth quarter of fiscal 2007, excluding the above-mentioned charges. As mentioned above, revenues in the fourth quarter of fiscal 2007 were favorably impacted by historical VSOE adjustments. ArcSight's operating expenses for the fourth quarter of fiscal 2008 included sales commissions related to five large sales transactions that were all deferred at the end of the quarter, resulting in $1.9 million of incremental variable cost without the associated revenue benefit, reducing earnings by $0.06 per diluted share.

During the fourth quarter of fiscal 2008, the company generated $2.1 million in cash from operations and closed the fourth quarter with cash and cash equivalents of $71.9 million. The company completed its initial public offering during the fourth quarter, raising net proceeds of $45.9 million, after deducting the underwriting discounts and offering expenses.

For the fiscal year ended April 30, 2008, ArcSight reported total revenues of $101.5 million compared to $69.8 million reported for fiscal 2007. GAAP net loss for fiscal year 2008 was $2.0 million, or $0.08 per diluted share, including $573,000 in amortization of intangible assets and $4.9 million in stock-based compensation expense. This compares to a net loss of $0.3 million, or $0.03 per diluted share, reported for fiscal 2007, including $476,000 in amortization of intangible assets and $1.5 million in stock-based compensation expense.

Non-GAAP net income for the fiscal year ended April 30, 2008 was $3.5 million, or $0.12 per diluted share, excluding the above-mentioned charges. This compares to a non-GAAP net income of $1.7 million, or $0.07 per diluted share, reported for fiscal 2007, excluding the above-mentioned charges.

"We had another record-breaking revenue quarter while also significantly overachieving our expectations in sales bookings, resulting in strong deferred revenue growth. While this positive sales momentum resulted in incremental variable operating expenses in the fourth quarter, it allows us to begin our fiscal 2009 year from a position of strength," commented Robert W. Shaw, chairman and CEO of ArcSight. "Greater protection against security threats and compliance violations has clearly emerged as a top priority and our unique offering, interoperability and expansive partner networks are driving traction and expansion on a global basis."

"Our strong business momentum is a result of our continued execution across all market verticals as well as new client wins, an evolving channel partner strategy, and further penetration into the installed base. This strong performance gives us the confidence to invest ahead of the curve to drive strong results in fiscal 2009," Shaw concluded.

Business Outlook

The following forward-looking statements reflect expectations as of June 19, 2008. Results may be materially different and are affected by the factors detailed in this release and in the ArcSight SEC filings.

First Quarter Expectations - Ending July 31, 2008

Based on current business trends and the visibility the company has from fourth quarter performance, ArcSight expects revenue for the first quarter of fiscal 2009 to be in the range of $26 million to $28 million, representing growth in the range of 31-41% over the same quarter of fiscal 2008.

ArcSight expects non-GAAP net loss for the first quarter of fiscal 2009 to be in the range of $1.8 million to $0.6 million, or ($0.06) to ($0.02) cents per diluted share, which excludes stock-based compensation expense and amortization of intangibles.

Full Year Expectations - Fiscal Year Ending April 30, 2009

For fiscal 2009, ArcSight anticipates revenue in the range of $124 million to $128 million and non-GAAP net income of $6.8 million to $9.0 million, or $0.20 to $0.26 cents per diluted share, excluding the above-mentioned charges.

Conference Call and Webcast Information

ArcSight will host a conference call and live webcast to discuss these financial results for investors and analysts at 2:00 p.m. Pacific Time on June 19, 2008. To access the conference call, dial 877-604-9670 for the U.S. or Canada and 719-325-4863 for international callers. The webcast will be available live on the Investor Relations section of the company's website at www.arcsight.com. An audio replay of the call will also be available to investors by phone beginning at approximately 4:00 p.m. Pacific Time on June 19, 2008 until 11:59 p.m. Pacific Time on June 26, 2008, by dialing 888-203-1112 for the U.S. or Canada or 719-457-0820 for international callers, and entering passcode 6504280. In addition, an archived webcast will be available on the Investor Relations section of the company's website at www.arcsight.com.

Use of Non-GAAP Financial Measures

ArcSight reports all financial information required in accordance with generally accepted accounting principles (GAAP). To supplement the ArcSight condensed consolidated financial statements presented in accordance with GAAP, ArcSight uses certain non-GAAP measures of financial performance. The presentation of these non-GAAP financial measures is not intended to be considered in isolation from, as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP measures have limitations in that they do not reflect all of the amounts associated with the results of ArcSight operations as determined in accordance with GAAP. The non-GAAP financial measures used by ArcSight include historical non-GAAP net income (loss) and non-GAAP basic and diluted earnings (loss) per share. These non-GAAP financial measures exclude amortization of intangible assets and stock-based compensation from the ArcSight statement of operations.

For a description of these items, including the reasons why management adjusts for them, and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures, please see the section of the accompanying tables titled "Use of Non-GAAP Financial Information" as well as the related tables that precede it. ArcSight may consider whether other significant non-recurring items that arise in the future should also be excluded in calculating the non-GAAP financial measures it uses.

ArcSight believes that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding the performance of ArcSight by excluding certain items that may not be indicative of the company's core business, operating results or future outlook. ArcSight management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing operating results of ArcSight, as well as when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate comparisons of the performance of ArcSight to prior periods.

Cautionary Statement Regarding Forward-Looking Statements

This news release contains forward-looking statements, including without limitation those regarding ArcSight's "Business Outlook" ("First Quarter Expectations - Ending July 31, 2008" and "Full Year Expectations - Fiscal Year Ending April 30, 2009"); the belief of ArcSight that greater protection against security threats and compliance violations has clearly emerged as a top priority for potential customers; the company's belief that its unique offering, interoperability, and expansive partner networks are driving traction and expansion on a global basis; the company's belief that its continued execution across all market verticals as well as new client wins, an evolving channel partner strategy, and further penetration into the installed base contribute to strong business momentum; and the company's belief that its investment ahead of the curve will drive strong results in fiscal 2009. These forward-looking statements are subject to material risks and uncertainties that may cause actual results to differ substantially from expectations. Investors should consider important risk factors, which include: the risk that demand for enterprise risk compliance management solutions may not increase and may decrease; the risk that competitors may be perceived by customers to be better positioned to help handle compliance violations and security threats and protect their businesses from major risk; the risk that the growth of ArcSight may be lower than anticipated; and other risks detailed under the caption "Risk Factors" in the final prospectus for the ArcSight initial public offering filed with the Securities and Exchange Commission (SEC) under Rule 424(b)(4) (Registration File No. 333-145974) and the company's other filings with the SEC. You can obtain copies of the final prospectus for the ArcSight initial public offering and its other SEC filings on the SEC's website at www.sec.gov.

The foregoing information represents the company's outlook only as of the date of this press release, and ArcSight undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, new developments or otherwise.

About ArcSight

ArcSight (NASDAQ: ARST) is a leading global provider of compliance and security management solutions that protect enterprises and government agencies. ArcSight helps customers comply with corporate and regulatory policy, safeguard their assets and processes, and control risk. The ArcSight platform collects and correlates user activity and event data across the enterprise so that businesses can rapidly identify, prioritize, and respond to compliance violations, policy breaches, cybersecurity attacks, and insider threats. For more information, visit www.arcsight.com. (ARST-IR)

©2008 ArcSight, Inc. All rights reserved. ArcSight and the ArcSight logo are trademarks of ArcSight, Inc.


                              ARCSIGHT, INC.
                        Consolidated Balance Sheets
            (In thousands, except share amounts and par value)

                                                    As of         As of
                                                  April 30,     April 30,
                                                    2008          2007
                                                ------------  ------------
                                                (Unaudited)
                                                ------------
Assets
Current assets:
   Cash and cash equivalents                    $     71,946  $     16,917
   Accounts receivable, net                           26,658        15,554
   Capitalized software licenses, current              1,900           249
   Other prepaid expenses and current assets           3,665         2,207
                                                ------------  ------------
Total current assets                                 104,169        34,927
Restricted cash                                          842           842
Income taxes receivable                                  391           761
Property and equipment, net                            4,834         2,753
Goodwill                                               5,746         5,746
Acquired intangibles assets, net                       2,161         2,734
Capitalized software licenses, non-current               144           394
Other long-term assets                                   292           833
                                                ------------  ------------
Total assets                                    $    118,579  $     48,990
                                                ============  ============
Liabilities and stockholders’ equity
Current liabilities:
   Accounts payable                             $      3,115  $      2,846
   Accrued compensation and benefits                  11,864         6,678
   Obligations for software licenses                   2,222           551
   Other accrued liabilities                           3,745         3,869
   Deferred revenues, current                         36,512        24,794
                                                ------------  ------------
      Total current liabilities                       57,458        38,738
Deferred revenues, non-current                         4,754         4,794
Other long-term liabilities                            1,598           328
                                                ------------  ------------
      Total liabilities                               63,810        43,860
Stockholders’ equity:
   Convertible preferred stock, $0.00001 par
    value per share, 10,000,000 and 21,601,752
    authorized as of April 30, 2008 and 2007,
    respectively; no shares and 13,032,497
    issued and outstanding as of April 30, 2008
    and 2007, respectively; aggregate
    liquidation preference of $0 and $26,918 as
    of April 30, 2008 and 2007, respectively               -        26,758
   Common stock, $0.00001 par value per share;
    150,000,000 and 32,500,000 shares
    authorized as of April 30, 2008 and 2007,
    respectively; 31,022,190 and 10,620,041
    issued and outstanding as of April 30, 2008
    and 2007, respectively                                 -             -
   Additional paid-in capital                        101,574        23,479
   Deferred stock-based compensation                     (53)         (544)
   Accumulated other comprehensive income (loss)         (45)           13
   Accumulated deficit                               (46,707)      (44,566)
                                                ------------  ------------
Total stockholders’ equity                            54,769         5,130
                                                ------------  ------------
Total liabilities and stockholders’ equity      $    118,579  $     48,990
                                                ============  ============



                              ARCSIGHT, INC.
                   Consolidated Statement of Operations
                            (On a GAAP basis)
                 (In thousands, except per share amounts)
                                (Unaudited)


                                      For the Three
                                       Months Ended     Fiscal Year Ended
                                    ------------------  ------------------
                                     April     April     April     April
                                       30,       30,       30,       30,
                                      2008      2007      2008      2007
                                    --------  --------  --------  --------
Revenues:
   Products                         $ 18,192  $ 17,106  $ 63,765  $ 43,989
   Maintenance                         7,980     6,383    27,607    18,762
   Services                            3,204     1,891    10,173     7,082
                                    --------  --------  --------  --------
     Total revenues                   29,376    25,380   101,545    69,833
Cost of revenues:
   Products                            1,466       895     4,767     2,569
   Maintenance(1)                      1,608       997     5,691     3,498
   Services(1)                         1,906       790     5,800     3,521
                                    --------  --------  --------  --------
     Total cost of revenues            4,980     2,682    16,258     9,588
                                    --------  --------  --------  --------
Gross profit                          24,396    22,698    85,287    60,245
Operating expenses(1):
   Research and development            5,592     3,966    19,762    14,535
   Sales and marketing                16,086    11,898    53,453    36,587
   General and administrative          3,495     3,467    13,422     9,453
                                    --------  --------  --------  --------
     Total operating expenses         25,173    19,331    86,637    60,575
                                    --------  --------  --------  --------
        Income (loss) from
         operations                     (777)    3,367    (1,350)     (330)
Interest income                          435       188       857       637
Other income and expense, net           (101)      (41)     (385)     (175)
                                    --------  --------  --------  --------
Income (loss) before provision for
 income taxes                           (443)    3,514      (878)      132
Provision for income taxes               617        97     1,131       389
                                    --------  --------  --------  --------
Net income (loss)                   $ (1,060) $  3,417  $ (2,009) $   (257)
                                    ========  ========  ========  ========

Net income (loss) per common share,
 basic                              $  (0.04) $   0.33  $  (0.08) $  (0.03)
                                    ========  ========  ========  ========
Net income (loss) per common share,
 diluted                            $  (0.04) $   0.13  $  (0.08) $  (0.03)
                                    ========  ========  ========  ========
Shares used in computing basic net
 income (loss) per common share       30,195    10,258    25,936    10,042
                                    ========  ========  ========  ========
Shares used in computing diluted
 net income (loss) per common share   30,195    27,152    25,936    10,042
                                    ========  ========  ========  ========


(1) Stock-based compensation expense as included in above
Cost of maintenance revenues              44         1       106         3
Cost of services revenues                 46         7       115        14
Research and development                 416       143     1,356       501
Sales and marketing                      773       456     2,685       661
General and administrative               232        81       664       350




                              ARCSIGHT, INC.
                   Consolidated Statement of Operations
                    (GAAP to Non-GAAP Reconciliation)
                 (In thousands, except per share amounts)
                                (Unaudited)

                                      For the Three
                                       Months Ended     Fiscal Year Ended
                                    ------------------  ------------------
                                      April    April     April     April
                                       30,       30,       30,       30,
                                      2008      2007      2008      2007
                                    --------  --------- --------  --------
GAAP net income (loss)              $ (1,060) $   3,417 $ (2,009) $   (257)
Plus:
   a) Stock-based expenses             1,511        688    4,926     1,529
   b) Amortization of intangibles        143        130      573       476
                                    --------  --------- --------  --------
Non-GAAP net income                 $    594  $   4,235 $  3,490  $  1,748
                                    ========  ========= ========  ========
GAAP net income (loss) per common
 share, basic                       $  (0.04) $    0.33 $  (0.08) $  (0.03)
Plus:
   a) Stock-based expenses              0.05       0.07     0.19      0.15
   b) Amortization of intangibles       0.01       0.01     0.02      0.05
Non-GAAP net income, basic          $   0.02  $    0.41 $   0.13  $   0.17
                                    ========  ========= ========  ========
Non-GAAP net income, diluted        $   0.02  $    0.16 $   0.12  $   0.07
                                    ========  ========= ========  ========
Shares used in computing basic net
 income (loss) per common share       30,195     10,258   25,936    10,042
                                    ========  ========= ========  ========
Shares used in computing diluted
 net income (loss) per common share   32,535     27,152   28,576    24,026
                                    ========  ========= ========  ========


Use of Non-GAAP Financial Information

In addition to the reasons stated above, which are generally applicable to each of the items ArcSight excludes from its non-GAAP financial measures, ArcSight believes it is appropriate to exclude certain items for the following reasons:

Amortization of Intangibles. When analyzing the operating performance of an acquired entity, ArcSight management focuses on the total return provided by the investment (i.e., operating profit generated from the acquired entity as compared to the purchase price paid) without taking into consideration any allocations made for accounting purposes. Because the purchase price for an acquisition necessarily reflects the accounting value assigned to intangible assets (including acquired in-process technology and goodwill), when analyzing the operating performance of an acquisition in subsequent periods, ArcSight management excludes the GAAP impact of the amortization of acquired intangible assets to its financial results. ArcSight believes that such an approach is useful in understanding the long-term return provided by an acquisition and that investors benefit from a supplemental non-GAAP financial measure that excludes the accounting amortization expense associated with acquired intangible assets.

In addition, in accordance with GAAP, ArcSight generally recognizes expenses for internally-developed intangible assets as they are incurred until technological feasibility is reached, notwithstanding the potential future benefit such assets may provide. Unlike internally developed intangible assets, however, and also in accordance with GAAP, ArcSight generally capitalizes the cost of acquired intangible assets and recognizes that cost as an expense over the useful lives of the assets acquired (other than goodwill, which is not amortized, and acquired in-process technology, which is expensed immediately, as required under GAAP). As a result of their GAAP treatment, there is an inherent lack of comparability between the financial performance of internally developed intangible assets and acquired intangible assets. Accordingly, ArcSight believes it is useful to provide, as a supplement to its GAAP operating results, a non-GAAP financial measure that excludes the amortization of acquired intangibles.

Stock-Based Compensation. When evaluating the performance of its consolidated results, ArcSight does not consider stock-based compensation charges. Likewise, the ArcSight management team excludes stock-based compensation expense from its operating plans. In contrast, the ArcSight management team is held accountable for cash-based compensation and such amounts are included in its operating plans. Further, when considering the impact of equity award grants, ArcSight places a greater emphasis on overall stockholder dilution rather than the accounting charges associated with such grants.

ArcSight believes it is useful to provide a non-GAAP financial measure that excludes stock-based compensation in order to better understand the long-term performance of its business. In addition, given its adoption of SFAS 123R, "Share-Based Payment," beginning in its fiscal year 2007, ArcSight believes that a non-GAAP financial measure that excludes stock-based compensation will facilitate the comparison of its year-over-year results.