SOURCE: Blue Coat Systems, Inc.

Blue Coat Systems, Inc.

May 26, 2011 16:05 ET

Blue Coat Reports Fourth Quarter and Year Ended April 30, 2011 Results

SUNNYVALE, CA--(Marketwire - May 26, 2011) - Blue Coat Systems, Inc. (NASDAQ: BCSI), a leading provider of Web security and WAN optimization solutions, today reported financial results for its fourth fiscal 2011 quarter and fiscal year ended April 30, 2011. These results were consistent with updated guidance reported on May 5, 2011 for its fourth quarter of fiscal 2011. Total net revenue for the fourth quarter of fiscal 2011 was $120.7 million compared with net revenue of $122.9 million in the third quarter of fiscal 2011.

Total net revenue for the fiscal year ended April 30, 2011 was $487.1 million compared with net revenue of $496.1 million for the fiscal year ended April 30, 2010.

"I am not satisfied with our revenue performance, as we did not deliver the top-line results that I believe we are capable of," said Mike Borman, president and chief executive officer. "While Blue Coat is well positioned in two great markets and possesses a strong and competitive product portfolio, the company is in transition as we work to improve our revenue performance."

Mr. Borman added, "The increased focus on our WAN optimization business contributed to a strong year-over-year increase in MACH5 product revenue in the fourth quarter. Another positive sign in the quarter was the sequential improvement in PacketShaper product revenue, and the renewed interest we are seeing from both customers and partners in that product."

On a GAAP basis, the Company reported net income of $9.0 million, or $0.18 per diluted share, for the fourth quarter of fiscal 2011, compared with net income of $12.1 million, or $0.25 per diluted share, in the third quarter of fiscal 2011.

For the fiscal year ended April 30, 2011, the Company reported GAAP net income of $47.0 million, or $0.98 per diluted share, compared with GAAP net income of $42.9 million, or $0.93 per diluted share, for the fiscal year ended April 30, 2010.

The Company reported non-GAAP net income of $14.6 million, or $0.30 per diluted share, for the fourth quarter of fiscal 2011, compared with non-GAAP net income of $16.7 million, or $0.34 per diluted share, in the third quarter of fiscal 2011.

For the fiscal year ended April 30, 2011, the Company reported non-GAAP net income of $68.5 million, or $1.42 per diluted share, compared with non-GAAP net income of $59.1 million, or $1.29 per diluted share, for the fiscal year ended April 30, 2010.

Cash flow provided by operations in the fourth quarter of fiscal 2011 was $20.4 million compared with $59.2 million in the third quarter of fiscal 2011. Cash flow provided by operations for the fiscal year ended April 30, 2011 was $131.0 million compared with $96.8 million for the fiscal year ended April 30, 2010. The Company ended the fourth quarter of fiscal 2011 with cash, cash equivalents, and restricted cash of $377.0 million.

Financial Outlook

For the first fiscal quarter ending July 31, 2011, the Company currently expects net revenue in the range of $110 to $117 million. On a GAAP basis, the Company currently expects net income of $0.05 to $0.12 per diluted share. On a non-GAAP basis, the Company currently expects net income of $0.18 to $0.25 per diluted share. For the first quarter of fiscal 2012, the Company is assuming a diluted share count of approximately 49 million shares, an expected annual effective GAAP tax rate of 35% and an expected annual effective non-GAAP tax rate of 28%.

About Non-GAAP Financial Measures

The Company uses non-GAAP financial measures 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, and 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 results of operations, since such items have limited impact on their current and future operating 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 diluted net income per share.

Conference Call & Webcast

Blue Coat will hold its quarterly conference call to discuss final results for the fourth quarter of fiscal 2011 and the outlook for the first quarter of fiscal 2012 on Thursday, May 26, 2011 at 2:00 p.m. PDT (5:00 p.m. EDT). Participants in the United States should call (800) 230-1766. International participants should call (612) 332-0107. The passcode for the call is: 203548. 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 Thursday, May 26, 2011 at 5:00 p.m. PDT (8:00 p.m. EDT), 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 203548.

About Blue Coat Systems

Blue Coat Systems, Inc. is a leading provider of Web security and WAN optimization solutions. Blue Coat offers solutions that provide 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. Blue Coat also offers service provider solutions for managed security and WAN optimization, as well as carrier-grade caching solutions to save on bandwidth and improve the end-user Web experience. 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: any statements regarding our business outlook and 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." 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 any of 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 data)
                                (Unaudited)



                                                           Year Ended
                           Three Months Ended               April 30,
                     -------------------------------  --------------------
                     April 30, January 31, April 30,
                       2011       2011       2010       2011       2010
                     ---------  ---------  ---------  ---------  ---------
Net revenue:
  Product            $  69,706  $  73,447  $  87,782  $ 291,848  $ 322,101
  Service               50,998     49,435     44,814    195,265    174,036
                     ---------  ---------  ---------  ---------  ---------
Total net revenue      120,704    122,882    132,596    487,113    496,137
Cost of net revenue:
  Product               15,497     15,870     17,501     62,615     76,979
  Service               11,338     11,419     12,289     43,868     48,654
                     ---------  ---------  ---------  ---------  ---------
Total cost of net
 revenue                26,835     27,289     29,790    106,483    125,633
                     ---------  ---------  ---------  ---------  ---------
Gross profit            93,869     95,593    102,806    380,630    370,504

Operating expenses:
  Sales and
   marketing            49,660     47,196     45,618    186,332    179,725
  Research and
   development          20,238     21,145     24,107     82,186     84,930
  General and
   administrative        7,651      9,982     11,177     38,691     47,010
  Amortization of
   intangible assets     1,843      1,843      1,843      7,372      7,289
  Restructuring              -         15      3,492        193     12,551
                     ---------  ---------  ---------  ---------  ---------
Total operating
 expenses               79,392     80,181     86,237    314,774    331,505
                     ---------  ---------  ---------  ---------  ---------
Operating income        14,477     15,412     16,569     65,856     38,999

Interest income            184        155         73        629        303
Interest expense          (240)      (224)      (237)      (911)      (918)
Other expense, net         (13)      (340)      (414)      (518)    (1,033)
                     ---------  ---------  ---------  ---------  ---------
Income before income
 taxes                  14,408     15,003     15,991     65,056     37,351
Provision (benefit)
 for income taxes        5,413      2,932     (7,617)    18,032     (5,528)
                     ---------  ---------  ---------  ---------  ---------
Net income           $   8,995  $  12,071  $  23,608  $  47,024  $  42,879
                     =========  =========  =========  =========  =========


Basic net income per
 share               $    0.19  $    0.26  $    0.52  $    1.00  $    0.97
                     =========  =========  =========  =========  =========
Diluted net income
 per share           $    0.18  $    0.25  $    0.49  $    0.98  $    0.93
                     =========  =========  =========  =========  =========

Weighted average
 shares used in
 computing basic
 net income per
 share                  47,595     47,061     45,790     46,920     44,326
                     =========  =========  =========  =========  =========

Weighted average
 shares used in
 computing diluted
 net income per
 share                  48,997     48,764     47,754     48,198     45,980
                     =========  =========  =========  =========  =========



                          BLUE COAT SYSTEMS, INC.
                                  Table 2
          Reconciliation of GAAP to Non-GAAP Financial Measures
                  (In thousands, except per share data)
                                (Unaudited)


                                                            Year Ended
                               Three Months Ended           April 30,
                          ----------------------------  ------------------
                          April 30, January 31, April 30,
                            2011      2011      2010      2011      2010
                          --------  --------  --------  --------  --------
Gross Profit
 Reconciliation:
GAAP gross
 profit                   $ 93,869  $ 95,593  $102,806  $380,630  $370,504
   Fair value
    write-up of
    acquired
    inventory
    sold                A        -         -         -         -     2,807
   Stock-based
    compensation
    expense included
    in cost of
    revenue             B      453       329       354     1,558     2,013
   Amortization
    of intangible
    assets included
    in cost of
    revenue             C    1,168     1,167     1,218     4,691     5,152
                          --------  --------  --------  --------  --------
Non-GAAP gross profit     $ 95,490  $ 97,089  $104,378  $386,879  $380,476
                          ========  ========  ========  ========  ========


Operating
 Income
 Reconciliation:
GAAP operating
 income                   $ 14,477  $ 15,412  $ 16,569  $ 65,856  $ 38,999
   Fair value
    write-up of
    acquired
    inventory
    sold                A        -         -         -         -     2,807
   Stock-based
    compensation
    expense             B    4,747     4,821     4,347    18,553    19,234
   Amortization
    of intangible
    assets              C    3,011     3,010     3,061    12,063    12,441
   (Reversals)
    expense for
    matters related to
    the stock option
    investigation       D   (2,183)       42       125    (2,042)      112
   Restructuring        E        -        15     3,492       193    12,551
                          --------  --------  --------  --------  --------
Non-GAAP
 operating income         $ 20,052  $ 23,300  $ 27,594  $ 94,623  $ 86,144
                          ========  ========  ========  ========  ========


Net Income
 Reconciliation:
GAAP net income           $  8,995  $ 12,071  $ 23,608  $ 47,024  $ 42,879
   Fair value
    write-up of
    acquired
    inventory
    sold                A        -         -         -         -     2,807
   Stock-based
    compensation
    expense             B    4,747     4,821     4,347    18,553    19,234
   Amortization
    of intangible
    assets              C    3,011     3,010     3,061    12,063    12,441
   (Reversals)
    expense for
    matters related to
    the stock option
    investigation       D   (2,183)       42       125    (2,042)      112
   Restructuring        E        -        15     3,492       193    12,551
   Non-recurring
    GAAP tax benefit    F        -         -   (10,610)        -   (10,610)
   Income tax
    adjustments         G       18    (3,249)   (5,111)   (7,300)  (20,266)
                          --------  --------  --------  --------  --------
Non-GAAP net income       $ 14,588  $ 16,710  $ 18,912  $ 68,491  $ 59,148
                          ========  ========  ========  ========  ========


Net Income per
 Share
 Reconciliation:
GAAP diluted
 net income per
 share                    $   0.18  $   0.25  $   0.49  $   0.98  $   0.93
   Fair value
    write-up of
    acquired
    inventory
    sold                A        -         -         -         -      0.06
   Stock-based
    compensation
    expense             B     0.10      0.10      0.09      0.38      0.42
   Amortization
    of intangible
    assets              C     0.06      0.06      0.07      0.25      0.27
   (Reversals)
    expense for
    matters related to
    the stock option
    investigation       D    (0.04)        -      0.01     (0.04)     0.01
   Restructuring        E        -         -      0.07         -      0.27
   Non-recurring
    GAAP tax benefit    F        -         -     (0.22)        -     (0.23)
   Income tax
    adjustments         G        -     (0.07)    (0.11)    (0.15)    (0.44)
                          --------  --------  --------  --------  --------
Non-GAAP diluted net
 income per share         $   0.30  $   0.34  $   0.40  $   1.42  $   1.29
                          ========  ========  ========  ========  ========

Shares used in computing
 non-GAAP diluted net
 income per share           48,997    48,764    47,754    48,198    45,980
                          ========  ========  ========  ========  ========

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):

                                                           Year Ended
                           Three Months Ended               April 30,
                    --------------------------------- ---------------------
                    April 30,  January 31, April 30,
                      2011        2011       2010       2011       2010
                    ---------- ----------- ---------- ---------- ----------
Cost of revenue     $      453 $       329 $      354 $    1,558 $    2,013
Sales and marketing      1,551       1,381      1,133      5,726      6,520
Research and
 development             1,987       2,310      2,026      7,107      6,491
General and
 administrative            756         801        834      4,162      4,210
                    ---------- ----------- ---------- ---------- ----------
  Subtotal               4,747       4,821      4,347     18,553     19,234
Restructuring                -           -          -          -        108
                    ---------- ----------- ---------- ---------- ----------
        Total       $    4,747 $     4,821 $    4,347 $   18,553 $   19,342
                    ========== =========== ========== ========== ==========

(C) Amortization of intangible assets associated with acquisitions.

(D) Includes (reversals) expenses for matters related to the Company's
    stock option investigation, including professional fees and derivative
    settlement net gain of $2.2 million.

(E) Restructuring includes severance and facilities related exit costs
    associated with the Fiscal 2010 Restructuring Plan.

(F) Income tax adjustment is used to reconcile the GAAP tax provision to
    a non-GAAP tax provision utilizing an expected annual effective tax
    rate of 27%. Prior to Fiscal 2011, the expected annual effective
    tax rate was 30%.



                          BLUE COAT SYSTEMS, INC.
                                  Table 3
                  CONDENSED CONSOLIDATED BALANCE SHEETS
                              (In thousands)
                                (Unaudited)


                                                      April 30,  April 30,
                                                        2011       2010
                                                      ---------  ---------

ASSETS
Current assets:
  Cash and cash equivalents                           $ 375,939  $ 236,347
  Accounts receivable, net                               67,626     64,204
  Inventory                                              10,134      6,010
  Prepaid expenses and other current assets              14,091     15,526
  Current portion of deferred income tax assets          10,399     10,980
                                                      ---------  ---------
Total current assets                                    478,189    333,067

Property and equipment, net                              31,745     33,684
Restricted cash                                           1,031        986
Goodwill                                                242,611    242,611
Identifiable intangible assets, net                      24,970     37,033
Non-current portion of deferred income tax assets        34,650     41,517
Other assets                                              6,212      7,140
                                                      ---------  ---------
Total assets                                          $ 819,408  $ 696,038
                                                      =========  =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                    $  20,806  $  15,000
  Accrued payroll and related benefits                   15,947     16,254
  Deferred revenue                                      121,526    104,050
  Other current liabilities                              10,758     12,921
                                                      ---------  ---------
Total current liabilities                               169,037    148,225

Deferred revenue, less current portion                   56,546     50,172
Deferred rent, less current portion                       5,501      6,427
Long-term income taxes payable                           35,152     25,989
Other non-current liabilities                               688      1,193
Convertible senior notes                                 78,136     77,241
Commitments and contingencies

Blue Coat stockholders' equity:
  Common stock                                                4          3
  Additional paid-in capital                          1,273,934  1,231,032
  Treasury stock                                         (4,623)    (3,035)
  Accumulated deficit                                  (794,967)  (841,991)
                                                      ---------  ---------
Total Blue Coat stockholders' equity                    474,348    386,009
Noncontrolling interest                                       -        782
                                                      ---------  ---------
Total stockholders' equity                              474,348    386,791
                                                      ---------  ---------
Total liabilities and stockholders' equity            $ 819,408  $ 696,038
                                                      =========  =========



                          BLUE COAT SYSTEMS, INC.
                                  Table 4
              CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (In thousands)
                                (unaudited)


                                                     Year Ended April 30,
                                                     --------------------
                                                       2011       2010
                                                     ---------  ---------

Operating Activities
Net income                                           $  47,024  $  42,879
Adjustments to reconcile net income to net cash
 provided by operating activities:
  Depreciation                                          13,676     14,651
  Amortization                                          13,651     13,736
  Stock-based compensation                              18,553     19,342
  Deferred income taxes                                  7,448    (25,200)
  Tax benefit of stock option deduction                  2,149      1,897
  Excess tax benefit from stock-based compensation      (2,211)    (6,811)
  Issuance of common shares in connection with the
   derivative litigation settlement                      1,645          -
  (Loss) gain on disposition of equipment                   (6)       555
  Changes in operating assets and liabilities:
    Accounts receivable, net                            (3,422)    13,642
    Inventory                                           (4,124)      (310)
    Prepaid expenses and other assets                    1,670     (4,036)
    Accounts payable                                     5,806     (9,105)
    Accrued expenses and other liabilities               5,262     11,900
    Deferred revenue                                    23,850     23,643
                                                     ---------  ---------
Net cash provided by operating activities              130,971     96,783

Investing Activities
Purchases of property and equipment, and technology
 licenses                                              (11,731)   (17,793)
Restricted cash                                            (45)      (136)
Acquisitions, net of cash acquired                           -     (3,763)
                                                     ---------  ---------
Net cash used in investing activities                  (11,776)   (21,692)

Financing Activities
Net proceeds from issuance of common stock              18,968     40,282
Excess tax benefit from stock-based compensation         2,211      6,811
Acquisition of noncontrolling interest                    (782)         -
                                                     ---------  ---------
Net cash provided by financing activities               20,397     47,093

Net increase in cash and cash equivalents              139,592    122,184
Cash and cash equivalents at beginning of period       236,347    114,163
                                                     ---------  ---------
Cash and cash equivalents at end of period           $ 375,939  $ 236,347
                                                     =========  =========



                          BLUE COAT SYSTEMS, INC.
                                  Table 5
                    RECONCILIATION OF PROJECTED GAAP TO
                  PROJECTED NON-GAAP FINANCIAL MEASURES
                  (In thousands, except per share data)



                                                        Three Months Ended
                                                          July 31, 2011
                                                        ------------------
                                                          Low       High
                                                        --------  --------

Projected GAAP Net Income                               $  2,500  $  5,800
Add back:
  Stock-based compensation expense                    A    5,300     5,300
  Amortization of intangible assets                   B    3,000     3,000
  Income tax adjustments                              C   (2,100)   (1,700)
                                                        --------  --------
Projected Non-GAAP net income                           $  8,700  $ 12,400
                                                        ========  ========


Projected GAAP Diluted Net Income per Share             $   0.05  $   0.12
Add back:
  Stock-based compensation expense                    A     0.11      0.11
  Amortization of intangible assets                   B     0.06      0.06
  Income tax adjustments                              C    (0.04)    (0.04)
                                                        --------  --------
Projected Non-GAAP diluted net income per share         $   0.18  $   0.25
                                                        ========  ========



(A) 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.

(B) Amortization of intangible assets associated with acquisitions.

(C) Income tax adjustment is used to reconcile the GAAP tax provision to a
    non-GAAP tax provision utilizing an expected annual effective tax rate
    of 28%.

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