SOURCE: Stratus Technologies

Stratus Technologies

July 15, 2013 08:30 ET

Stratus Technologies Bermuda Holdings Ltd. Announces Financial Results for First Quarter of Fiscal Year 2014

HAMILTON, BERMUDA--(Marketwired - Jul 15, 2013) - Stratus Technologies Bermuda Holdings Ltd. (together with its consolidated subsidiaries, "Stratus" or the "Company"), the leading provider of high availability solutions, today announced financial results for the first quarter of fiscal year 2014 ended May 26, 2013.

  • Q1 Revenue: $47.5 million
  • Q1 Net Loss: $6.4 million
  • Q1 Adjusted EBITDA: $10.0 million

Commenting on the quarter, Dave Laurello, Stratus CEO and President, said, "For the first quarter of fiscal year 2014, we delivered growth in our software business due to the Marathon acquisition, and saw continued stability in our Services revenue. At the same time, Stratus was challenged by a year-over-year comparison to an abnormally strong legacy Q1 of fiscal year 2013, currency headwinds that were particularly acute due to 28% of our revenue coming from Japan, and the on-going sluggish server market. As a result, EBITDA was down from a year ago."

Looking toward the future, Laurello added, "We continue to hone our strategy to become the de facto standard for availability in the cloud, and redirect investment to strategic areas such as software and cloud services. Early conversations with customers and industry analysts confirm there is a great need for always-on cloud services and, most importantly, that Stratus is well-positioned to address it. While I expect software and cloud services to be the foundation of our future growth, we are in the midst of a transition which will take time."

Total revenue for the quarter-to-date period ended May 26, 2013 was $47.5 million as compared to $52.5 million in the quarter-to-date period ended May 27, 2012. This is a 10% decrease as reported, and a 4% decrease at constant currency. Profit from operations was $6.9 million compared to $10.8 million for the same period last year. Net loss was $6.4 million, compared to a net loss of $2.9 million in the first quarter of fiscal year 2013. Net loss for the quarter-to-date periods ended May 26, 2013 and May 27, 2012 include a net loss on change in fair value of embedded derivatives of $0.1 million and $0.3 million respectively. The Company reported Adjusted EBITDA, a non-GAAP financial measure, of $10.0 million, or 21% of revenue, compared to $13.2 million, or 25% of revenue, for the same period last year. This represents a gross decrease of 25% compared to the prior year, or 11% at constant currency. Please refer to the reconciliation of Adjusted EBITDA to Generally Accepted Accounting Principles ("GAAP") financial measures in the attached, unaudited "Consolidated Statements of Operations."

First Quarter Results Conference Call
A conference call to review first quarter financial results will be held today, July 15, 2013, at 1:30 p.m. Eastern Time, and may be accessed by calling 1-877-941-0844 (U.S. only) or 1-480-629-9835 with a conference ID of 4628627. A recording of this conference call will be available later today at 1-800-406-7325 (U.S. only) or 1-303-590-3030 with a conference ID of 4628627 for 30 days.

About Stratus
Stratus delivers uptime assurance for the applications its customers depend on most for their success. With its resilient software and hardware technologies, together with proactive availability monitoring and management, Stratus products help to save lives and to protect the business and reputations of companies, institutions, and governments the world over. To learn more about worry-free computing, visit www.stratus.com.

Forward-Looking Statements: This press release may contain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended). You are cautioned that such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could cause actual results to differ materially from those described in such forward-looking statements. Such risks and uncertainties include, but are not limited to: the continued acceptance of the Company's products by the market; the Company's ability to enter into new service agreements and to retain customers under existing service contracts; the Company's ability to source quality components and key technologies without interruption and at acceptable prices; the Company's ability to comply with certain covenants in the governing documents for the Company's credit facilities and other debt instruments; the Company's ability to refinance indebtedness when required; the Company's reliance on sole source manufacturers and suppliers; the presence of existing competitors and the emergence of new competitors; the Company's financial condition and liquidity and the Company's leverage and debt service obligations; economic conditions globally and in the Company's most important markets; developments in the fault-tolerant and high-availability server markets; claims by third parties that the Company infringes upon their intellectual property rights; the Company's success in adequately protecting its intellectual property rights; the Company's success in maintaining efficient manufacturing and logistics operations; the Company's ability to recruit, retain and develop appropriately skilled employees; exposure for systems and service failures; fluctuations in foreign currency exchange rates; fluctuations in interest rates; current risks of terrorist activity and acts of war; the impact of changing tax laws; the impact of changes in policies, laws, regulations or practices of foreign governments on the Company's international operations; and the impact of natural or man-made disasters. Any forward-looking statements in this press release are made as of the date hereof, and the Company undertakes no duty to further update such forward-looking statements.

© 2013 Stratus Technologies Bermuda Ltd. All rights reserved.

Stratus® is a trademark or registered trademark of ours. All other trade names, service marks and trademarks are the property of their respective holders. Our use or display of other parties' trade names, service marks or trademarks is not intended to and does not imply a relationship with, or endorsement or sponsorship of us by, the trade name, service mark or trademark owners.

   
   
STRATUS TECHNOLOGIES BERMUDA HOLDINGS LTD.  
CONSOLIDATED BALANCE SHEETS (Unaudited)  
   
             
    May 26,     February 24,  
    2013     2013  
    (Dollar and share date in thousands)  
ASSETS                
                 
Current assets:                
Cash and cash equivalents   $ 15,129     $ 22,163  
Accounts receivable, net of allowance for doubtful accounts of $132 and $281, respectively     31,741       38,330  
Inventory     6,090       6,687  
Deferred income taxes     1,573       1,667  
Income taxes receivable     12       -  
Prepaid expenses and other current assets     4,419       3,989  
Total current assets     58,964       72,836  
                 
Property and equipment, net     9,693       10,443  
Intangible assets, net     6,923       7,258  
Goodwill     12,994       13,024  
Deferred income taxes     9,335       9,687  
Deferred financing fees     5,664       6,381  
Other assets     1,628       1,795  
Total assets   $ 105,201     $ 121,424  
                 
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND REDEEMABLE ORDINARY STOCK, AND STOCKHOLDERS' DEFICIT                
                 
Current liabilities:                
Current portion of long-term debt   $ 5,000     $ 5,000  
Accounts payable     6,118       7,763  
Accrued expenses     13,047       15,661  
Accrued interest payable     3,261       9,238  
Income taxes payable     -       500  
Deferred income taxes     -       -  
Deferred revenue     35,435       37,740  
Total current liabilities     62,861       75,902  
                 
Long-term debt, net of discount     278,103       273,393  
Embedded derivatives     20,316       20,252  
Long-term deferred income taxes     424       424  
Deferred revenue and other long-term liabilities     17,207       17,556  
Total liabilities     378,911       387,527  
                 
Redeemable convertible preferred stock and redeemable ordinary stock:                
Series A: 7,000 shares authorized; 6,561 shares issued and outstanding at May 26, 2013 and February 24, 2013     120,283       117,923  
Series B: 20,524 shares authorized; 4,373 and 3,532 issued and outstanding at May 26, 2013 and February 24, 2013     80,161       63,479  
Right to shares of Series B redeemable convertible preferred stock     4,828       5,518  
Ordinary shares subject to puts, 767 and 773 shares issued and outstanding at May 26, 2013 and February 24, 2013, respectively     1,151       1,160  
Total redeemable convertible preferred stock and redeemable ordinary stock     206,423       188,080  
                 
Stockholders' deficit:                
Ordinary stock, $0.5801 par value, 181,003 shares authorized; 28,045 and 28,039 shares issued and outstanding at May 26, 2013 and February 24, 2013, respectively     16,269       16,265  
Series A ordinary stock: $0.5801 par value, 7,678 shares authorized; 0 shares issued and outstanding at May 26, 2013 and February 24, 2013     -       -  
Series B ordinary stock: $0.5801 par value, 90,115 shares authorized; 19,204 and 15,512 shares issued and outstanding at May 26, 2013 and February 24, 2013     11,140       8,998  
Additional paid-in-capital     -       -  
Accumulated deficit     (505,764 )     (478,778 )
Accumulated other comprehensive loss     (1,778 )     (668 )
Total stockholders' deficit     (480,133 )     (454,183 )
                 
Total liabilities, redeemable convertible preferred stock and redeemable ordinary stock, and stockholders' deficit   $ 105,201     $ 121,424  
   
   
STRATUS TECHNOLOGIES BERMUDA HOLDINGS LTD.  
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)  
For the fiscal thirteen-week periods ended May 26, 2013 and May 27, 2012  
   
    13 weeks ended  
    May 26, 2013   May 27, 2012  
    (Dollars in thousands)  
REVENUE              
Product   $ 14,838   $ 19,638  
Service     32,658     32,857  
Total revenue     47,496     52,495  
               
COST OF REVENUE              
Product     6,885     7,177  
Service     13,238     14,235  
Total cost of revenue     20,123     21,412  
               
Gross profit     27,373     31,083  
               
OPERATING EXPENSES              
Research and development     6,538     6,606  
Sales and marketing     7,832     8,109  
General and administrative     5,691     5,233  
Restructuring charges     65     34  
Management fees     300     300  
Total operating expenses     20,426     20,282  
               
Profit from operations     6,947     10,801  
Interest income     2     6  
Interest expense     (13,109 )   (12,527 )
Loss on change in fair value for embedded derivatives     (64 )   (291 )
Other income (expense), net     114     (51 )
Loss before income taxes     (6,110 )   (2,062 )
Income taxes     296     874  
               
Net loss   $ (6,406 ) $ (2,936 )
               
               
EBITDA TABLE:              
Net loss   $ (6,406 ) $ (2,936 )
Add:              
Interest expense, net     13,107     12,521  
Income taxes     296     874  
Depreciation and amortization     1,935     1,723  
EBITDA (1)     8,932     12,182  
               
Add:              
Restructuring (a)     65     34  
Stock-based compensation expense (b)     53     41  
Management fees (c)     300     300  
Reserves (d)     171     69  
Loss on change in fair value for embedded derivatives (e)     64     291  
Other expense, net (f)     376     303  
Total adjustments     1,029     1,038  
Adjusted EBITDA (1)   $ 9,961   $ 13,220  
               

1) EBITDA represents income (loss) before interest, taxes, depreciation and amortization. We present EBITDA because we consider it an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. In addition to other applications, EBITDA is used by us and others in our industry to evaluate and price potential acquisition candidates.

Adjusted EBITDA represents EBITDA with certain additional adjustments, as calculated pursuant to the requirements of the interest maintenance covenant under our Revolving Credit Facility. We present Adjusted EBITDA because we believe that it allows investors to assess our ability to meet the interest maintenance covenant under our Revolving Credit Facility.

Our management also uses Adjusted EBITDA internally as a basis upon which to assess our operating performance, and Adjusted EBITDA is also a factor in the evaluation of the performance of our management in determining compensation. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under Generally Accepted Accounting Principles ("GAAP"). Some of these limitations are:

  • EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements for capital expenditures, or contractual commitments;
  • EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
  • EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;
  • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;
  • EBITDA and Adjusted EBITDA do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; and
  • other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only supplementally, as described above.

a) In order to better align expenses with anticipated revenues, we implemented restructuring programs in prior years. These programs were designed to streamline our business model and centralize certain functions. The expense for the quarter-to-date fiscal periods ended May 26, 2013 and May 27, 2012 reflect changes to prior estimates of these liabilities.

b) In the quarter-to-date and year-to-date fiscal periods ended May 26, 2013 and May 27, 2012, we recorded non-cash stock-based compensation expense charges related to share-based awards to employees.

c) On April 30, 2010 we entered into a four year advisory and strategic planning agreement with an investment banking firm. The yearly fee is $0.5 million.

On October 1, 2005, we entered into an Agreement for Management, Advisory, Strategic Planning and Consulting Services with Investcorp International, Inc., an affiliate of the Investcorp Group, and MidOcean US Advisor, LP, an affiliate of MidOcean, for an aggregate yearly fee of $0.7 million which renews on an annual basis. The payment of the yearly fee is restricted in the Senior Secured Notes and in the Second Lien Credit Facility until these credit facilities are paid in full.

The long-term accrued liability related to this yearly fee totaled $4.0 million and $3.8 million at May 26, 2013 and February 24, 2013, respectively.

d) In the quarter-to-date and year-to-date fiscal periods ended May 26, 2013 and May 27, 2012, we recorded non-cash inventory write-downs.

e) In the quarter-to-date fiscal periods ended May 26, 2013 and May 27, 2012, we recorded a loss due to the change in fair value of the embedded derivatives related to the Senior Secured Notes.

f) In the quarter-to-date fiscal period ended May 26, 2013, we recorded other expense, net of $0.4 million, primarily consisting of $0.5 million of miscellaneous and non-recurring charges and $0.1 million of bank fees. These were partially offset by $0.3 million of net foreign currency gains.

In the quarter-to-date fiscal period ended May 27, 2012, we recorded other expense, net of $0.3 million, primarily consisting of $0.3 million of miscellaneous and non-recurring charges and $0.1 million of bank fees. These were partially offset by $0.1 million of net foreign currency gains.

   
   
STRATUS TECHNOLOGIES BERMUDA HOLDINGS LTD.  
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)  
   
    13 weeks ended  
    May 26,     May 27,  
    2013     2012  
    (Dollars in thousands)  
                 
OPERATING ACTIVITIES                
Cash flows used in operating activities:                
Net loss   $ (6,406 )   $ (2,936 )
Adjustments to reconcile net loss to net cash used in operating activities:                
  Depreciation and amortization     1,935       1,723  
  Amortization of deferred financing costs and debt discount     3,223       2,855  
  Stock-based compensation     53       41  
  Provision for doubtful accounts     (214 )     24  
  Inventory provision     171       69  
  Loss on change in fair value of embedded derivatives     64       291  
  Loss on retirement and sale of property and equipment     29       40  
  Interest payable-in-kind     2,277       2,081  
Changes in assets and liabilities                
  Accounts receivable     6,293       (1,318 )
  Inventory     (22 )     84  
  Prepaid expenses and other current assets     (517 )     (262 )
  Accounts payable     (1,447 )     572  
  Accrued expenses     (2,332 )     (178 )
  Accrued interest     (5,977 )     (6,225 )
  Income taxes payable     (234 )     334  
  Deferred revenue     (2,197 )     2,533  
  Other long-term assets and liabilities     (43 )     (206 )
Net cash used in operating activities     (5,344 )     (478 )
                 
INVESTING ACTIVITIES                
Cash flows used in investing activities:                
  Acquisition of property and equipment     (652 )     (1,494 )
  Acquisition of business     -       (975 )
  Acquisition of other long-term assets     (40 )     (30 )
Net cash used in investing activities     (692 )     (2,499 )
                 
FINANCING ACTIVITIES                
Cash flows used in financing activities:                
  Payment of equity issuance fees     (144 )     -  
Net cash used in financing activities     (144 )     -  
Effect of exchange rate changes on cash     (854 )     (281 )
Net decrease in cash and cash equivalents     (7,034 )     (3,258 )
Cash and cash equivalents at beginning of period     22,163       27,510  
Cash and cash equivalents at end of period   $ 15,129     $ 24,252