SOURCE: Stratus Technologies

Stratus Technologies

January 13, 2014 08:47 ET

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

HAMILTON, BERMUDA--(Marketwired - Jan 13, 2014) - 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 third quarter of fiscal year 2014 ended November 24, 2013.

  • Q3 Revenue: $47.1 million
  • Q3 Net Loss: $5.8 million
  • Q3 Adjusted EBITDA: $11.4 million

Commenting on the quarter, Dave Laurello, Stratus CEO and President, said, "During the quarter, we experienced positive momentum in our software business and with ftServer, which earned third party accolades* for its reliability and ability to deliver fault tolerance in virtual environments. At the same time, we advanced the development and testing of our next-generation software solutions, and received further validation from customers, analysts and potential partners of the need for fault tolerant software that enables enterprises and cloud providers to deliver the highest levels of availability for their business critical applications."

Total revenue for the quarter-to-date period ended November 24, 2013 was $47.1 million as compared to $49.0 million in the quarter-to-date period ended November 25, 2012. This is a 4% decrease as reported, and a 4% increase at constant currency. Profit from operations was $8.6 million compared to $8.6 million for the same period last year, a 1% decrease as reported, and a 24% increase at constant currency. Profit from operations for the quarter-to-date period ended November 24, 2013 included restructuring charges of $0.7 million to further align spending with current business initiatives compared to $0.1 million in the prior year. Net loss was $5.8 million, compared to net income of $1.1 million in the same period in the prior year. Net loss for the quarter-to-date period ended November 24, 2013 and net income for the quarter-to-date period ended November 25, 2012 includes a non-cash net loss on change in fair value of embedded derivatives of $0.4 million, and a non-cash net gain on change in fair value of embedded derivatives of $5.5 million respectively.

The Company reported Adjusted EBITDA, a non-GAAP financial measure, of $11.4 million, or 24% of revenue, compared to $11.4 million, or 23% of revenue, for the same period last year. This represents a gross increase of less than 1% compared to the prior year, or 19% 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."

Total revenue for the year-to-date period ended November 24, 2013 was $145.8 million as compared to $154.0 million in the year-to-date period ended November 25, 2012. This is a 5% decrease as reported, and a 2% increase at constant currency. Profit from operations was $26.0 million compared to $30.3 million for the same period last year. This is a 14% decrease as reported, and an 8% increase at constant currency. Profit from operations for the year-to-date period ended November 24, 2013 included restructuring charges of $1.9 million to further align spending with current business initiatives compared to $0.2 million in the prior year. Net loss was $17.7 million, compared to a net loss of $6.1 million in the same period last year. This is a 191% increase as reported, and an 81% increase at constant currency. Net loss for the year-to-date periods ended November 24, 2013 and November 25, 2012 include a non-cash net loss on change in fair value of embedded derivatives of $1.4 million and a non-cash net gain on change in fair value of embedded derivatives of $4.7 million respectively. Net loss for the year-to-date periods ended November 24, 2013 and November 25, 2012 includes a net loss on extinguishment of debt of $0.8 million and $0.9 million, respectively.

The Company reported Adjusted EBITDA, a non-GAAP financial measure, of $36.3 million, or 25% of revenue, compared to $37.7 million, or 24% of revenue, for the same period last year. This represents a gross decrease of 4% compared to the prior year, or an increase of 14% 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."

Third Quarter Results Conference Call
A conference call to review third quarter financial results will be held today, January 13, 2014, 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 4659420. 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 4659420 for 30 days.

About Stratus Technologies
Stratus Technologies is the leading provider of infrastructure based solutions that keep applications running continuously in today's always-on world. Stratus enables rapid deployment of always-on infrastructures, from enterprise servers to clouds, without any changes to applications. Stratus' flexible solutions -- software, platform and services -- prevent downtime before it occurs and ensure uninterrupted performance of essential business operations. 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. 

*CRN¸ "The 10 Coolest Servers of 2013," December 2013
ITIC, "2013 Global Server Hardware and Server OS Reliability Survey," February 2013

© 2014 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)  
   
    November 24,     February 24,  
    2013     2013  
    (Dollars and share data in thousands)  
             
ASSETS  
                 
Current assets:                
Cash and cash equivalents   $ 12,576     $ 22,163  
Accounts receivable, net of allowance for doubtful accounts of $185 and $281, respectively     33,176       38,330  
Inventory     5,496       6,687  
Deferred income taxes     1,597       1,667  
Prepaid expenses and other current assets     3,889       3,989  
Total current assets     56,734       72,836  
                 
Property and equipment, net     9,316       10,443  
Intangible assets, net     7,706       7,258  
Goodwill     13,013       13,024  
Deferred income taxes     9,374       9,687  
Deferred financing fees     4,122       6,381  
Other assets     1,573       1,795  
Total assets   $ 101,838     $ 121,424  
                 
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND REDEEMABLE ORDINARY STOCK, AND STOCKHOLDERS' DEFICIT  
                 
Current liabilities:                
Short term debt   $ 8,000     $ -  
Current portion of long-term debt     5,000       5,000  
Accounts payable     7,254       7,763  
Accrued expenses     12,420       15,661  
Accrued interest payable     3,047       9,238  
Income taxes payable     165       500  
Deferred revenue     29,067       37,740  
Total current liabilities     64,953       75,902  
                 
Long-term debt, net of discount     283,140       273,393  
Embedded derivatives     21,002       20,252  
Long-term deferred income taxes     424       424  
Deferred revenue and other long-term liabilities     16,653       17,556  
Total liabilities     386,172       387,527  
                 
Redeemable convertible preferred stock and redeemable ordinary stock:                
Series A: 7,000 shares authorized; 6,561 shares issued and outstanding at November 24, 2013 and February 24, 2013     124,999       117,923  
Series B: 20,524 shares authorized; 4,373 and 3,532 shares issued and outstanding at November 24, 2013 and February 24, 2013, respectively     83,305       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 November 24, 2013 and February 24, 2013, respectively     1,151       1,160  
Total redeemable convertible preferred stock and redeemable ordinary stock     214,283       188,080  
                 
Stockholders' deficit:                
Ordinary stock, $0.5801 par value, 181,003 shares authorized; 28,045 and 28,039 shares issued and outstanding at November 24, 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 November 24, 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 November 24, 2013 and February 24, 2013     11,140       8,998  
Additional paid-in-capital     -       -  
Accumulated deficit     (524,866 )     (478,778 )
Accumulated other comprehensive loss     (1,160 )     (668 )
Total stockholders' deficit     (498,617 )     (454,183 )
                 
Total liabilities, redeemable convertible preferred stock and redeemable ordinary stock, and stockholders' deficit   $ 101,838     $ 121,424  
                 
   
   
STRATUS TECHNOLOGIES BERMUDA HOLDINGS LTD.  
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)  
For the fiscal three-month periods ended November 24, 2013 and November 25, 2012  
(In thousands)  
   
    November 24, 2013     November 25, 2012  
    (Dollars in thousands)  
REVENUE                
Product   $ 15,431     $ 15,627  
Service     31,700       33,360  
Total revenue     47,131       48,987  
                 
COST OF REVENUE                
Product     7,367       6,566  
Service     12,457       13,393  
Total cost of revenue     19,824       19,959  
Gross profit     27,307       29,028  
                 
OPERATING EXPENSES                
Research and development     5,343       6,162  
Sales and marketing     7,800       8,253  
General and administrative     4,640       5,583  
Restructuring charges     672       111  
Management fees     300       300  
Total operating expenses     18,755       20,409  
                 
Profit from operations     8,552       8,619  
Interest income     2       7  
Interest expense     (13,058 )     (12,486 )
(Loss) gain on change in fair value for embedded derivatives     (372 )     5,493  
Other expense, net     (451 )     (122 )
(Loss) income before income taxes     (5,327 )     1,511  
Income taxes     518       447  
                 
Net (loss) income   $ (5,845 )   $ 1,064  
EBITDA TABLE:                
Net (loss) income   $ (5,845 )   $ 1,064  
Add:                
Interest expense, net     13,056       12,479  
Income taxes     518       447  
Depreciation and amortization     1,597       1,855  
EBITDA (1)   $ 9,326     $ 15,845  
                 
Add (deduct):                
Restructuring (a)     672       111  
Stock-based compensation expense (b)     6       58  
Management fees (c)     300       300  
Reserves (d)     247       295  
Loss (gain) on change in fair value for embedded derivatives (f)     372       (5,493 )
Other expense, net (g)     476       242  
Total adjustments     2,073       (4,487 )
Adjusted EBITDA (1)   $ 11,399     $ 11,358  
                 
   
   
STRATUS TECHNOLOGIES BERMUDA HOLDINGS LTD.  
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)  
For the fiscal nine-month periods ended November 24, 2013 and November 25, 2012  
(In thousands)  
   
    November 24, 2013     November 25 2012  
    (Dollars in thousands)  
REVENUE                
Product   $ 49,712     $ 55,097  
Service     96,108       98,918  
Total revenue     145,820       154,015  
                 
COST OF REVENUE                
Product     22,616       22,197  
Service     38,505       41,246  
Total cost of revenue     61,121       63,443  
Gross profit     84,699       90,572  
                 
OPERATING EXPENSES                
Research and development     17,539       18,985  
Sales and marketing     22,983       24,221  
General and administrative     15,371       15,999  
Restructuring charges     1,946       188  
Management fees     900       900  
Total operating expenses     58,739       60,293  
                 
Profit from operations     25,960       30,279  
Interest income     5       17  
Interest expense     (39,060 )     (37,412 )
Loss on extinguishment of debt     (829 )     (939 )
(Loss) gain on change in fair value for embedded derivatives     (1,375 )     4,668  
Other expense, net     (783 )     (477 )
Loss before income taxes     (16,082 )     (3,864 )
Income taxes     1,617       2,219  
                 
Net loss   $ (17,699 )   $ (6,083 )
EBITDA TABLE:                
Net loss   $ (17,699 )   $ (6,083 )
Add:                
Interest expense, net     39,055       37,395  
Income taxes     1,617       2,219  
Depreciation and amortization     5,112       5,281  
EBITDA (1)   $ 28,085     $ 38,812  
Add (deduct):                
Restructuring (a)     1,946       188  
Stock-based compensation expense (b)     104       160  
Management fees (c)     900       900  
Reserves (d)     1,249       490  
Loss on extinguishment of debt (e)     829       939  
Loss (gain) on change in fair value for embedded derivatives (f)     1,375       (4,668 )
Other expense, net (g)     1,833       906  
Total adjustments     8,236       1,085  
Adjusted EBITDA (1)   $ 36,321     $ 37,727  
                 

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

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 the quarter-to-date period and year-to-date period ended November 24, 2013 as well as in prior periods. These programs were designed to streamline our business model and centralize certain functions.

b) In the quarter-to-date and year-to-date fiscal periods ended November 24, 2013 and November 25, 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 $4.3 million and $3.8 million at November 24, 2013 and February 24, 2013, respectively.

d) In the quarter-to-date and year-to-date fiscal periods ended November 24, 2013 and November 25, 2012, we recorded non-cash inventory write-downs.

e) In the year-to-date fiscal period ended November 24, 2013 and November 25, 2012 we recorded a loss on extinguishment of debt related to the ECF payment in the fiscal second quarter 2014 and 2013, related to the Senior Secured Notes. The loss is due to a premium, the write-off of a pro rata portion of deferred financing fees along with debt discount and related fees offset by the reduction in the value ascribed to the ECF embedded derivative liability.

f) In the quarter-to-date and year-to-date fiscal periods ended November 24, 2013 and November 25, 2012, we recorded a loss and gain, respectively, due to the net change in fair value of the embedded derivatives related to the Senior Secured Notes. 

g) In the quarter-to-date fiscal period ended November 24, 2013, we recorded other expense, net of $0.5 million, primarily consisting of $0.3 million of net foreign currency loses and $0.1 million of bank fees.

In the year-to-date fiscal period ended November 24, 2013, we recorded other expense, net of $1.8 million, primarily consisting of $1.1 million of miscellaneous and non-recurring charges, $0.3 million of net foreign currency losses and $0.4 million of bank fees. 

In the quarter-to-date fiscal period ended November 25, 2012, we recorded other expense, net of $0.2 million, primarily consisting of $0.1 million of bank fees and $0.1 million of miscellaneous and non-recurring charges.
In the year-to-date fiscal period ended November 25, 2012, we recorded other expense, net of $0.9 million, primarily consisting of $0.5 million of miscellaneous and non-recurring charges and $0.4 of million bank fees.

   
   
STRATUS TECHNOLOGIES BERMUDA HOLIDNGS LTD.  
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)  
   
    39 weeks ended  
    November 24,     November 25,  
    2013     2012  
    (Dollars in thousands)  
OPERATING ACTIVITIES                
Cash flows (used in) provided by operating activities:                
Net loss   $ (17,699 )   $ (6,083 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:                
  Depreciation and amortization     5,112       5,281  
  Amortization of deferred financing costs and debt discount     9,755       8,704  
  Stock-based compensation     104       160  
  Provision for recovery of doubtful accounts     (249 )     (39 )
  Inventory provision     1,249       490  
  Loss on extinguishment of debt     829       939  
  Premium on excess cash flow payment     (1,001 )     (999 )
  Loss (gain) on change in fair value of embedded derivatives     1,375       (4,668 )
  Loss on sale of asset     -       31  
  Loss on retirement of property and equipment     49       84  
  Interest payable-in-kind     6,987       6,385  
Changes in assets and liabilities                
  Accounts receivable     5,142       5,755  
  Inventory     (706 )     (418 )
  Prepaid expenses and other current assets     108       317  
  Accounts payable     (394 )     (665 )
  Accrued expenses     (3,203 )     (818 )
  Accrued interest     (6,191 )     (6,417 )
  Income taxes payable     (81 )     531  
  Deferred revenue     (9,501 )     (5,109 )
  Other long-term assets and liabilities     702       2,184  
Net cash (used in) provided by operating activities     (7,613 )     5,645  
                 
INVESTING ACTIVITIES                
Cash flows used in investing activities:                
  Acquisition of property and equipment     (2,870 )     (4,872 )
  Acquisition of business, net of cash acquired     -       (6,821 )
  Capitalization of software development costs     (1,387 )     -  
  Acquisition of other long-term assets     (93 )     (100 )
Net cash used in investing activities     (4,350 )     (11,793 )
                 
FINANCING ACTIVITIES                
Cash flows provided by (used in) financing activities:                
  Proceeds from revolving credit facility     8,000       -  
  Payments on long-term debt     (5,005 )     (4,995 )
  Payment of equity issuance fees     (144 )     -  
Net cash provided by (used in) financing activities     2,851       (4,995 )
Effect of exchange rate changes on cash     (475 )     (401 )
Net decrease in cash and cash equivalents     (9,587 )     (11,544 )
Cash and cash equivalents at beginning of period     22,163       27,510  
Cash and cash equivalents at end of period   $ 12,576     $ 15,966