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| [November 03, 2005] |
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WatchGuard Reports Third Quarter Results; Company Generates $2.9 Million in Operating Cash Flow
SEATTLE --(Business Wire)-- Nov. 3, 2005 -- WatchGuard Technologies, Inc. (Nasdaq: WGRD), a leading provider of network security, today announced its financial results for the third quarter ended September 30, 2005.
WatchGuard reported net revenue of $19.0 million for the third quarter of 2005, compared to $20.3 million in the previous quarter, and $20.8 million in the third quarter of 2004. Product revenue was $11.6 million, compared to $12.9 million in the previous quarter, and $13.4 million in the third quarter of 2004. Service revenue was $7.4 million for the third quarter of 2005, compared to $7.4 million in the previous quarter, and $7.4 million in the third quarter of 2004.
On a generally accepted accounting principles, or GAAP, basis, WatchGuard reported a net loss of $1.0 million, or $0.03 per share, in the third quarter, compared to a net loss of $2.0 million, or $0.06 per share, in the previous quarter, and a net loss of $1.5 million, or $0.05 per share, in the third quarter of 2004. Excluding amortization of acquisition-related costs, non-cash stock-based compensation, and restructuring charges, WatchGuard reported a non-GAAP net loss of $33,000, or $0.00 per share, in the third quarter, compared to a non-GAAP net loss of $0.8 million, or $0.02 per share, in the previous quarter, and a non-GAAP net loss of $0.9 million, or $0.03 per share, in the third quarter of 2004. The reconciliation of WatchGuard's GAAP operating results to WatchGuard's non-GAAP operating results for the quarters ended September 30, 2005, June 30, 2005, and September 30, 2004, are set forth at the end of this release.
WatchGuard ended September 30, 2005, with $79.1 million in cash and securities, of which $3.0 million is restricted cash under the terms of certain real estate lease agreements.
WatchGuard extended its technological leadership in the unified threat management appliance market with enhanced solutions to combat spam, viruses, spyware, malicious sites, and other intrusions. The Company's new spamBlocker service, offered in partnership with Commtouch Software (Nasdaq: CTCH), analyzes Internet message patterns, resulting in real-time spam detection and a top rating in detection accuracy. WatchGuard also launched the Firebox SSL Core VPN Gateway with Citrix Systems, Inc. (Nasdaq: CTXS), the first SSL VPN solution designed to meet the needs of small and medium sized businesses that allows authorized users to connect through an auto-updating, Web-deployed client. In addition, WatchGuard augmented its anti-virus and spyware protection with more than 370 new signature updates to its gateway anti-virus / intrusion prevention service. WatchGuard also expanded the number of categories for its WebBlocker URL filtering service, and simplified the administration and management of multiple Firebox X Edge appliance deployments with new centralized management features.
"We continue to enhance our security solutions and make progress on our operational objectives," said Ed Borey, Chief Executive Officer of WatchGuard. "WatchGuard is continuing to develop innovative, easy-to-use solutions designed to meet the evolving security needs of our customers. We are encouraged by our positive operating cash flow, careful expense control, and improved gross margins. WatchGuard remains focused on driving its business forward."
Webcast Information
An Internet broadcast and replay of WatchGuard's conference call discussing its third quarter results (2:00 PM Pacific/5:00 PM Eastern) will be available on November 3, 2005, at www.watchguard.com under "Investor Relations."
About WatchGuard Technologies, Inc.
WatchGuard provides network security. The company's Firebox X family of upgradeable appliances delivers the performance, functionality and security strength to meet the needs of organizations of any size. WatchGuard's Intelligent Layered Security protects against emerging threats and provides the platform to integrate additional services offered by the Company. All WatchGuard products include a LiveSecurity Service subscription for vulnerability alerts, software updates, expert security instruction, as well as individualized and self-help customer care. WatchGuard is headquartered in Seattle, Washington, with offices throughout Europe and Asia. For more information, please visit www.watchguard.com.
Certain statements in this press release, including statements about our ability to grow our business and improve our results of operations, statements about expected new products, services, features or functionality, and other statements about our plans, objectives, intentions, and expectations are "forward-looking statements" within the meaning of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on the opinions and estimates of management at the time the statements are made and are subject to known and unknown risks and uncertainties and inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risk that we will be unable to grow our business as expected or at all, the risk that our future operating results will fall below expectations, the risk that expected new products, services, features or functionality are not available when expected or at all, and the other risks described under "Important Factors That May Affect Our Operating Results, Our Business and Our Stock Price" in our quarterly report on Form 10-Q for the quarter ended June 30, 2005, and in our Securities and Exchange Commission filings from time to time. Readers are cautioned not to place undue reliance upon these forward-looking statements, which speak only as of the date of this release.
WatchGuard, LiveSecurity, Firebox, Fireware and Peak are either registered trademarks or trademarks of WatchGuard Technologies, Inc. or its subsidiaries in the United States and/or other countries. All other trademarks are the property of their respective owners. -0- *T WATCHGUARD TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data and percentages) unaudited Three Months Ended Nine Months Ended ------------------------------- ---------------------- September September September September 30, June 30, 30, 30, 30, 2005 2005 2004 (1) 2005 2004 (1) ---------- -------- ----------- ---------- ----------- Revenues: Product $ 11,622 $12,878 $ 13,393 $ 33,631 $ 42,494 Service 7,427 7,445 7,381 22,356 21,012 --------- ------- ---------- --------- ---------- Total revenues 19,049 20,323 20,774 55,987 63,506 --------- ------- ---------- --------- ---------- Cost of revenues: Product (2) 4,746 5,265 6,379 14,094 19,342 Service (2) 1,384 1,457 1,390 4,312 4,165 --------- ------- ---------- --------- ---------- Total cost of revenues 6,130 6,722 7,769 18,406 23,507 --------- ------- ---------- --------- ---------- Gross margin 12,919 13,601 13,005 37,581 39,999 --------- ------- ---------- --------- ---------- Gross margin percent 67.8% 66.9% 62.6% 67.1% 63.0% Operating expenses: Sales and marketing (2) 6,274 7,607 7,740 21,827 24,439 Research and development (2) 4,626 4,821 4,402 13,890 13,660 General and administrative (2) 3,350 3,368 2,056 9,474 6,390 Amortization of other intangible assets 243 243 243 730 730 Restructuring charges - - 400 - 400 --------- ------- ---------- --------- ---------- Total operating expenses 14,493 16,039 14,841 45,921 45,619 --------- ------- ---------- --------- ---------- Operating loss (1,574) (2,438) (1,836) (8,340) (5,620) Interest and other income, net 573 488 310 1,513 863 --------- ------- ---------- --------- ---------- Loss before income taxes (1,001) (1,950) (1,526) (6,827) (4,757) Provision for income taxes 23 29 23 94 66 --------- ------- ---------- --------- ---------- Net loss $ (1,024) $(1,979) $ (1,549) $ (6,921) $ (4,823) ========= ======= ========== ========= ========== Basic and diluted net loss per share $ (0.03) $ (0.06) $ (0.05) $ (0.20) $ (0.14) ========= ======= ========== ========= ========== Shares used in calculation of basic and diluted net loss per share 33,986 33,792 33,575 33,836 33,430 ========= ======= ========== ========= ========== (1) Operating results for the three months and nine months ended September 30, 2004 have been restated to correct certain accounting errors as described in our 2004 annual report on Form 10-K. (2) Includes stock-based compensation as follows: Cost of revenues: Product $ 6 $ 10 $ - $ 16 $ - Service 26 52 - 78 - Sales and marketing 172 252 - 424 4 Research and development 234 415 (1) 649 9 General and administrative 310 238 1 548 5 -------- ------- ------- -------- ------ Total $ 748 $ 967 $ - $ 1,715 $ 18 ======== ======= ======= ======== ====== WATCHGUARD TECHNOLOGIES, INC. NON-GAAP PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS Excluding Stock-Based Compensation, Amortization of Other Intangible Assets and Restructuring Charges (In thousands, except per share data and percentages) unaudited Three Months Ended Nine Months Ended ---------------------------- ------------------- September September September September 30, June 30, 30, 30, 30, 2005 2005 2004 (1) 2005 2004 (1) --------- -------- --------- --------- --------- Revenues: Product $11,622 $12,878 $13,393 $33,631 $42,494 Service 7,427 7,445 7,381 22,356 21,012 ------- ------- ------- ------- ------- Total revenues 19,049 20,323 20,774 55,987 63,506 ------- ------- ------- ------- ------- Cost of revenues: Product 4,740 5,255 6,379 14,078 19,342 Service 1,358 1,405 1,390 4,234 4,165 ------- ------- ------- ------- ------- Total cost of revenues 6,098 6,660 7,769 18,312 23,507 ------- ------- ------- ------- ------- Gross margin 12,951 13,663 13,005 37,675 39,999 ------- ------- ------- ------- ------- Gross margin percent 68.0% 67.2% 62.6% 67.3% 63.0% Operating expenses: Sales and marketing 6,102 7,355 7,740 21,403 24,435 Research and development 4,392 4,406 4,403 13,241 13,651 General and administrative 3,040 3,130 2,055 8,926 6,385 ------- ------- ------- ------- ------- Total operating expenses 13,534 14,891 14,198 43,570 44,471 ------- ------- ------- ------- ------- Pro forma operating loss (583) (1,228) (1,193) (5,895) (4,472) Interest and other income, net 573 488 310 1,513 863 ------- ------- ------- ------- ------- Pro forma loss before income taxes (10) (740) (883) (4,382) (3,609) Provision for income taxes 23 29 23 94 66 ------- ------- ------- ------- ------- Pro forma net loss $ (33) $ (769) $ (906) $(4,476) $(3,675) ======= ======= ======= ======= ======= Basic and diluted pro forma net loss per share $ (0.00) $ (0.02) $ (0.03) $ (0.13) $ (0.11) ======= ======= ======= ======= ======= Shares used in calculation of basic and diluted pro forma net loss per share 33,986 33,792 33,575 33,836 33,430 ======= ======= ======= ======= ======= (1) Operating results for the three months and nine months ended September 30, 2004 have been restated to correct certain accounting errors as described in our 2004 annual report on Form 10-K. WATCHGUARD TECHNOLOGIES, INC. RECONCILIATION OF NON-GAAP PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS TO GAAP CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands) unaudited Three Months Ended Nine Months Ended ---------------------------- ------------------- September June September September September 30, 30, 30, 30, 30, 2005 2005 2004 (1) 2005 2004 (1) --------- -------- --------- --------- --------- Non-GAAP pro forma cost of revenues $ 6,098 $ 6,660 $ 7,769 $18,312 $23,507 Adjustments to reconcile pro forma cost of revenues to GAAP cost of revenues: Stock-based compensation 32 62 - 94 - ------- ------- ------- ------- ------- GAAP cost of revenues $ 6,130 $ 6,722 $ 7,769 $18,406 $23,507 ======= ======= ======= ======= ======= Non-GAAP pro forma gross margin $12,951 $13,663 $13,005 $37,675 $39,999 Adjustments to reconcile pro forma gross margin to GAAP gross margin: Stock-based compensation 32 62 - 94 - ------- ------- ------- ------- ------- GAAP gross margin $12,919 $13,601 $13,005 $37,581 $39,999 ======= ======= ======= ======= ======= Non-GAAP pro forma operating expenses $13,534 $14,891 $14,198 $43,570 $44,471 Adjustments to reconcile pro forma operating expenses to GAAP operating expenses: Stock-based compensation 716 905 - 1,621 18 Amortization of other intangible assets 243 243 243 730 730 Restructuring charges - - 400 - 400 ------- ------- ------- ------- ------- GAAP operating expenses $14,493 $16,039 $14,841 $45,921 $45,619 ======= ======= ======= ======= ======= Non-GAAP pro forma operating loss $ (583) $(1,228) $(1,193) $(5,895) $(4,472) Adjustments to reconcile pro forma operating loss to GAAP operating loss: Stock-based compensation 748 967 - 1,715 18 Amortization of other intangible assets 243 243 243 730 730 Restructuring charges - - 400 - 400 ------- ------- ------- ------- ------- GAAP operating loss $(1,574) $(2,438) $(1,836) $(8,340) $(5,620) ======= ======= ======= ======= ======= Non-GAAP pro forma net loss $ (33) $ (769) $ (906) $(4,476) $(3,675) Adjustments to reconcile pro forma net loss to GAAP net loss: Stock-based compensation 748 967 - 1,715 18 Amortization of other intangible assets 243 243 243 730 730 Restructuring charges - - 400 - 400 ------- ------- ------- ------- ------- GAAP net loss $(1,024) $(1,979) $(1,549) $(6,921) $(4,823) ======= ======= ======= ======= ======= (1) Operating results for the three months and nine months ended September 30, 2004 have been restated to correct certain accounting errors as described in our 2004 annual report on Form 10-K. Use of Non-GAAP Pro Forma Financial Information To supplement our consolidated financial statements presented on a GAAP basis, WatchGuard uses non-GAAP pro forma measures of operating results, net loss, and loss per share, which are adjusted to exclude certain costs and expenses we believe appropriate to enhance an overall understanding of our past financial performance and also our prospects for the future. These adjustments to our GAAP results are made with the intent of providing both management and investors a more complete understanding of WatchGuard's underlying operational results and trends and our marketplace performance. For example, the pro forma results are an indication of our baseline performance before other charges that are considered by management to be outside of our core operating results. In addition, these adjusted pro forma results are among the primary indicators management uses as a basis for planning and forecasting of future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for operating results prepared in accordance with generally accepted accounting principles in the United States. Non-GAAP pro forma results exclude: -- non-cash stock-based compensation expenses resulting from the variable accounting treatment of certain stock options issued to employees and directors, restricted stock issued to directors and officers, stock options granted to consultants and certain restricted common stock and common stock subject to repurchase issued in connection with the RapidStream, Inc. acquisition; -- amortization of other intangible assets obtained in WatchGuard's acquisition of RapidStream, Inc. in April 2002; and -- restructuring charges associated with restructuring plans initiated in 2001 and 2002. WATCHGUARD TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) September 30, December 31, 2005 2004 -------------- ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents $ 11,724 $ 4,660 Short-term available-for-sale investments 64,414 72,189 Trade accounts receivable, net 5,615 7,305 Inventories, net 3,927 3,145 Prepaid expenses and other current assets 2,728 2,780 ------------ ----------- Total current assets 88,408 90,079 Property and equipment, net 5,453 6,303 Restricted cash 3,000 3,000 Goodwill 66,605 66,605 Other intangibles, net and other assets 1,954 2,494 ------------ ----------- Total assets $ 165,420 $ 168,481 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,538 $ 3,214 Accrued expenses and other liabilities 8,810 7,581 Short-term accrued restructuring costs 1,170 1,289 Short-term deferred revenues 17,925 17,402 ------------ ----------- Total current liabilities 30,443 29,486 Long-term deferred rent 1,348 1,447 Long-term accrued restructuring costs 3,012 3,599 Long-term deferred revenues 2,143 1,818 ------------ ----------- Total liabilities 36,946 36,350 Total stockholders' equity 128,474 132,131 ------------ ----------- Total liabilities and stockholders' equity $ 165,420 $ 168,481 ============ =========== WATCHGUARD TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) unaudited Three Months Ended Nine Months Ended ------------------- ------------------- September September September September 30, 30, 30, 30, 2005 2004 (1) 2005 2004 (1) --------- --------- --------- --------- Operating activities: Net loss $ (1,024) $ (1,549) $ (6,921) $ (4,823) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Noncash expenses: Depreciation and amortization of property and equipment 642 628 1,945 2,104 Amortization of other intangible assets 243 243 730 730 Stock-based compensation 748 - 1,715 18 Changes in operating assets and liabilities: Trade accounts receivable, net 739 (354) 1,690 (1,452) Inventories, net 979 1,361 (782) (111) Prepaid expenses and other current assets (64) 432 52 635 Other assets (15) - (190) 100 Accounts payable 114 (1,202) (676) (668) Accrued expenses, other liabilities and deferred and rent - 481 1,130 (206) Accrued restructuring costs (222) (121) (706) (1,137) Deferred revenues 732 (231) 848 1,953 -------- -------- -------- -------- Net cash provided by (used in) operating activities 2,872 (312) (1,165) (2,857) -------- -------- -------- -------- Investing activities: Purchases of property and equipment, net (682) (602) (1,095) (1,401) Proceeds from maturities of marketable securities 11,920 5,430 53,492 33,030 Purchases of marketable securities (12,941) (6,310) (45,776) (32,272) -------- -------- -------- -------- Net cash provided by (used in) investing activities (1,703) (1,482) 6,621 (643) -------- -------- -------- -------- Financing activities: Proceeds from stock option exercises and issuances of common stock under the employee stock purchase plan 1,252 485 1,608 2,576 -------- -------- -------- -------- Net cash provided by financing activities 1,252 485 1,608 2,576 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 2,421 (1,309) 7,064 (924) Cash and cash equivalents at beginning of period 9,303 4,284 4,660 3,899 -------- -------- -------- -------- Cash and cash equivalents at end of period $ 11,724 $ 2,975 $ 11,724 $ 2,975 ======== ======== ======== ======== (1) Operating results for the three months and nine months ended September 30, 2004 have been restated to correct certain accounting errors as described in our 2004 annual report on Form 10-K. *T
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