FDRY Foundry Networks (MM)

SANTA CLARA, Calif., Oct. 23 /PRNewswire-FirstCall/ -- Foundry Networks(TM), Inc. (NASDAQ:FDRY), a performance and total solutions leader for end-to-end switching and routing, today announced financial results for its third quarter ended September 30, 2008. Foundry's revenue for the third quarter of 2008 was $165.9 million, compared to $159.5 million in the third quarter of 2007, and compared to $160.7 million in the second quarter of 2008. Net income was $17.8 million or $0.12 per diluted share, compared to net income of $27.6 million, or $0.18 per diluted share in the third quarter of 2007, and net income of $18.3 million, or $0.12 per diluted share in the second quarter of 2008. Revenue for the first nine months of 2008 was $476.6 million, compared to $438.6 million for the first nine months of 2007. Net income for the first nine months of 2008 was $50.1 million, or $0.33 per diluted share, compared to net income of $52.3 million, or $0.34 per diluted share, for the same period in 2007. Included in Foundry's results for the third quarter of 2008 were $13.4 million of non-cash stock-based compensation expense and $2.8 million of expense for costs arising out of the pending acquisition by Brocade Communications Systems, Inc. and related litigation. Excluding these expenses and the related tax effect, non-GAAP net income in the third quarter of 2008 was $28.4 million and non-GAAP net income per diluted share was $0.19 per share. Please refer to the table below for a reconciliation of GAAP to non- GAAP net income. In the third quarter of 2008, North American non-Federal commercial revenue represented 47.6% of total revenue, representing a decrease of approximately 15.6% from the prior quarter. This was offset by sales to the U.S. Federal Government, which represented 28.3% of total revenue and was up 68.7% sequentially, a record high for Foundry. Sales to Europe, the Middle East and Africa (EMEA) represented 14.7% of total revenue, representing an increase of 2.3% from the prior quarter. Sales to Japan represented 4.1% of total revenue while the rest of Asia represented 5.4%. The Company ended the quarter with $1,006.7 million in cash and securities and the book-to-bill ratio was equal to one. About Non-GAAP Financial Measures Foundry uses non-GAAP net income and non-GAAP net income per share for internal planning purposes, to assess the results of its business on an ongoing basis, to determine management compensation, and for the convenience of analysts and investors. These measures are not in accordance with, or an alternative to, similarly-named measures under GAAP. The measures are intended to supplement GAAP financial information, and may be different from non-GAAP financial measures used by other companies. Foundry believes these measures provide useful information to its management, board of directors and investors regarding Foundry's performance when used in conjunction with GAAP information. Foundry believes it is useful to investors to receive information about how items in the statement of operations are affected by stock-based compensation, the expenses related to the stock option investigation and restatement of the Company's consolidated financial statements, costs related to the pending acquisition by Brocade Communications Systems, Inc., litigation expense incurred related to an action brought against the Board of Directors of Foundry as a result of the pending acquisition and the related income tax effect of these items. Stock-based compensation expense consists of expenses recorded under SFAS 123(R), "Share- Based Payment," in connection with awards granted under the Company's equity incentive plans and shares issued pursuant to the Company's employee stock purchase plan. The Company excludes stock-based compensation expense from non-GAAP financial measures because it is a non-cash measurement that does not reflect the Company's ongoing business and because the Company believes that investors want to understand the impact on the Company of the adoption of SFAS 123(R). The Company believes that the provision of non-GAAP information that excludes stock-based compensation improves the ability of investors to compare its period-over-period operating results, as there is significant variability and unpredictability across companies with respect to this expense. The Company also excludes legal, accounting and one-time employee compensation costs related to the stock option investigation and restatement of the Company's consolidated financial statements in addition to costs related to the pending acquisition by Brocade Communications Systems, Inc. and litigation expense related to the pending acquisition because these expenses do not reflect the Company's ongoing business and the exclusion of these expenses improves the ability of investors to compare its period-over-period operating results. However, investors should be aware that non-GAAP measures have inherent limitations and should be read in conjunction with our consolidated financial statements prepared in accordance with GAAP. About Foundry Networks Foundry Networks, Inc. (NASDAQ:FDRY) is a leading provider of high- performance enterprise and service provider switching, routing, security and Web traffic management solutions, including Layer 2/3 LAN switches, Layer 3 Backbone switches, Layer 4-7 application switches, wireless LAN and access points, metro and core routers. Foundry's customers include the world's premier ISPs, metro service providers, and enterprises, including e-commerce sites, universities, entertainment, health and wellness, government, financial and manufacturing companies. For more information about the company and its products, call 1.888.TURBOLAN or visit http://www.foundrynet.com/. FOUNDRY NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Net revenue: Product $137,494 $136,974 $398,200 $372,976 Service 28,408 22,523 78,436 65,574 Total net revenue 165,902 159,497 476,636 438,550 Cost of revenue: Product 51,788 55,032 151,795 157,864 Service 7,333 4,395 23,112 15,305 Total cost of revenue 59,121 59,427 174,907 173,169 Gross margin 106,781 100,070 301,729 265,381 Operating expenses: Research and development 24,032 18,425 67,685 57,528 Sales and marketing 46,580 38,425 140,106 116,985 General and administrative 11,267 10,271 33,311 32,975 Other charges, net 2,773 60 2,773 5,660 Total operating expenses 84,652 67,181 243,875 213,148 Income from operations 22,129 32,889 57,854 52,233 Interest and other income, net 4,685 11,440 20,413 32,337 Income before provision for income taxes 26,814 44,329 78,267 84,570 Provision for income taxes 8,972 16,761 28,193 32,279 Net income $17,842 $27,568 $50,074 $52,291 Basic net income per share $0.12 $0.19 $0.34 $0.35 Weighted average shares used in computing basic net income per share 147,301 148,897 146,542 147,768 Diluted net income per share $0.12 $0.18 $0.33 $0.34 Weighted average shares used in computing diluted net income per share 153,103 156,486 151,098 154,776 FOUNDRY NETWORKS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) September 30, December 31, 2008 2007 ASSETS (unaudited) (2) Assets: Cash and investments (1) $1,006,727 $965,668 Accounts receivable, net 115,611 124,234 Inventories 51,874 42,384 Prepaid expenses and other current assets 23,428 12,439 Deferred tax assets 79,731 79,214 Property and equipment, net 6,948 9,658 Other long-term assets 5,874 5,234 Total assets $1,290,193 $1,238,831 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable $23,426 $23,892 Accrued payroll and related expenses 37,863 50,806 Other accrued expenses 12,045 12,382 Income taxes payable 12,296 11,860 Deferred product and support revenue 92,762 80,767 Other long-term liabilities 364 475 Total liabilities 178,756 180,182 Stockholders' equity 1,111,437 1,058,649 Total liabilities and shareholders' equity $1,290,193 $1,238,831 (1) Includes $87.4 million of long-term marketable securities at September 30, 2008 and $58.1 million at December 31, 2007. (2) Derived from audited condensed consolidated financial statements as of December 31, 2007. FOUNDRY NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) Nine Months Ended September 30, 2008 2007 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $50,074 $52,291 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,378 8,395 Stock-based compensation expense 38,586 32,801 Provision for doubtful accounts 361 (359) Provision for sales returns (533) (592) Inventory provisions 6,050 3,138 Benefit for deferred income taxes (516) (3,243) Excess tax benefits from stock-based compensation (4,302) (6,342) Changes in operating assets and liabilities: Accounts receivable 8,795 (35,562) Inventories (15,476) (11,144) Prepaid expenses and other assets (12,528) (11,668) Accounts payable (466) (3,049) Accrued payroll and related expenses (12,943) 6,337 Income taxes payable 4,675 17,640 Other accrued expenses (449) (1,457) Deferred product and support revenue 11,994 10,098 Net cash provided by operating activities 80,700 57,284 CASH FLOWS FROM INVESTING ACTIVITIES: Maturities and purchases of investments, net 138,314 (22,905) Purchases of property and equipment, net (2,425) (4,180) Net cash provided by (used in) investing activities 135,889 (27,085) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuances of common stock under stock plans, net of repurchases 46,759 38,045 Repurchase and retirement of common stock (75,580) (37,975) Excess tax benefits from stock-based compensation 4,302 6,342 Net cash provided by (used in) financing activities (24,519) 6,412 Increase in cash and cash equivalents 192,070 36,611 Effect of exchange rate changes on cash 692 (312) Cash and cash equivalents, beginning of period 331,961 258,137 Cash and cash equivalents, end of period $524,723 $294,436 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for income taxes, net of refunds received $35,735 $25,957 FOUNDRY NETWORKS, INC. RECONCILIATION OF GAAP TO NON-GAAP NET INCOME AND EPS (unaudited) (in thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Net income excluding certain charges and benefits (Non-GAAP) $28,448 $35,903 $76,735 $80,770 Stock-based compensation expense (1) (13,427) (13,286) (38,586) (32,801) Stock option investigation and related compensation costs (2) - (60) - (13,246) Acquisition related costs (3) (2,773) - (2,773) - Income tax effect 5,594 5,011 14,698 17,568 Net income $17,842 $27,568 $50,074 $52,291 Diluted net income per share excluding certain charges and benefits (Non-GAAP) $0.19 $0.23 $0.51 $0.52 Stock-based compensation expense (1) (0.09) (0.08) (0.26) (0.21) Stock option investigation and related compensation costs (2) - - - (0.09) Acquisition related costs (3) (0.02) - (0.02) - Income tax effect 0.04 0.03 0.10 0.12 Diluted net income per share $0.12 $0.18 $0.33 $0.34 (1) Includes stock-based compensation expense as follows: Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Cost of product revenue $421 $385 $1,326 $1,019 Cost of service revenue 891 601 2,613 1,464 Research and development 4,899 4,956 13,617 11,734 Sales and marketing 5,150 5,108 15,122 12,705 General and administrative 2,066 2,236 5,908 5,879 Total $13,427 $13,286 $38,586 $32,801 (2) Reflects expenses related to the independent review of our stock option practices, which began in June 2006, and related legal, accounting, and compensation costs as follows: Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Cost of product revenue $- $- $- $250 Cost of service revenue - - - 228 Research and development - - - 3,305 Sales and marketing - - - 3,128 General and administrative - - - 675 Other charges, net - 60 - 5,660 Total $- $60 $- $13,246 (3) Reflects expenses due to our pending acquisition by Brocade Communications Systems, Inc. and litigation expense related to an action brought against the Board of Directors of Foundry as a result of the pending acquisition. The costs are included in other charges, net in our condensed consolidated statements of income. DATASOURCE: Foundry Networks, Inc. CONTACT: Dan Fairfax, Chief Financial Officer, +1-408-207-1700, , or Michael Iburg, Treasurer, +1-408-207-1305, , both of Foundry Networks, Inc.; or Investor Relations, Brendan Lahiff of FD, +1-415-293-4425, , for Foundry Networks, Inc. Web site: http://www.foundrynet.com/

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