WGRD Watchguard Technologies

WatchGuard Technologies, Inc. (Nasdaq:WGRD), a leading provider of Unified Threat Management (UTM) solutions, today announced its financial results for the first quarter of 2006. WatchGuard reported net revenue of $18.6 million for the first quarter of 2006, compared to $19.2 million in the previous quarter, and $16.6 million in the first quarter of 2005. Product revenue was $10.9 million in the first quarter of 2006, compared to $11.6 million in the previous quarter, and $9.1 million in the first quarter of 2005. Service revenue was $7.7 million for the first quarter of 2006, compared to $7.6 million in the previous quarter, and $7.5 million in the first quarter of last year. Reflecting increased sales of WatchGuard subscription services during the first quarter, deferred revenue increased from $20.4 million at December 31, 2005, to $22.5 million at March 31, 2006. Product revenue for the first quarter of 2005 was affected by WatchGuard's transition to a sell-through revenue recognition model during the quarter in the U.S., Australia, and New Zealand. WatchGuard estimates the transition to a sell-through model in these regions reduced product revenues by approximately $2.0 million for the first quarter of 2005, not including changes in customer buying patterns upon conversion to a sell-through model. WatchGuard reported a net loss of $4.1 million, or $0.12 per share, in the first quarter of 2006, compared to a net loss of $1.3 million, or $0.04 per share, in the previous quarter, and a net loss of $3.9 million, or $0.12 per share, in the first quarter of 2005. Excluding amortization of acquisition-related costs, non-cash stock-based compensation, and restructuring charges, WatchGuard reported a non-GAAP net loss of $2.8 million, or $0.08 per share, in the first quarter of 2006, compared to a non-GAAP net loss of $1.7 million, or $0.05 per share, in the previous quarter, and a non-GAAP net loss of $3.7 million, or $0.11 per share, in the first quarter of 2005. The reconciliation of WatchGuard's GAAP operating results to WatchGuard's non-GAAP operating results for the quarters ended March 31, 2006, December 31, 2005, and March 31, 2005, are set forth at the end of this release. WatchGuard ended the first quarter of 2006 with $75.4 million in cash and securities, of which $2.4 million is restricted cash under the terms of certain real estate lease agreements. Cash and securities were down $2.4 million from the $77.8 million on hand at December 31, 2005. "Although WatchGuard did not experience product revenue growth during the first quarter of 2006, we are pleased with the growth in our deferred revenue and we expect to launch several new UTM appliances for small- to medium-sized enterprises in the second quarter," said Ed Borey, Chief Executive Officer of WatchGuard. "We have been working on converging both our product and software platforms for the past 18 months and the results of these efforts are now coming to fruition. We believe these key new products and services will provide the engine to drive the Company toward sustainable growth and profitability." Webcast Information An Internet broadcast and replay of WatchGuard's conference call discussing its first quarter of 2006 results (2:00 PM Pacific/5:00 PM Eastern) will be available on May 8, 2006, at www.watchguard.com under "Investor Relations." Investors may access the live conference call by calling (800) 638-4817 (U.S. and Canada) and (617) 614-3943 (International). The conference call ID number is 16419354. 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 revenues, reach and maintain profitability 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 revenues as expected or at all, the risk that we will be unable to reach or maintain profitability, 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 "Risk Factors" in our annual report on Form 10-K for the year ended December 31, 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, Firebox and LiveSecurity are either registered trademarks or trademarks of WatchGuard Technologies, Inc. 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 -------------------------- March December March 31, 31, 31, 2006 2005 2005 -------- -------- -------- Revenues: Product $10,873 $11,606 $9,131 Service 7,717 7,598 7,484 -------- -------- -------- Total revenues 18,590 19,204 16,615 -------- -------- -------- Cost of revenues: Product (1) 4,568 4,462 4,083 Service (1) 1,704 1,365 1,471 -------- -------- -------- Total cost of revenues 6,272 5,827 5,554 -------- -------- -------- Gross margin 12,318 13,377 11,061 -------- -------- -------- Gross margin percent 66.3% 69.7% 66.6% Operating expenses: Sales and marketing (1) 7,101 6,151 7,946 Research and development (1) 5,433 4,814 4,443 General and administrative (1) 4,327 3,936 2,756 Amortization of other intangible assets 243 244 244 Restructuring charges - 165 - -------- -------- -------- Total operating expenses 17,104 15,310 15,389 -------- -------- -------- Operating loss (4,786) (1,933) (4,328) Interest and other income, net 720 678 452 -------- -------- -------- Loss before income taxes (4,066) (1,255) (3,876) Income tax provision 18 21 42 -------- -------- -------- Net loss $(4,084) $(1,276) $(3,918) ======== ======== ======== Basic and diluted net loss per share $(0.12) $(0.04) $(0.12) ======== ======== ======== Shares used in calculation of basic and diluted net loss per share 34,282 34,187 33,717 ======== ======== ======== (1) Includes stock-based compensation as follows: Cost of revenues: Product $ 8 $ (7) $ - Service 35 (40) - Sales and marketing 235 (206) - Research and development 252 (342) - General and administrative 541 (241) - ------- ------ --- Total $1,071 $(836) $ - ======= ====== === WATCHGUARD TECHNOLOGIES, INC. RECONCILIATION OF GAAP NET LOSS TO NON-GAAP NET LOSS (In thousands) unaudited Three Months Ended -------------------------- March December March 31, 31, 31, 2006 2005 2005 -------- ----------------- GAAP net loss $(4,084) $(1,276) $(3,918) Adjustments to reconcile GAAP net loss to non-GAAP net loss: Stock-based compensation 1,071 (836) - Amortization of other intangible assets 243 244 244 Restructuring charges - 165 - -------- -------- -------- Non-GAAP net loss $(2,770) $(1,703) $(3,674) -------- -------- -------- Non-GAAP basic and diluted net loss per share $(0.08) $(0.05) $(0.11) ======== ======== ======== Shares used in calculation of basic and diluted non-GAAP net loss per share 34,282 34,187 33,717 ======== ======== ======== Use of Non-GAAP Financial Information To supplement our consolidated financial statements presented on a GAAP basis, WatchGuard uses a non-GAAP measure of net loss (including on a per share basis), which is adjusted to exclude certain costs and expenses. WatchGuard believes this non-GAAP measure is useful to enhance an overall understanding of our past financial performance and also our prospects for the future. This adjustment to our GAAP net loss is presented 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, this non-GAAP measure is an indication of our baseline performance before other charges that are considered by management to be nonrecurring and otherwise outside of our core operating results. This adjusted non-GAAP measure is among the primary indicators management uses as a basis for planning and forecasting of future periods. Non-GAAP results exclude the following items. STOCK-BASED COMPENSATION. Non-GAAP net loss excludes stock-based compensation expenses, which consist primarily of expenses for stock options, restricted stock awards and purchases of common stock under our Employee Stock Purchase Plan. WatchGuard began recording stock-based compensation expenses under SFAS 123-R in the first quarter of 2006. Prior to 2006, WatchGuard's stock-based compensation expenses resulted primarily 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. WatchGuard excludes stock-based compensation expenses from its non-GAAP financial measures primarily because these costs are non-cash expenses with no current effect on cash or the future uses of cash. WatchGuard does not consider these expenses as part of its ongoing operating results when assessing the performance of the Company. For these reasons, management believes that exclusion of stock-based compensation expense may be important to an understanding of WatchGuard's ongoing operational performance. AMORTIZATION OF OTHER INTANGIBLE ASSETS. Non-GAAP net loss also excludes amortization of other intangible assets arising from WatchGuard's acquisition of RapidStream in April 2002. These non-cash charges represent a non-cash expense that has no effect on current or future period cash flows or operations of the Company. The amortization expense results from WatchGuard's acquisition of RapidStream in April 2002, a non-recurring event outside of the course of WatchGuard's normal business operations. Due to the nonrecurring nature of this event, management believes that exclusion of the related amortization charges may be important to an understanding of WatchGuard's ongoing operational performance. RESTRUCTURING CHARGES. Finally, non-GAAP net loss excludes restructuring charges resulting from our restructuring plans initiated in 2001 and 2002. Again, these charges represent a non-recurring, non-cash expense that has no effect on current or future period cash flows or operations. These restructuring charges resulted from the Company's restructuring plan initiated in 2001, in an effort to streamline operations and reduce operating costs, and an unrelated restructuring in 2002, to eliminate redundancies and excess headcount resulting from the acquisition of RapidStream. Due to the nonrecurring nature of these events, management believes that exclusion of the related restructuring charges may be important to an understanding of WatchGuard's ongoing operational performance. Management believes that presentation of non-GAAP net loss provides an additional tool for investors to evaluate ongoing operating results and trends. 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. Investors are encouraged to review the reconciliation of non-GAAP net loss to the GAAP net loss, as presented herein. WATCHGUARD TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) December March 31, 31, 2006 2005 ----------- --------- (unaudited) ASSETS Current assets: Cash and cash equivalents $18,235 $20,390 Short-term available-for-sale investments 49,891 54,379 Trade accounts receivable, net 5,432 4,883 Inventories, net 4,054 4,093 Prepaid expenses and other 2,569 2,442 Short-term restricted cash 600 1,200 ----------- --------- Total current assets 80,781 87,387 Property and equipment, net 5,794 6,197 Long-term restricted cash 1,800 1,800 Long-term available-for-sale investments 4,863 - Goodwill 66,605 66,605 Other intangibles, net, and other non-current assets 1,554 1,735 ----------- --------- Total assets $161,397 $163,724 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $2,814 $4,654 Accrued expenses and other liabilities 6,919 6,985 Short-term accrued restructuring costs 1,060 1,119 Short-term deferred revenues 19,814 18,278 ----------- --------- Total current liabilities 30,607 31,036 Long-term deferred rent 1,223 1,302 Long-term accrued restructuring costs 2,577 2,756 Long-term deferred revenues 2,725 2,163 ----------- --------- Total liabilities 37,132 37,257 Total stockholders' equity 124,265 126,467 ----------- --------- Total liabilities and stockholders' equity $161,397 $163,724 =========== ========= WATCHGUARD TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) unaudited Three Months Ended ----------------- March March 31, 31, 2006 2005 -------- -------- Operating activities: Net loss $(4,084) $(3,918) Adjustments to reconcile net loss to net cash used in operating activities: Noncash expenses: Depreciation and amortization of property and equipment 678 656 Amortization of other intangible assets 243 244 Stock-based compensation 1,071 - Changes in operating assets and liabilities: Trade accounts receivable, net (549) 494 Inventories, net 39 (1,655) Prepaid expenses and other current assets (127) (190) Other assets (63) 17 Accounts payable (1,840) (291) Accrued expenses, other liabilities and deferred rent (145) 1,902 Accrued restructuring costs (238) (315) Deferred revenues 2,098 (320) -------- -------- Net cash used in operating activities (2,917) (3,376) -------- -------- Investing activities: Purchases of property and equipment (274) (67) Proceeds from maturities of marketable securities 16,206 26,647 Purchases of marketable securities (16,507) (20,143) -------- -------- Net cash provided by (used in) investing activities (575) 6,437 -------- -------- Financing activities: Proceeds from stock option exercises and issuances of common stock under the employee stock purchase plan 737 346 Change in restricted cash 600 - -------- -------- Net cash provided by financing activities 1,337 346 -------- -------- Net increase (decrease) in cash and cash equivalents (2,155) 3,407 Cash and cash equivalents at beginning of period 20,390 4,660 -------- -------- Cash and cash equivalents at end of period $18,235 $8,067 ======== ======== Supplemental disclosure of cash flow information: Cash paid for income taxes $19 $78 ======== ======== *T