Blue Coat Reports Financial Results for Second Fiscal Quarter Ended October 31, 2009

SUNNYVALE, Calif. -- (BUSINESS WIRE) -- Blue Coat Systems, Inc. (Nasdaq:BCSI), the technology leader in Application Delivery Networking, today reported its financial results for its second fiscal quarter ended October 31, 2009. Total net revenue for the second quarter of fiscal 2010 was $120.4 million, an increase of 1% compared with net revenue of $119.0 million in the second quarter of fiscal 2009, and an increase of 4% compared with net revenue of $116.0 million in the first quarter of fiscal 2010.

“I am very pleased with Blue Coat’s financial performance in the second quarter, and believe it further validates that our unique Application Delivery Network strategy is resonating strongly in the market,” said Brian NeSmith, president and chief executive officer, Blue Coat Systems. “In the quarter, we experienced solid sequential revenue growth in North America and in Europe. We saw strong demand in both the U.S. Federal and enterprise segments of our business for Application Delivery Network solutions, which help contain network and bandwidth costs, enhance business productivity, and mitigate exposure to evolving threat environments.”

On a GAAP basis, the Company reported net income of $8.4 million, or $0.19 per diluted share, in the second quarter of fiscal 2010, compared with net loss of $0.3 million, or $(0.01) per diluted share, in the second quarter of fiscal 2009, and net income of $4.0 million, or $0.09 per diluted share, in the first quarter of fiscal 2010.

The Company reported non-GAAP net income of $13.1 million, or $0.29 per diluted share, in the second quarter of fiscal 2010, compared with non-GAAP net income of $11.6 million, or $0.27 per diluted share, in the second quarter of fiscal 2009, and non-GAAP net income of $10.1 million, or $0.23 per diluted share, in the first quarter of fiscal 2010.

“Blue Coat’s second quarter results featured strong improvement in operating profitability, which is an important initiative for the company in Fiscal 2010,” said Gordon Brooks, senior vice president and chief financial officer, Blue Coat Systems. “In the quarter, our non-GAAP operating margin percentage increased sequentially 300 basis points to 15.5% compared with 12.5% in the prior quarter. This improvement further highlights our commitment to increasing operating profitability.”

Non-GAAP net income excludes charges related to the fair value write-up of acquired inventory sold, stock-based compensation expense, amortization of intangible assets, expenses for matters related to the stock option investigation, and restructuring expenses, and assumes a long-term effective tax rate of 30% on non-GAAP pre-tax income. A discussion of non-GAAP financial measures is provided under the section “About Non-GAAP Financial Measures” later in this press release. A detailed reconciliation of the GAAP to non-GAAP financial measures is included in Table 2 of this press release.

The Company ended the quarter on October 31, 2009, with cash, cash equivalents, and restricted cash of $142.5 million, an increase of $19.8 million from the prior quarter. Cash flow provided by operations in the second quarter of fiscal 2010 was $18.2 million.

Financial Outlook

For the third fiscal quarter ending January 31, 2010, the Company currently expects net revenue in the range of $121 to $126 million. On a GAAP basis, the Company currently expects net income of $0.01 to $0.12 per diluted share. On a non-GAAP basis, the Company currently expects net income of $0.31 to $0.36 per diluted share. For the third quarter of fiscal 2010, the Company is assuming a diluted share count of approximately 46.5 million shares. The increased range in GAAP net income per diluted share is due to the variability of the timing of restructuring expenses.

About Non-GAAP Financial Measures

The Company uses non-GAAP financial measures of income for internal evaluation and to report the results of its business. These non-GAAP financial measures include non-GAAP gross profit, non-GAAP operating income, non-GAAP net income, and non-GAAP diluted net income per share. These measures are not in accordance with, nor an alternative to, U.S. generally accepted accounting principles or GAAP. These measures are intended to supplement GAAP financial information, and may be different from non-GAAP financial measures used by other companies. The Company believes that these measures provide useful information to its management, board of directors and investors regarding its ongoing operating activities and business trends related to its financial condition and results of operations. The Company believes that it is useful to provide investors with information to understand how specific line items in the statement of operations are affected by certain items, such as the fair value write-up of acquired inventory sold, stock-based compensation expense, amortization of intangible assets, expenses for matters related to the stock option investigation, restructuring expenses, and related income tax adjustments. In addition, the Company’s management and board of directors use these non-GAAP financial measures in developing operating budgets and in reviewing the Company’s financial results of operations, since items such as expense related to the fair value write-up of acquired inventory sold, stock-based compensation expense, amortization of intangible assets, expenses for matters related to the stock option investigation, restructuring expenses, and related income tax adjustments do not impact its current resource allocation decisions. Additionally, the Company believes that inclusion of these non-GAAP financial measures provides consistency and comparability with its past reports of financial results. However, investors should be aware that non-GAAP measures have inherent limitations and should be read in conjunction with the Company’s consolidated financial statements prepared in accordance with GAAP. Refer to the accompanying tables for a detailed reconciliation of GAAP to non-GAAP gross profit, operating income, net income and net income per share.

Conference Call & Webcast

Blue Coat will hold its quarterly conference call to discuss results for the second quarter of fiscal 2010 and the outlook for the third quarter of fiscal 2010 on Tuesday, November 24, 2009 at 5:00 p.m. ET (2:00 p.m. PT). Participants in the United States should call (800) 230-1092. International participants should call (612) 234-9959. The passcode for the call is: 122333. The conference call can also be accessed through an audio webcast from the Company’s website, www.bluecoat.com/company/investorrelations. A replay of the call will be available starting on Tuesday, November 24, 2009 at 8:00 p.m. ET (5:00 p.m. PT), and can be accessed by calling (800) 475-6701 for U.S. participants and (320) 365-3844 for international participants. The passcode for the replay is 122333. An audio Webcast of the call will also be available at www.bluecoat.com/company/investorrelations

Click here to download Blue Coat Financial Statements

About Blue Coat Systems

Blue Coat Systems is the technology leader in Application Delivery Networking. Blue Coat offers an Application Delivery Network Infrastructure that provides the visibility, acceleration and security required to optimize and secure the flow of information to any user, on any network, anywhere. This application intelligence enables enterprises to tightly align network investments with business requirements, speed decision making and secure business applications for long-term competitive advantage. For additional information, please visit www.bluecoat.com.

FORWARD LOOKING STATEMENTS: This document contains certain forward looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements including: statements regarding our business outlook, future financial and operating results; any statements of expectation or belief; any statements regarding plans, strategies and objectives of management for future operations; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the risks that are described from time to time in the Securities and Exchange Commission reports filed by the Company, including but not limited to the risks described in the Company’s most recent reports on Form 10-K and Form 10-Q, particularly under the heading “Risk Factors.” Accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what impact they will have on the results of operations or financial condition of the Company. The Company assumes no obligation and does not intend to update these forward-looking statements except as required by applicable law after the date on which it was made.

Blue Coat and the Blue Coat logo are registered trademarks or trademarks of Blue Coat Systems, Inc. and/or its affiliates in the United States and certain other countries. All other trademarks mentioned in this document are the property of their respective owners.

BLUE COAT SYSTEMS, INC.
Table 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
				Three Months Ended												Six Months Ended
				October 31,				July 31,				October 31,				October 31,
					2009				2009				2008				2009				2008
Net revenue:
Product				$	76,502			$	73,692			$	84,797			$	150,194			$	158,726
Service					43,934				42,297				34,227				86,231				62,801
Total net revenue					120,436				115,989				119,024				236,425				221,527
Cost of net revenue:
Product					19,261				19,483				25,120				38,744				47,234
Service					12,947				12,037				12,017				24,984				21,970
Total cost of net revenue					32,208				31,520				37,137				63,728				69,204
Gross profit					88,228				84,469				81,887				172,697				152,323
Operating expenses:
Sales and marketing					45,608				45,576				44,952				91,184				88,600
Research and development					19,568				19,836				20,171				39,404				38,358
General and administrative					11,176				12,716				13,281				23,892				24,314
Amortization of intangible assets					1,822				1,821				1,862				3,643				3,024
Restructuring					-				-				-				-				1,546
Total operating expenses					78,174				79,949				80,266				158,123				155,842
Operating income (loss)					10,054				4,520				1,621				14,574				(3,519	)
Interest income					72				101				349				173				851
Interest expense					(227	)			(228	)			(232	)			(455	)			(389	)
Other income (expense), net					155				(16	)			(1,353	)			139				(1,540	)
Income (loss) before income taxes					10,054				4,377				385				14,431				(4,597	)
Provision for income taxes					1,687				381				636				2,068				1,489
Net income (loss)				$	8,367			$	3,996			$	(251	)		$	12,363			$	(6,086	)
Basic net income (loss) per share				$	0.19			$	0.09			$	(0.01	)		$	0.28			$	(0.16	)
Diluted net income (loss) per share				$	0.19			$	0.09			$	(0.01	)		$	0.28			$	(0.16	)
Weighted average shares used in computing basic
net income (loss) per share					43,777				43,193				38,432				43,485				38,224
Weighted average shares used in computing diluted
net income (loss) per share					45,202				44,594				38,432				44,777				38,224

BLUE COAT SYSTEMS, INC.
Table 2
Reconciliation of GAAP to Non-GAAP Financial Measures
(In thousands, except per share amounts)
(Unaudited)
					Three Months Ended													Six Months Ended
					October 31,				July 31,				October 31,					October 31,
					2009				2009				2008					2009				2008
Gross Profit Reconciliation:
GAAP gross profit					$	88,228			$	84,469			$	81,887				$	172,697			$	152,323
	Fair value write-up of acquired inventory sold			A		985				1,325				7,214					2,310				13,290
	Stock-based compensation expense included in cost of revenue			B		815				590				491					1,405				900
	Amortization of intangible assets			C		1,347				1,348				1,386					2,695				2,352
Non-GAAP gross profit					$	91,375			$	87,732			$	90,978				$	179,107			$	168,865
Operating Income Reconciliation:
GAAP operating income (loss)					$	10,054			$	4,520			$	1,621				$	14,574			$	(3,519	)
	Fair value write-up of acquired inventory sold			A		985				1,325				7,214					2,310				13,290
	Stock-based compensation expense			B		5,527				4,811				5,094					10,338				9,343
	Amortization of intangible assets			C		3,169				3,169				3,249					6,338				5,377
	Expenses (reversals) for matters related to the stock option investigation			D		(1,052	)			702				653					(350	)			1,356
	Restructuring			E		-				-				-					-				1,546
Non-GAAP operating income					$	18,683			$	14,527			$	17,831				$	33,210			$	27,393
Net Income Reconciliation:
GAAP net income (loss)					$	8,367			$	3,996			$	(251	)			$	12,363			$	(6,086	)
	Fair value write-up of acquired inventory sold			A		985				1,325				7,214					2,310				13,290
	Stock-based compensation expense			B		5,527				4,811				5,094					10,338				9,343
	Amortization of intangible assets			C		3,169				3,169				3,249					6,338				5,377
	Expenses (reversals) for matters related to the stock option investigation			D		(1,052	)			702				653					(350	)			1,356
	Restructuring			E		-				-				-					-				1,546
	Income tax adjustments			F		(3,917	)			(3,934	)			(4,342	)				(7,851	)			(6,405	)
Non-GAAP net income					$	13,079			$	10,069			$	11,617				$	23,148			$	18,421
Net Income (Loss) per Share Reconciliation:
GAAP diluted net income (loss) per share					$	0.19			$	0.09			$	(0.01	)			$	0.28			$	(0.16	)
	Fair value write-up of acquired inventory sold			A		0.02				0.03				0.17					0.05				0.31
	Stock-based compensation expense			B		0.12				0.11				0.12					0.23				0.22
	Amortization of intangible assets			C		0.07				0.07				0.07					0.14				0.13
	Expenses (reversals) for matters related to the stock option investigation			D		(0.02	)			0.02				0.01					-				0.03
	Restructuring			E		-				-				-					-				0.04
	Income tax adjustments			F		(0.09	)			(0.09	)			(0.10	)				(0.18	)			(0.15	)
	Anti-dilution adjustment for GAAP-based net loss					-				-				0.01					-				0.01
Non-GAAP diluted net income per share					$	0.29			$	0.23			$	0.27				$	0.52			$	0.43
Shares used in computing GAAP diluted net income (loss) per share						45,202				44,594				38,432					44,777				38,224
	Effect of dilutive securities			G		-				-				5,180					-				4,601
Shares used in computing non-GAAP diluted net income per share						45,202				44,594				43,612					44,777				42,825
Notes:
(A)	Purchase accounting rules require that the inventory we acquired in the Packeteer acquisition be written-up to its estimated fair market value. The
	fair value write-up increases the cost of revenue, essentially eliminating the profit that would normally have been recognized at the time such
	inventory is sold. To facilitate comparability of gross margin between periods, the fair value write-up related to acquired inventory sold has been
	excluded on a non-GAAP basis.
(B)	Stock-based compensation expense consists of non-cash charges for employee stock options, restricted stock awards, restricted stock units, and
	employee stock purchase plan awards.
	Results include stock-based compensation expense as follows (unaudited):
					Three Months Ended													Six Months Ended
					October 31,				July 31,				October 31,					October 31,
					2009				2009				2008					2009				2008
	Cost of revenue				$	815			$	590			$	491				$	1,405			$	900
	Sales and marketing					2,070				1,687				1,730					3,757				3,251
	Research and development					1,457				1,532				1,384					2,989				2,501
	General and administrative					1,185				1,002				1,489					2,187				2,691
	Total				$	5,527			$	4,811			$	5,094				$	10,338			$	9,343
(C)	Amortization of intangible assets associated with acquisitions.
(D)	Current period activity includes the reversal of accruals related to the settlement of stock option payroll taxes due in Canada, offset by expenses for matters related to the Company's stock option investigation, including professional fees.
(E)	Restructuring includes severance costs for Blue Coat employees terminated in connection with the Packeteer acquisition.
(F)	Income tax adjustment is used to reconcile the GAAP tax provision to a non-GAAP tax provision utilizing an expected long-term effective tax rate of 30%.
(G)	The effect of dilutive securities was excluded from GAAP diluted weighted average shares due to the reported net loss under GAAP, but are included for non-GAAP diluted weighted average shares since we have non-GAAP net income.

BLUE COAT SYSTEMS, INC.
Table 3
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
							October 31,				April 30,
							2009				2009
							(unaudited)
ASSETS
Current assets:
Cash and cash equivalents							$	141,521			$	114,163
Accounts receivable, net								75,677				77,161
Inventory								6,869				5,700
Prepaid expenses and other current assets								14,247				13,113
Current portion of deferred income tax assets								7,941				7,941
Total current assets								246,255				218,078
Property and equipment, net								37,944				34,955
Restricted cash								962				850
Goodwill								238,082				238,466
Identifiable intangible assets, net								42,436				48,774
Non-current portion of deferred income tax assets								19,412				19,412
Other assets								3,791				1,758
Total assets							$	588,882			$	562,293
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable							$	19,080			$	24,105
Accrued payroll and related benefits								15,553				18,374
Deferred revenue								90,710				96,656
Other accrued liabilities								8,856				12,299
Total current liabilities								134,199				151,434
Deferred revenue, less current portion								41,877				33,923
Deferred rent, less current portion								6,405				5,703
Long-term income taxes payable								15,948				12,677
Other non-current liabilities								437				600
Zero Coupon Convertible Senior Notes, due in 2013								76,794				76,347
Commitments and contingencies
Stockholders' equity:
Common stock								2				2
Additional paid-in capital								1,188,125				1,168,106
Treasury stock								(2,398	)			(1,629	)
Accumulated deficit								(872,507	)			(884,870	)
Total stockholders' equity								313,222				281,609
Total liabilities and stockholders' equity							$	588,882			$	562,293

BLUE COAT SYSTEMS, INC.
Table 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
							Six Months Ended October 31,
							2009				2008
Operating Activities
Net income (loss)							$	12,363			$	(6,086	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation								6,528				4,799
Amortization								6,476				5,376
Stock-based compensation								10,338				9,343
Accretion of warrants and issuance costs related to convertible senior notes								447				372
Stock-based compensation related to restructuring								-				88
Tax benefit of stock option deduction								235				197
Excess tax benefit from stock-based compensation								(792	)			(156	)
Loss on disposition of equipment								474				39
Changes in operating assets and liabilities:
Accounts receivable, net								1,484				(9,870	)
Inventory								(1,169	)			14,431
Prepaid expenses and other current assets								(1,134	)			604
Other assets								(1,420	)			498
Accounts payable								(5,025	)			4,498
Accrued payroll and related benefits								(2,821	)			(1,994	)
Accrued restructuring								(101	)			200
Other accrued liabilities								156				(12,020	)
Deferred rent								696				(727	)
Deferred income taxes								-				(393	)
Deferred revenue								2,008				19,665
Net cash provided by operating activities								28,743				28,864
Investing Activities
Purchases of property and equipment								(9,991	)			(11,300	)
Restricted cash								(112	)			-
Proceeds from sale and maturities of investment securities								-				1,204
Purchase of intangible assets								(751	)			-
Acquisitions, net of cash acquired and prior investment								-				(169,327	)
Net cash used in investing activities								(10,854	)			(179,423	)
Financing Activities
Net proceeds from issuance of common stock								8,677				6,716
Excess tax benefit from stock-based compensation								792				156
Net proceeds from issuance of convertible senior notes								-				79,657
Net cash provided by financing activities								9,469				86,529
Net increase (decrease) in cash and cash equivalents								27,358				(64,030	)
Cash and cash equivalents at beginning of period								114,163				160,974
Cash and cash equivalents at end of period							$	141,521			$	96,944

BLUE COAT SYSTEMS, INC.
Table 5
RECONCILIATION OF PROJECTED GAAP TO
PROJECTED NON-GAAP FINANCIAL MEASURES
(In thousands, except per share amounts)
							Three Months Ended
							January 31, 2010
							Low		High
Projected GAAP Net Income							$ 400		$ 5,800
Add back:
	Fair value write-up of acquired inventory sold					A	300		300
	Stock-based compensation expense					B	5,000		5,000
	Amortization of intangible assets					C	3,100		3,100
	Expenses for matters related to the stock option investigation					D	500		500
	Restructuring					E	11,000		8,000
	Income tax adjustments					F	(6,000)		(5,900)
Projected Non-GAAP net income							$ 14,300		$ 16,800
Projected GAAP Diluted Net Income per Share							$ 0.01		$ 0.12
Add back:
	Fair value write-up of acquired inventory sold					A	0.01		0.01
	Stock-based compensation expense					B	0.11		0.11
	Amortization of intangible assets					C	0.07		0.07
	Expenses for matters related to the stock option investigation					D	0.01		0.01
	Restructuring					E	0.23		0.17
	Income tax adjustments					F	(0.13)		(0.13)
Projected Non-GAAP diluted net income per share							$ 0.31		$ 0.36
(A)	Purchase accounting rules require that the inventory we acquired in the Packeteer acquisition be written-up to its estimated fair market value. The fair value write-up increases the cost of revenue, essentially eliminating the profit that would normally have been recognized at the time such inventory is sold. To facilitate comparability of gross margin between periods, the fair value write-up related to acquired inventory sold has been excluded on a non-GAAP basis.
(B)	Stock-based compensation expense consists of non-cash charges for employee stock options, restricted stock awards, restricted stock units, and employee stock purchase plan awards.
(C)	Amortization of intangible assets associated with acquisitions.
(D)	Includes expenses for matters related to the Company's stock option investigation, including professional fees.
(E)	Restructuring includes severance costs associated with the November 3, 2009 restructuring plan.
(F)	Income tax adjustment is used to reconcile the GAAP tax provision to a non-GAAP tax provision utilizing an expected long-term effective tax rate of 30%.