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NetScreen Technologies Inc. Reports Record First Quarter Results

Sunnyvale, CA - January 22, 2003 - NetScreen Technologies, Inc. (Nasdaq: NSCN), today announced financial results for its first fiscal quarter ended December 31, 2002.

Revenue in the quarter ended December 31, 2002 was a record $51.1 million, an increase of 76 percent over revenue of $29.0 million recorded in the same quarter last year and an increase of 24 percent over revenue of $41.1 million recorded in the quarter ended September 30, 2002.

Pro forma net income for the quarter ended December 31, 2002 was $10.9 million, representing a 109% increase over the quarter ended September 30, 2002. Pro forma net income was approximately $227,000 in the December quarter last year. Pro forma earnings per share for the quarter ended December 31, 2002 was $0.14 per basic and $0.13 per diluted share, compared to pro forma earnings per share of $0.07 per basic and diluted share in the quarter ended September 30, 2002. Pro forma earnings were $0.01 per basic share and $0.00 per diluted share, in the December quarter last year. Pro forma net income and per share information excludes non-cash stock-based compensation associated with stock options, amortization of intangible assets and deemed dividends associated with preferred stock issued by the company. The company's pro forma tax rate was lower than expected, at 13.55%, primarily due to the utilization of deferred tax assets

Net income applicable to common stockholders calculated on a GAAP (generally accepted accounting principles) basis for the quarter ended December 31, 2002 was $3.2 million, or $0.04 per basic and diluted share, compared to a net loss applicable to common stockholders of $34.5 million, or ($1.25) per basic and diluted share, in the same period last year. The GAAP net income applicable to common stockholders in the quarter ended December 31, 2002 includes a non-cash charge of $6.1 million for stock-based compensation associated with stock options and approximately $244,000 for amortization of intangible assets associated with the OneSecure acquisition. The GAAP net loss applicable to common stockholders in the same period last year includes a one-time non-cash charge of $27.6 million for a deemed dividend relating to the issuance of the company's Series F convertible preferred stock below its deemed fair value, a non-cash charge of $1.1 million for cumulative deemed dividends related to Series E and F convertible preferred stock, and a non-cash charge of $5.9 million for stock-based compensation associated with stock options.

"NetScreen's overall performance in the December quarter was simply outstanding," said Robert Thomas, NetScreen's president and chief executive officer. "In addition to our incredible financial results, we strengthened the foundation of the company through product enhancements, the expansion of our Global Alliance partnerships and the continued penetration the Global 2000 enterprise market and the government sector."

Remo Canessa, NetScreen's chief financial officer, stated, "In addition to record revenue results we achieved a record pro forma gross margin of 78.8%. We also achieved a pro forma operating profit margin of 23%, which is a substantial improvement over the 15% pro forma operating profit we recorded last quarter. In addition, we achieved GAAP profitability for the very first time. Our balance sheet remained strong as deferred revenue increased 35% over the prior quarter to $35.3 million and we generated a record $21.9 million in operating cash flow. In addition, our DSOs decreased to 35 days in the December 2002 quarter compared to 40 days in our September 2002 quarter. As of December 31, 2002, our cash, cash equivalents and short-term investments balance stood at $273.3 million."

Recent Company Highlights

  • Announced several large enterprise and government customer wins including McDonalds's Taiwan, Rent-A-Center, Las Vegas Review-Journal and the U.S. Coast Guard.Received stringent Common Criteria certification (EAL2) for the NetScreen-5XT, -50, -208, -500 and -5200 running NetScreen ScreenOS 4.0.
  • Strengthened solution for mobile network operators with significant enhancements to the NetScreen-500 GPRS to support the newest standards for securely transmitting information via GPRS (General Packet Radio Services) networks.
  • Enhanced the security and resiliency provided to enterprises looking to secure remote sites and telecommuters with new features for the NetScreen-5XT including a Restricted Zone, fail-over and fail-back functionality and expanded routing support.
  • Ranked No. 1 in revenue growth among the top five vendors in the Worldwide Total VPN and Firewall Appliance Solutions segment for the third calendar quarter of 2002, according to Infonetics Research.
  • Expanded our Global Alliance Program to include SafeWeb, a leading developer of secure sockets layer VPN appliances, SilentRunner, a leading provider of network security analysis solutions, Solsoft, a leading provider of visual security policy management solutions, and SurfControl, a leading provider of Web and e-mail filtering.
  • Received "Outstanding Product of the Year" award for the NetScreen-5000 Series at CRN Magazine's 2002 U.K. channel awards.

Outlook

The following statements are based on information the company has available today, and will be the only statements of this nature that the company will comment on going forward or until updated in the future. NetScreen assumes no duty to update these numbers at any time during the quarter. These statements are forward-looking, and actual results may differ materially.

For the quarter ending March 31, 2003, NetScreen currently expects to achieve revenue growth of between 10 and 12 percent over the December 2002 quarter. Pro forma gross margins are expected to be between 75 and 76 percent. In addition, the company expects pro forma operating expenses for the March 2003 quarter to increase by 10 to 11 percent over the December 2002 quarter. Pro forma operating expense and pro forma gross margin expectations exclude stock-based compensation and the amortization of intangible assets.

For the fiscal year ending September 30, 2003, NetScreen is raising its revenue projection to between $225 million and $230 million, representing year over year revenue growth of approximately 62 to 66 percent. Prior guidance for fiscal 2003 had been for revenues to range between $194 million and $208 million.

Conference Call

NetScreen will host a public conference call to discuss the first quarter results and current business developments, and to provide guidance for the second quarter and fiscal 2003 today at 4:30 p.m. Eastern Time (1:30 p.m. Pacific Time). A live webcast of the call can be accessed at: http://ir.netscreen.com/ireye/ir_site.zhtml?ticker=nscn&script=2100. A replay of the webcast will be available at the same web address starting approximately two hours after the conclusion of the live webcast and running through February 20, 2003.

Institutional investors and research analysts can access the live conference by calling 800-309-8225 (U.S. and Canada) or 706-634-0672 (International). A taped replay of this call will be available for one week following the call. The dial-in numbers for the replay are 800-642-1687 (U.S. and Canada) and 706-645-9291 (International). The call's ID number is: 7449874. The replay will be available starting approximately two hours after the conclusion of the live call and running through January 30, 2003.

About NetScreen Technologies

NetScreen Technologies, Inc., is a leading developer of integrated network security solutions that offer the security, performance and total cost of ownership required by enterprises and carriers. NetScreen's innovative solutions provide key security technologies, such as virtual private network, denial of service protection, firewall and intrusion prevention, in a line of easy-to-manage security appliances and systems. NetScreen is located at 805 11th Ave, Sunnyvale, CA 94085. More information on NetScreen's products can be found at http://www.netscreen.com or by calling toll free at 1-800-638-8296.

                     NETSCREEN TECHNOLOGIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(excludes stock-based compensation, amortization of intangible assets
               and deemed dividends on preferred stock)
               (in thousands, except per share amounts)
                                                  Three Months Ended
                                                     December 31,
                                                  -------------------
                                                     2002       2001
                                                   -------    -------
Revenues:
    Product                                       $42,451    $24,099
    Maintenance and service                         8,619      4,874
                                                   -------    -------
       Total revenues                              51,070     28,973
                                                   -------    -------
Cost of revenues:
    Product (1) (2)                                 8,686      6,880
    Maintenance and service (1)                     2,140        972
                                                   -------    -------
       Total cost of revenues                      10,826      7,852
                                                   -------    -------
Gross margin                                       40,244     21,121
                                                   -------    -------
Operating expenses:
    Research and development (1) (2)                7,776      5,562
    Sales and marketing (1) (2)                    17,430     11,773
    General and administrative (1)                  3,467      3,589
                                                   -------    -------
       Total operating expenses                    28,673     20,924
                                                   -------    -------
Pro forma income from operations                   11,571        197
Interest and other income, net                      1,063        330
                                                   -------    -------
Pro forma income before taxes                      12,634        527
Provision for income taxes                         (1,712)      (300)
                                                   -------    -------
Pro forma net income  (3)                         $10,922    $   227
                                                   =======    =======

Basic pro forma net income per share              $  0.14    $  0.01
                                                   =======    =======
Shares used in computing basic pro forma net
 income per share                                  77,003     27,569
                                                   =======    =======
Diluted pro forma net income per share            $  0.13    $    --
                                                   =======    =======
Shares used in computing diluted pro forma net
 income per share                                  82,893     66,324
                                                   =======    =======
(1) Excludes stock-based compensation of the
    following:
       Cost of product revenues                   $   411    $   410
       Cost of maintenance and service revenues       277        230
       Research and development                     1,983      1,820
       Sales and marketing                          2,697      2,828
       General and administrative                     724        649
                                                   -------    -------
       Total stock-based compensation             $ 6,092    $ 5,937
                                                   =======    =======
(2) Excludes amortization of intangible assets of
    the following:
       Cost of product revenues                   $   186    $    --
       Research and development                        23         --
       Sales and marketing                             35         --
                                                   -------    -------
       Total amortization of intangible assets    $   244    $    --
                                                   =======    =======
(3) Excludes deemed dividends on Series E and F
    convertible preferred stock                   $    --    $28,743
                                                   =======    =======
Certain amounts have been reclassified to conform to the current
presentation.

                     NETSCREEN TECHNOLOGIES, INC.
                 PRO FORMA RECONCILIATION (UNAUDITED)
                            (in thousands)
                                                    Three Months
                                                       Ended
                                                    December 31,
                                                   -----------------
                                                    2002       2001
                                                   -----       -----
Pro forma net income                             $10,922    $    227
Stock-based compensation                          (6,092)     (5,937)
Amortization of intangible assets                   (244)         --
Provision for income taxes                        (1,374)         --
Deemed dividends on Series E and F convertible
  preferred stock                                     --     (28,743)
                                                  -------    --------
GAAP net income (loss) applicable to common
 stockholders                                    $ 3,212    $(34,453)
                                                  =======    ========


                     NETSCREEN TECHNOLOGIES, INC.
   GAAP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
               (in thousands, except per share amounts)
                                                  Three Months Ended
                                                     December 31,
                                                 --------------------
                                                    2002        2001
                                                  -------    --------
Revenues:
    Product                                      $42,451    $ 24,099
    Maintenance and service                        8,619       4,874
                                                  -------    --------
       Total revenues                             51,070      28,973
                                                  -------    --------
Cost of revenues:
    Product (1) (2)                                9,283       7,290
    Maintenance and service (1)                    2,417       1,202
                                                  -------    --------
       Total cost of revenues                     11,700       8,492
                                                  -------    --------
Gross margin                                      39,370      20,481
                                                  -------    --------
Operating expenses:
    Research and development (1) (2)               9,782       7,382
    Sales and marketing (1) (2)                   20,162      14,601
    General and administrative (1)                 4,191       4,238
                                                  -------    --------
       Total operating expenses                   34,135      26,221
                                                  -------    --------
Income (loss) from operations                      5,235      (5,740)
Interest and other income, net                     1,063         330
                                                  -------    --------
Income (loss) before taxes                         6,298      (5,410)
Provision for income taxes                        (3,086)       (300)
                                                  -------    --------
Net income (loss)                                  3,212      (5,710)
Deemed dividend on Series E and F redeemable
   convertible preferred stock                        --     (28,743)
                                                  -------    --------
Net income (loss) applicable to common
 stockholders                                    $ 3,212    $(34,453)
                                                  =======    ========
Basic net income (loss) per share applicable to
   common stockholders                           $  0.04    $  (1.25)
                                                  =======    ========
Shares used in computing basic net income (loss)
   per share applicable to common stockholders    77,003      27,569
                                                  =======    ========
Diluted net income (loss) per share applicable
 to common stockholders                          $  0.04    $  (1.25)
                                                  =======    ========
Shares used in computing diluted net income
 (loss) per share applicable to
  common stockholders                              82,893      27,569
                                                  =======    ========
(1) Includes stock-based compensation of the
    following:
       Cost of product revenues                  $   411    $    410
       Cost of maintenance and service revenues      277         230
       Research and development                    1,983       1,820
       Sales and marketing                         2,697       2,828
       General and administrative                    724         649
                                                  -------    --------
       Total stock-based compensation            $ 6,092    $  5,937
                                                  =======    ========
(2) Includes amortization of intangible assets
    of the following:
       Cost of product revenues                  $   186    $     --
       Research and development                       23          --
       Sales and marketing                            35          --
                                                  -------    --------
       Total amortization of intangible assets   $   244    $     --
                                                  =======    ========

Certain amounts have been reclassified to conform to the current
presentation.


                      NETSCREEN TECHNOLOGIES, INC.
                CONDENSED CONSOLIDATED BALANCE SHEETS
                            (in thousands)
                                             December 31, September 30,
                                                  2002        2002
                                                --------    --------
                                              (Unaudited)
ASSETS
Current assets:
 Cash and cash equivalents                      $ 15,681    $ 11,153
 Short-term investments                          257,654     238,711
 Restricted cash                                     746       1,611
 Accounts receivable, net                         19,675      18,046
 Inventories                                       1,796       2,249
 Other current assets                              6,289       5,231
                                                 --------    --------
     Total current assets                        301,841     277,001
Property and equipment                             7,398       6,264
Restricted cash                                      693          --
Intangible assets                                  5,515       5,759
Goodwill                                          57,281      56,807
Other assets                                         686         853
                                                 --------    --------
     Total assets                               $373,414    $346,684
                                                 ========    ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable                               $  5,331    $  5,027
 Accrued expenses                                 12,530      11,452
 Accrued compensation                              7,020       6,909
 Accrued income taxes                              4,682       1,865
 Deferred revenue                                 35,300      26,150
 Current portion of restructuring liabilities        679         541
 Current portion of debt and capital lease
  obligations                                      1,623       1,761
                                                 --------    --------
     Total current liabilities                    67,165      53,705
                                                 --------    --------
Restructuring liabilities, less
  current portion                                   2,403       2,577
Long-term portion of debt and capital
  lease obligations                                 1,085       1,513
                                                 --------    --------
Total stockholders' equity                       302,761     288,889
                                                 --------    --------
 Total liabilities and stockholders' equity     $373,414    $346,684
                                                 ========    ========

Certain amounts have been reclassified to conform to the current
presentation.


NetScreen is a trademark of NetScreen Technologies, Inc. Other trademarks are the property of their respective owners.

This press release contains forward-looking statements about events and circumstances that have not yet occurred. Statements containing words such as "will," "expects," "believes," "growing," and other statements in the future tense are forward-looking statements. Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties. These risks and uncertainties include volatility in the Internet infrastructure and networking market, increased competition, integration risks, long sales cycles, and unpredictability of future quarters and product related risks such as whether new products will be introduced and if introduced, whether new and existing products will perform as expected. Detailed information about potential factors that could affect NetScreen's business, financial condition and results of operations is included in the company's periodic reports on Form 10-Q and 10-K, including (without limitation) under the captions, "Factors That May Affect Our Business and Future Results of Operations and Financial Condition" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are on file with the Securities and Exchange Commission (the "SEC") and available at the SEC's website at www.sec.gov. The company undertakes no responsibility to update the information in this press release if any forward-looking statement later turns out to be inaccurate.