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NetScreen Technologies, Inc. Reports Record Fiscal Third Quarter Financial Results

Sunnyvale, CA - July 23, 2003 - NetScreen Technologies, Inc. (Nasdaq: NSCN), today announced financial results for its third fiscal quarter and nine months ended June 30, 2003.

Revenue in the quarter ended June 30, 2003 was a record $64.3 million, an increase of 76.7 percent over revenue of $36.4 million in the same quarter last year and an increase of 10.3 percent over revenue of $58.3 million in the quarter ended March 31, 2003. Revenues for the first nine months of fiscal 2003 were $173.8 million, an increase of 78.4 percent over revenues of $97.4 million recorded in the same period last year.

Net income calculated on the basis of generally accepted accounting principles (GAAP) for the quarter ended June 30, 2003 was $35.3 million, or $0.44 per basic and $0.41 per diluted share, compared to a net loss of $2.4 million, or ($0.03) per basic and diluted share, in the same period last year. GAAP net income in the quarter ended June 30, 2003 includes a non-cash net tax benefit of $23.5 million resulting from the non-recurring recognition of previously reserved deferred tax assets such as net operating losses. GAAP net income also includes the effect of a non-cash charge of $6.1 million for stock-based compensation associated primarily with stock options granted prior to the company’s initial public offering and approximately $245,000 for amortization of intangible assets associated with the September 2002 acquisition of OneSecure Inc. GAAP net loss in the same period last year includes the effect of a non-cash charge of $6.1 million for stock-based compensation associated with stock options. GAAP net income applicable to common stockholders for the first nine months of fiscal 2003 was $44.4 million, or $0.57 per basic and $0.53 per diluted share, compared to a net loss applicable to common stockholders of $40.2 million, or ($0.71) per basic and diluted share in the same period last year.

Pro forma net income for the quarter ended June 30, 2003 was a record $15.4 million, or $0.19 per basic and $0.18 per diluted share, compared to pro forma net income of $3.7 million, or $0.05 per basic and diluted share, in the same quarter last year and pro forma net income of $13.0 million, or $0.17 per basic and $0.15 per diluted share, in the quarter ended March 31, 2003. Pro forma net income and per share information in the quarter ended June 30, 2003 exclude the recognition of a net tax benefit relating to deferred tax assets and reflects our previously normalized pro forma tax rate of 15 percent. Additionally, pro forma net income and per share information excludes non-cash, stock-based compensation associated with stock options and amortization of intangible assets.

“During the quarter we continued to extend our penetration into large enterprise accounts both domestically and internationally,” said Robert Thomas, president and chief executive officer. “We saw revenue growth in each of our geographic regions in the June quarter as security continues to be a primary focus area. We also experienced another robust quarter of sales to the government sector, educational institutions and financial institutions.”

Remo Canessa, NetScreen’s chief financial officer, stated, “Stronger sales in North America helped us achieve our seventh consecutive quarter of double-digit sequential revenue growth since our initial public offering in December 2001. The strength of our products and lower service and maintenance costs led to an increase in our pro forma gross margin and efficient spending helped us post record pro forma operating profit margin. We were operating cash flow positive for the eighth consecutive quarter generating $17.4 million, bringing our cash, cash equivalents and short-term investments balance up to $315.2 million as of June 30, 2003.”

Recent Company Highlights

  • Expanded alliance with Trend Micro, Inc. to deliver a new best-of-breed integrated security gateway for remote sites that combines antivirus, firewall, VPN and intrusion prevention in a single platform.
  • Introduced the NetScreen-5GT low-end appliance, which provides firewall, VPN, denial of service protection and has added memory and CPU power to accommodate future security capabilities, including intrusion detection and prevention as well as Trend Micro’s award-winning network antivirus functionality.
  • Maintained No. 1 position in unit market share of the high-end (greater than $30,000) price-banded category of VPN and firewall appliances in the March quarter, according to Infonetics Research. In addition, according to this report, NetScreen passed a competitor and moved into second place in unit market share in the mid-range ($10,000 to $30,000) price-banded category and reached third place for overall revenue in the Worldwide Total VPN and Firewall Appliance Hardware and Software Market Share category in the March quarter.
  • Named Chris Andrews to the new position of vice president of North American sales.
  • Achieved Common Criteria Evaluation Assurance Level 4 (EAL4) certification for certain firewall and VPN appliances and systems, an important worldwide evaluation standard for security products.
  • Defined a phased IPv6 development plan and executed the first phase delivery: availability of a NetScreen ScreenOS technology release that demonstrates IPv6 support for both firewall and VPN.
  • Received Open Security Evaluation Criteria (OSEC) verification for the NetScreen-IDP 100, the first in-line device to offer accurate attack detection with real-time intrusion prevention capabilities.
  • Announced new large enterprise, government and service provider customer wins including New York State Psychiatric Institute, Japan’s NTT-ME, PUMA AG, TELUS and the University of Buffalo.
  • Expanded our Global Alliance Program to include Alcatel, a provider of end-to-end communications solutions, and Certicom Corp., a provider of wireless security solutions.
  • Launched new corporate web site that features enhanced navigation and data accessibility for customers, partners, and prospects worldwide, as well as a new online customer service and support center.

Outlook

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

During the second half of the June quarter the SARS epidemic resulted in a slowdown in our business in certain countries in Asia Pacific and we expect some follow-on impact in the September 2003 quarter. For the quarter ending September 30, 2003, NetScreen currently expects to achieve revenue growth of between 4 and 6 percent over the June 2003 quarter. On a GAAP basis, gross margins are expected to be between 75 and 76 percent and operating expenses are expected to increase by 4 to 6 percent in the September 2003 quarter. Our GAAP effective tax rate is expected to be approximately 50 percent in the September 2003 quarter. Pro forma gross margins are expected to be between 76 and 77 percent. In addition, the company expects pro forma operating expenses for the September 2003 quarter to increase by 6 to 8 percent over the June 2003 quarter. Our pro forma effective tax rate is expected to be approximately 39 percent going forward. Pro forma operating expense, pro forma gross margin and pro forma effective tax rate expectations exclude stock-based compensation and the amortization of intangible assets.

Conference Call

NetScreen will host a public conference call to discuss the third quarter results and current business developments, and to provide guidance for the fourth quarter and fiscal 2003 today at 5:00 p.m. Eastern Time (2:00 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 August 23, 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: 1664896. The replay will be available starting approximately two hours after the conclusion of the live call and running through July 31, 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 94089. 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.
        GAAP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                    (in thousands, except per share amounts)
 
                              Three Months Ended         Nine Months Ended
                                   June 30,                  June 30,
                              2003         2002         2003           2002
 
     Revenues:
      Product               $52,573       $30,091     $142,961       $80,684
      Maintenance and
       service               11,767         6,320       30,791        16,737
       Total revenues        64,340        36,411      173,752        97,421
     Cost of revenues:
      Product (1) (2)        11,728         7,292       31,641        21,148
      Maintenance and
      service (1)             3,177         2,129        8,825         5,294
       Total cost of
        revenues             14,905         9,421       40,466        26,442
     Gross margin            49,435        26,990      133,286        70,979
     Operating expenses:
      Research and
       development (1) (2)   11,161         8,578       32,020        24,192
      Sales and
       marketing (1) (2)     22,707        16,338       62,906        45,929
      General and
       administrative (1)     4,883         4,214       13,932        12,648
       Total operating
        expenses             38,751        29,130      108,858        82,769
     Income (loss)
      from operations        10,684       (2,140)       24,428      (11,790)
     Interest and
      other income, net       1,090           948        3,157         2,233
     Income (loss)
      before taxes           11,774       (1,192)       27,585       (9,557)
     Benefit (provision)
      for income taxes       23,496       (1,250)       16,788       (1,889)
     Net income (loss)       35,270       (2,442)       44,373      (11,446)
     Deemed dividend on
      Series E and F
      redeemable
      convertible
      preferred stock            --            --           --      (28,743)
     Net income (loss)
      applicable
      to common
      stockholders          $35,270      $(2,442)      $44,373     $(40,189)
     Basic net income
       (loss) per
       share
       applicable to
       common
       stockholders           $0.44      $ (0.03)        $0.57       $(0.71)
     Shares used in
      computing basic
      net income (loss)
      per share applicable
      to common
      stockholders           79,935        71,317       78,438        56,486
 
     Diluted net income
      (loss) per share
      applicable to
      common stockholders     $0.41      $ (0.03)        $0.53       $(0.71)
     Shares used in
      computing diluted
      net income (loss)
      per share applicable
      to common
      stockholders           85,180        71,317       84,128        56,486
 
 
     (1) Includes stock-based compensation of the following:
         Cost of product
          revenues             $387          $411       $1,209        $1,232
         Cost of maintenance
          and service revenues  276           274          830           742
         Research and
          development         1,908         1,928        5,856         5,695
         Sales and marketing  2,763         2,794        7,620         8,386
         General and
          administrative        720           742        2,100         2,082
          Total stock-based
           compensation     $ 6,054       $ 6,149      $17,615       $18,137
 
     (2) Includes amortization of intangible assets of the
         following:
          Cost of product
           revenues            $186           $--         $558           $--
          Research and
           development           23            --           69            --
          Sales and marketing    36            --          107            --
           Total amortization
            of intangible
            assets             $245           $--         $734           $--
 
 
        Certain amounts have been reclassified to conform to the current
        presentation.


                          NETSCREEN TECHNOLOGIES, INC.
     PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
   (excludes net tax benefit relating to recognition of deferred tax assets,
     stock-based compensation, amortization of intangible assets and deemed
                         dividends on preferred stock)
                    (in thousands, except per share amounts)
 
 
                              Three Months Ended         Nine Months Ended
                                   June 30,                   June 30,
                              2003         2002         2003          2002
 
     Revenues:
      Product               $52,573       $30,091     $142,961       $80,684
      Maintenance and
       service               11,767         6,320       30,791        16,737
       Total revenues        64,340        36,411      173,752        97,421
     Cost of revenues:
      Product (1) (2)        11,155         6,881       29,874        19,916
      Maintenance and
       service (1)            2,901         1,855        7,995         4,552
       Total cost of
        revenues             14,056         8,736       37,869        24,468
     Gross margin            50,284        27,675      135,883        72,953
     Operating expenses:
      Research and
       development (1) (2)    9,230         6,650       26,095        18,497
      Sales and marketing
       (1) (2)               19,908        13,544       55,179        37,543
      General and
       administrative (1)     4,163         3,472       11,832        10,566
       Total operating
        expenses             33,301        23,666       93,106        66,606
     Pro forma income
       from operations       16,983         4,009       42,777         6,347
     Interest and other
      income, net             1,090           948        3,157         2,233
     Pro forma income
      before taxes           18,073         4,957       45,934         8,580
     Benefit (provision)
      for income taxes      (2,711)       (1,250)      (6,664)       (1,889)
     Pro forma net
      income (3)            $15,362        $3,707      $39,270        $6,691
 
     Basic pro forma net
      income per share        $0.19         $0.05        $0.50         $0.12
     Shares used in
      computing basic pro
      forma net income per
      share                  79,935        71,317       78,438        56,486
 
     Diluted pro forma
      net income per share    $0.18         $0.05        $0.47         $0.09
     Shares used in
      computing diluted
      pro forma net
      income per share       85,180        76,394       84,128        73,963
 
     (1) Excludes stock-based compensation of the following:
          Cost of product
           revenues            $387          $411       $1,209        $1,232
          Cost of maintenance
           and service
           revenues             276           274          830           742
          Research and
           development        1,908         1,928        5,856         5,695
          Sales and
           marketing          2,763         2,794        7,620         8,386
          General and
           administrative       720           742        2,100         2,082
           Total stock-
            based
            compensation     $6,054        $6,149     $ 17,615       $18,137
 
     (2) Excludes amortization of intangible assets of thefollowing:
         Cost of product
          revenues             $186           $--         $558           $--
         Research and
          development            23            --           69            --
         Sales and marketing     36            --          107            --
          Total amortization
           of intangible
            assets             $245           $--         $734           $--
 
     (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.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
 
                                                    June 30,     September 30,
                                                      2003           2002*
                                                   (Unaudited)
     Assets
 
     Current assets:
      Cash and cash equivalents                       $76,649        $11,153
      Short-term investments                          238,559        238,711
      Restricted cash                                     308          1,611
      Accounts receivable, net                         28,518         18,046
      Refundable income taxes                             243             --
      Inventories                                       3,195          2,249
      Deferred taxes                                   35,771             --
      Other current assets                              4,324          5,231
         Total current assets                         387,567        277,001
     Property and equipment                             9,969          6,264
     Restricted cash                                      827             --
     Intangible assets                                  5,025          5,759
     Goodwill                                          54,522         56,807
     Other assets                                         540            853
         Total assets                                $458,450       $346,684
 
     Liabilities and Stockholders' Equity
     Current liabilities:
      Accounts payable                                 $6,329         $5,027
      Accrued expenses                                 15,319         11,452
      Accrued compensation                             10,028          6,909
      Accrued income taxes                                 --          1,865
      Deferred revenue                                 47,375          26,15
      Current portion of restructuring liabilities        682            541
      Current portion of debt and
       capital lease obligations                          114          1,761
       Total current liabilities                       79,847         53,705
     Restructuring liabilities,
      less current portion                              2,154          2,577
     Long-term portion of debt and capital
     lease obligations                                     --          1,513
     Total stockholders' equity                       376,449        288,889
        Total liabilities and stockholders'
         equity                                      $458,450       $346,684
 
 
       Certain amounts have been reclassified to conform to the current
       presentation.


 
                          NETSCREEN TECHNOLOGIES, INC.
            Reconciliation of Pro Forma to GAAP Numbers (Unaudited)
                                   $ in 000s
 
 
                                  Three Months     Three Months    Three Months
                                     Ended           Ended           Ended
                                    June 30,        March 31        June 30,
                                     2003            2003            2002
 
 
                                         % of            % of            % of
                                  $     Revenue   $    Revenue    $    Revenue
 
     Revenues - GAAP and Pro
      forma                     64,340  100.0%  58,342  100.0%  36,411  100.0%
 
 
     Pro forma gross margin     50,284   78.2%  45,355   77.7%  27,675   76.0%
       Stock based compensation
        - cost of product
        revenues                  (387)  -0.6%    (411)  -0.7%    (411)  -1.1%
       Amortization of
        intangible assets -
        cost of product
        revenues                  (186)  -0.3%    (186)  -0.3%      --    0.0%
       Stock based compensation
        - cost of maintenance
        and service               (276)  -0.5%    (277)  -0.5%    (274)  -0.8%
     GAAP gross margin          49,435   76.8%  44,481   76.2%  26,990   74.1%
 
 
     Pro forma research and
      development operating
      expenses                   9,230   14.3%   9,089   15.6%   6,650   18.3%
       Stock based compensation  1,908    3.0%   1,965    3.4%   1,928    5.3%
       Amortization of
        intangible assets           23    0.0%      23    0.0%      --    0.0%
     GAAP research and
      development operating
      expenses                  11,161   17.3%  11,077   19.0%   8,578   23.6%
 
 
     Pro forma sales and
      marketing operating
      expenses                  19,908   30.9%  17,841   30.5%  13,544   37.2%
       Stock based
        compensation             2,763    4.3%   2,160    3.7%   2,794    7.7%
       Amortization of
        intangible assets           36    0.1%      36    0.1%      --    0.0%
     GAAP sales and marketing
      operating expenses        22,707   35.3%  20,037   34.3%  16,338   44.9%
 
 
     Pro forma general and
      administrative operating
      expenses                   4,163    6.5%   4,202    7.2%   3,472    9.6%
       Stock based compensation    720    1.1%     656    1.1%     742    2.0%
     GAAP general and
      administrative operating
      expenses                   4,883    7.6%   4,858    8.3%   4,214   11.6%
 
 
     Pro forma operating
      expenses                  33,301   51.8%  31,132   53.4%  23,666   65.0%
       Stock based compensation  5,391    8.3%   4,781    8.2%   5,464   15.0%
       Amortization of
        intangible assets           59    0.1%      59    0.1%      --    0.0%
     GAAP operating expenses    38,751   60.2%  35,972   61.7%  29,130   80.0%
 
 
     Pro forma income from
      operations                16,983   26.4%  14,223   24.4%   4,009   11.0%
       Stock based
        compensation            (6,054)  -9.4%  (5,469)  -9.4%  (6,149) -16.9%
       Amortization of
        intangible assets         (245)  -0.4%    (245)  -0.4%      --    0.0%
     GAAP income (loss) from
      operations                10,684   16.6%   8,509   14.6%  (2,140)  -5.9%
 
 
     Pro forma net income       15,362   23.9%  12,986   22.3%   3,707   10.2%
       Stock based compensation (6,054)  -9.4%  (5,469)  -9.4%  (6,149) -16.9%
       Amortization of
        intangible assets         (245)  -0.4%    (245)  -0.4%      --    0.0%
       GAAP adjustment to
        provision for income
        taxes relating to
        stock-based
        compensation and
        amortization of
        intangible assets       (1,636)  -2.5%  (1,381)  -2.4%      --     0.0%
       Tax benefit relating to
        recognition of
        deferred
        tax assets              27,843   43.2%      --     0.0%     --     0.0%
     GAAP net income (loss)     35,270   54.8%   5,891   10.1%  (2,442)   -6.7%
 
     Components of gross
      margin:
 
     Product revenue - GAAP and
      Pro forma                 52,573  100.0%  47,937  100.0%  30,091  100.0%
 
     Pro forma product gross
      margin                    41,418   78.8%  37,904   79.1%  23,210   77.1%
       Stock based compensation
        - cost of product
        revenues                  (387)  -0.7%    (411)  -0.9%    (411)  -1.3%
       Amortization of
        intangible assets -
        cost of product
        revenues                  (186)  -0.4%    (186)  -0.4%      --    0.0%
     GAAP product gross margin  40,845   77.7%  37,307   77.8%  22,799   75.8%
 
 
     Maintenance and service
      revenue - GAAP and Pro
      forma                     11,767  100.0%  10,405  100.0%   6,320  100.0%
 
     Pro forma service gross
      margin                     8,866   75.3%   7,451   71.6%   4,465   70.6%
       Stock based compensation
        - cost of maintenance
        and service               (276)  -2.3%    (277)  -2.7%    (274)  -4.3%
     GAAP service gross margin   8,590   73.0%   7,174   68.9%   4,191   66.3%


                       NETSCREEN TECHNOLOGIES, INC.
 
      Reconciliation of Pro Forma to GAAP Tax Provision (Unaudited)
                                $ in 000s
 
                                          Three Months Ended  Nine Months Ended
                                               June 30,           June 30,
                                             2003     2002     2003      2002
 
 
     Pro forma income before taxes         $18,073   $4,957  $45,934    $8,580
 
     Pro forma provision for income taxes   (2,711)  (1,250)  (6,664)   (1,889)
 
     Pro forma effective tax rate            15.0%    25.2%    14.5%     22.0%
 
     Pro forma net income                  $15,362   $3,707  $39,270    $6,691
 
 
     Pro forma income before taxes         $18,073   $4,957  $45,934    $8,580
     Stock-based compensation               (6,054)  (6,149) (17,615)  (18,137)
     Amortization of intangible assets        (245)      --     (734)       --
 
     GAAP income (loss) before taxes        11,774   (1,192)  27,585    (9,557)
 
     Pro forma provision for income taxes   (2,711)  (1,250)  (6,664)   (1,889)
     GAAP adjustment to provision for
      income taxes relating to stock-based
      compensation and amortization of
      intangibles                           (1,636)           (4,391)
     Tax benefit relating to recognition
      of deferred tax assets                27,843       --   27,843        --
     GAAP benefit (provision) for income
      taxes                                 23,496   (1,250)  16,788    (1,889)
 
     GAAP effective tax rate               -199.6%     (A)    -60.9%       (A)
 
     GAAP net income (loss)                $35,270  $(2,442) $44,373  $(11,446)
 
 
     (A)  Taxes paid for foreign jurisdiction purposes


                            NETSCREEN TECHNOLOGIES, INC.
                                  Guidance Summary
 
    Reconciliation of Pro Forma to GAAP Gross Margin, Operating Expenses and
                                  Income Taxes
                                    (Unaudited)
                                     $ in 000s
 
                                           Three Months Ended Sept. 30, 2003
                                               Low(1)            High(2)
 
                                                     % of               % of
                                             $     Revenue      $     Revenue
 
     Revenues - GAAP and Pro forma          66,950   100.0%    68,200   100.0%
 
 
     Pro forma gross margin                 50,880    76.0%    52,515    77.0%
       Stock based compensation - cost of
        product revenues                      (355)   -0.5%      (355)   -0.5%
       Amortization of intangible assets
        - cost of product revenues            (186)   -0.3%      (186)   -0.3%
       Stock based compensation - cost of
        maintenance and service               (269)   -0.4%      (269)   -0.4%
     GAAP gross margin                      50,070    74.8%    51,705    75.8%
 
 
     Pro forma operating expenses           35,965    53.7%    35,300    51.8%
       Stock based compensation              5,086     7.6%     5,086     7.5%
       Amortization of intangible assets        59     0.1%        59     0.1%
     GAAP operating expenses                41,110    61.4%    40,445    59.3%
 
 
     Pro forma income before taxes         $15,915            $18,215
 
     Pro forma provision for income taxes   (6,207)            (7,104)
 
     Pro forma effective tax rate            39.0%              39.0%
 
     Proforma net income                    $9,708            $11,111
 
 
     Pro forma income before taxes         $15,915            $18,215
     Stock-based compensation               (5,710)            (5,710)
     Amortization of intangible assets        (245)              (245)
 
     GAAP income before taxes                9,960             12,260
 
     Pro forma provision for income taxes   (6,207)            (7,104)
     GAAP adjustment to provision for
      income taxes relating to stock-
      based compensation and amortization
      of intangibles                         1,227                974
     GAAP provision for income taxes        (4,980)            (6,130)
 
     GAAP effective tax rate                 50.0%              50.0%
 
     GAAP net income                        $4,980             $6,130
 
     Notes:
 
      (1) Low guidance reflects 4% revenue increase over the prior quarter, 76%
          gross margin and 8% operating expense increase over the prior
          quarter.
 
      (2) High guidance reflects 6% revenue increase over the prior quarter,
          77% gross margin and 6% operating expense increase over the prior
          quarter.


NetScreen and the NetScreen logo are trademarks of NetScreen Technologies, Inc. in the United States and other countries. 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. For example, words such as "will", "can", "provide", "enabling" and "continue", or other statements in the future tense, are forward-looking statements. Actual outcomes and results may differ materially from expectations in this press release due to a number of risks and uncertainties. Such risks and uncertainties include whether the market for security products will grow as projected, if at all, whether demand for NetScreen products will continue, whether new products, if and when introduced, will be successful and whether products will perform as expected.