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NetScreen Technologies, Inc. Reports Record Fiscal First Quarter 2004 Financial Results

Sunnyvale, CA - January 21, 2004 - NetScreen Technologies, Inc. (Nasdaq: NSCN), today announced financial results for its fiscal first quarter ended December 31, 2003.

Revenue in the quarter ended December 31, 2003 was a record $81.0 million, an increase of 59 percent over revenue of $51.1 million in the same quarter last year and an increase of 13 percent over revenue of $71.6 million in the quarter ended September 30, 2003.

Net income calculated on the basis of generally accepted accounting principles (GAAP) for the quarter ended December 31, 2003 was $6.4 million, or $0.07 per basic and diluted share, compared to a net income of $3.2 million or $0.04 per basic and diluted share, in the same quarter last year. GAAP income from operations for the quarter ended December 31, 2003 was $10.9 million. GAAP net income and GAAP income from operations for the quarter ended December 31, 2003 include a non-cash charge of $7.1 million for stock-based compensation associated primarily with stock options granted prior to the company's initial public offering and stock options assumed in conjunction with the November 2003 acquisition of Neoteris, Inc. GAAP net income and GAAP income from operations for the quarter ended December 31, 2003 also include a charge of $2.0 million for amortization of intangible assets associated with the acquisition of Neoteris and the September 2002 acquisition of OneSecure, Inc. GAAP net income in the same quarter last year includes the effect of non-cash charges of $6.1 million for stock-based compensation associated primarily with stock options granted prior to the company's initial public offering and a charge of approximately $244,000 for amortization of intangible assets associated with the OneSecure acquisition.

Pro forma net income for the quarter ended December 31, 2003 was $12.9 million, or $0.15 per basic and $0.14 per diluted share, compared to pro forma net income of $10.9 million, or $0.14 per basic and $0.13 per diluted share, in the same quarter last year and pro forma net income of $11.9 million, or $0.15 per basic and $0.14 per diluted share, in the quarter ended September 30, 2003. Pro forma net income and pro forma net income per share information differs from the GAAP results because it excludes the effect of the non-cash stock-based compensation charges and amortization of intangibles charges and the related tax effects.

"The December quarter was very eventful for NetScreen," said Robert Thomas, president and chief executive officer. "We closed the acquisition of Neoteris, the market leader in SSL VPN products, launched three significant new products and had another superbly executed quarter from a financial perspective. We are very pleased with the rapid progress we've made in integrating Neoteris into the NetScreen family. We introduced new products such as the NetScreen-5GT appliance that has embedded antivirus protection provided through our partnership with Trend Micro, Inc., the Deep Inspection firewall, which provides application-level attack prevention and we launched NetScreen-Security Manager 2004, our next generation central management platform. Combined, we believe the acquisition of Neoteris and the new product introductions will be key contributors to our future growth."

Remo Canessa, NetScreen's chief financial officer, stated, "Strong sales in the Americas and Europe in the December quarter led NetScreen to another quarter of record revenues. We were pleased to see pro forma income from operations increase to $20.0 million, 7 percent over the September quarter despite the incremental operating expenses incurred with Neoteris. NetScreen generated a record $30.3 million in operating cash flow in the December quarter bringing our cash and short-term investments balance as of December 31, 2003 to $379.2 million."

Recent Company Highlights

  • Completed the acquisition of Neoteris, Inc., the market leader in the SSL VPN product category, as well as a leader in the application security gateway market.
  • Launched the NetScreen-Hardware Security Client, a low-cost, centrally managed appliance with firewall, VPN, Deep Inspection and antivirus capabilities, designed for very large deployments in a distributed large enterprise or service provider managed service.
  • Delivered embedded antivirus functionality on the NetScreen-5GT, the industry's first appliance to tightly integrate best-of-breed firewall, VPN, intrusion prevention and gateway antivirus security functionality in a single platform.
  • Expanded the NetScreen-5 series with the NetScreen-5GT Extended, which includes functionality for smaller sites of a large enterprise that require multiple redundancy options and additional network segmentation.
  • Received Common Criteria EAL4+ certification for the NetScreen-5200 using NSA developed protection profiles, becoming the first firewall platform to achieve this certification level for the stringent profiles. Common Criteria is a standard that helps government organizations evaluate IT security products more effectively.
  • Recognized by market research firm IDC, as the only security appliance vendor among the top 5 to grow worldwide factory revenue market share year-over-year.
  • Awarded the 2003 Security Technologies Product of the Year for our Neoteris Secure Access products by industry analyst firm Frost & Sullivan.
  • Ranked as a market leader in market research firm META Group's METAspectrum(SM) for enterprise firewalls.
  • Won the coveted Editor's Choice Award from CMP Media LLC's Network Computing magazine, for the NetScreen-SA 5000 series SSL VPN appliances.

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.

For the quarter ending March 31, 2004, NetScreen currently expects to achieve revenue growth of between 10 and 12 percent over the December 2003 quarter. On a GAAP basis, gross margins are expected to be between 74 and 75 percent and operating expenses are expected to increase by 13 to 15 percent in the March 2004 quarter. Pro forma gross margins are expected to be between 77 and 78 percent. In addition, the company expects pro forma operating expenses for the March 2004 quarter to increase by 12 to 14 percent over the December 2003 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, 2004, NetScreen is raising its projected total revenue to range between $360 million and $375 million, representing year over year revenue growth of approximately 47 percent to 53 percent.

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 full year fiscal 2004 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 February 29, 2004.

Institutional investors and research analysts can access the live conference by calling 877-266-4218 (U.S. and Canada) or 706-679-3421 (International). A taped replay of this call will be available starting approximately two hours after the conclusion of the live call and running through January 30, 2004. 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: 4861311.

                         NETSCREEN TECHNOLOGIES, INC.
   GAAP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
               (in thousands, except per share amounts)
                                                       Three Months Ended
                                                          December 31,
                                                         2003       2002
Revenues:
  Product                                               $64,922   $42,451
  Maintenance and service                                16,095     8,619
    Total revenues                                       81,017    51,070
Cost of revenues:
  Product (A) (B)                                        14,778     9,283
  Maintenance and service (A)                             4,249     2,417
    Total cost of revenues                               19,027    11,700
Gross margin                                             61,990    39,370
Operating expenses:
  Research and development (A) (B)                       13,597     9,782
  Sales and marketing (A) (B)                            31,522    20,162
  General and administrative (A)                          5,970     4,191
    Total operating expenses                             51,089    34,135
Income from operations                                   10,901     5,235
Interest and other income, net                            1,126     1,063
Income before taxes                                      12,027     6,298
Provision for income taxes                               (5,653)   (3,086)
Net income                                               $6,374    $3,212
Basic net income per share                                $0.07     $0.04
Shares used in computing basic net income per share      86,539    77,003
Diluted net income per share                              $0.07     $0.04
Shares used in computing diluted net income per share    90,730    82,893
(A) Includes stock-based compensation of the following:
    Cost of product revenues                               $280      $411
    Cost of maintenance and service revenues                341       277
    Research and development                              2,689     1,983
    Sales and marketing                                   2,709     2,697
    General and administrative                            1,064       724
    Total stock-based compensation                       $7,083    $6,092
(B) Includes amortization of intangible assets of the following:
    Cost of product revenues                             $1,425      $186
    Research and development                                 23        23
    Sales and marketing                                     538        35
    Total amortization of intangible assets              $1,986      $244

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


                         NETSCREEN TECHNOLOGIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
  (excludes stock-based compensation, amortization of intangible assets and
                         related tax effects)
               (in thousands, except per share amounts)
                                                       Three Months Ended
                                                          December 31,
                                                         2003       2002
Revenues:
  Product                                               $64,922   $42,451
  Maintenance and service                                16,095     8,619
    Total revenues                                       81,017    51,070
Cost of revenues:
  Product (A) (B)                                        13,073     8,686
  Maintenance and service (A)                             3,908     2,140
  Total cost of revenues                                 16,981    10,826
Gross margin                                             64,036    40,244
Operating expenses:
  Research and development (A) (B)                       10,885     7,776
  Sales and marketing (A) (B)                            28,275    17,430
  General and administrative (A)                          4,906     3,467
    Total operating expenses                             44,066    28,673
Pro forma income from operations                         19,970    11,571
Interest and other income, net                            1,126     1,063
Pro forma income before taxes                            21,096    12,634
Provision for income taxes                               (8,228)   (1,712)
Pro forma net income                                    $12,868   $10,922
Basic pro forma net income per share                      $0.15     $0.14
Shares used in computing basic pro forma net income
 per share                                               86,539    77,003
Diluted pro forma net income per share                    $0.14     $0.13
Shares used in computing diluted pro forma net income per
 share                                                   90,730    82,893
(A) Excludes stock-based compensation of the following:
    Cost of product revenues                               $280      $411
    Cost of maintenance and service revenues                341       277
    Research and development                              2,689     1,983
    Sales and marketing                                   2,709     2,697
    General and administrative                            1,064       724
    Total stock-based compensation                       $7,083    $6,092
(B) Excludes amortization of intangible assets of the following:
    Cost of product revenues                              $1,425     $186
    Research and development                                  23       23
    Sales and marketing                                      538       35
    Total amortization of intangible assets               $1,986     $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,
                                                   2003          2003
                                                (Unaudited)    Assets
Current assets:
  Cash and cash equivalents                       $73,597       $53,914
  Short-term investments                          305,622       286,738
  Restricted cash                                      38            38
  Accounts receivable, net                         37,722        35,874
  Refundable income taxes                              48           943
  Inventories                                       2,924         2,501
  Deferred income taxes                            27,220        28,368
  Other current assets                              6,048         6,613
    Total current assets                          453,219       414,989
Property and equipment                             11,370        10,667
Restricted cash                                       139           823
Long-term deferred income taxes                     1,439         5,640
Intangible assets                                  38,370         4,781
Goodwill                                          250,420        54,271
Other assets                                          762           552
    Total assets                                 $755,719      $491,723
Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable                                 $9,804        $8,230
  Accrued expenses                                 24,281        17,204
  Accrued compensation                             12,963        12,234
  Deferred revenue                                 63,750        54,364
  Current portion of restructuring liabilities      1,019           648
  Current portion of debt and capital lease
   obligations                                         --            72
    Total current liabilities                     111,817        92,752
Restructuring liabilities, less current portion     3,754         2,042
    Total liabilities                             115,571        94,794
Total stockholders' equity                        640,148       396,929
    Total liabilities and stockholders' equity   $755,719      $491,723

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


                         NetScreen Technologies, Inc.
               Condensed Consolidated Statements of Operations
                       GAAP Reconciliation to Pro Forma
                     Three Months Ended December 31, 2003
           (in thousands, except per share amounts and percentages)

                                                        GAAP to
                                                       Pro Forma
                                              GAAP    Adjustments   Pro Forma
    Revenues:
      Product                                $64,922                 $64,922
      Maintenance and service                 16,095                  16,095
        Total revenues                        81,017                  81,017
    Cost of revenues:
                                                       (1,425) [a]
      Product                                 14,778     (280) [b]    13,073
      Maintenance and service                  4,249     (341) [b]     3,908
        Total cost of revenues                19,027   (2,046)        16,981
    Gross margin                              61,990    2,046         64,036
    Operating expenses:
                                                          (23) [a]
      Research & development                  13,597   (2,689) [b]    10,885
                                                         (538) [a]
      Sales & marketing                       31,522   (2,709) [b]    28,275
      General and administrative               5,970   (1,064) [b]     4,906
        Total operating expenses              51,089   (7,023)        44,066
    Income from operations                    10,901    9,069         19,970
    Interest & other income, net               1,126       --          1,126
    Income before income taxes                12,027    9,069         21,096
    Provision for income taxes                (5,653)  (2,575) [c]    (8,228)
    Net income                                $6,374   $6,494        $12,868
    Basic net income per share                 $0.07                   $0.15
    Shares used in computing basic net income
     per share                                86,539                  86,539
    Diluted net income per share               $0.07                   $0.14
    Shares used in computing diluted net
     income per share                         90,730                  90,730
    Certain measures as a percentage of revenue:
      Product gross margin                     77.2%                   79.9%
      Maintenance and service gross margin     73.6%                   75.7%
      Gross Margin                             76.5%                   79.0%
      Research & development expenses          16.8%                   13.4%
      Sales & marketing expenses               38.9%                   34.9%
      General and administrative expenses       7.4%                    6.1%
      Operating expenses                       63.1%                   54.4%
      Income from operations                   13.5%                   24.6%

    Notes:  [a] reflects amortization of intangible assets
            [b] reflects amortization of stock-based compensation
            [c] primarily reflects the GAAP adjustments to provision for
                income taxes related to stock based compensation and
                amortization of intangible assets.


                     NetScreen Technologies, Inc.
           Condensed Consolidated Statements of Operations
                   GAAP Reconciliation to Pro Forma
                Three Months Ended September 30, 2003
       (in thousands, except per share amounts and percentages)

                                                    GAAP to
                                                   Pro Forma
                                          GAAP    Adjustments  Pro Forma
Revenues:
  Product                                $57,391                $57,391
  Maintenance and service                 14,199                 14,199
    Total revenues                        71,590                 71,590
Cost of revenues:
                                                     (186) [a]
  Product                                 11,796     (355) [b]   11,255
  Maintenance and service                  3,858     (269) [b]    3,589
    Total cost of revenues                15,654     (810)       14,844
Gross margin                              55,936      810        56,746
Operating expenses:
                                                      (23) [a]
  Research & development                  11,924   (1,777) [b]   10,124
                                                      (35) [a]
  Sales & marketing                       26,005   (2,516) [b]   23,454
  General and administrative               5,241     (683) [b]   4,558
    Total operating expenses              43,170    (5,034)      38,136
Income from operations                    12,766     5,844       18,610
Interest & other income, net               1,028        --        1,028
Income before income taxes                13,794     5,844       19,638
Provision for income taxes                (6,647)   (1,062) [c]  (7,709)
Net income                                $7,147    $4,782      $11,929
Basic net income per share                 $0.09                  $0.15
Shares used in computing basic net income
 per share                                81,125                 81,125
Diluted net income per share               $0.08                  $0.14
Shares used in computing diluted net
 income per share                         86,390                 86,390
Certain measures as a percentage of revenue:
  Product gross margin                     79.4%                  80.4%
  Maintenance and service gross margin     72.8%                  74.7%
  Gross Margin                             78.1%                  79.3%
  Research & development expenses          16.7%                  14.1%
  Sales & marketing expenses               36.3%                  32.8%
  General and administrative expenses       7.3%                   6.4%
  Operating expenses                       60.3%                  53.3%
  Income from operations                   17.8%                  26.0%

Notes:  [a] reflects amortization of intangible assets
        [b] reflects amortization of stock-based compensation
        [c] primarily reflects the GAAP adjustments to provision for
            income taxes related to stock based compensation and
            amortization of intangible assets.


                     NetScreen Technologies, Inc.
           Condensed Consolidated Statements of Operations
                   GAAP Reconciliation to Pro Forma
                 Three Months Ended December 31, 2002
       (in thousands, except per share amounts and percentages)

                                                    GAAP to
                                                    Pro Forma
                                            GAAP   Adjustments   Pro Forma
Revenues:
  Product                                  $42,451                $42,451
  Maintenance and service                    8,619                  8,619
    Total revenues                          51,070                 51,070
Cost of revenues:
                                                      (186) [a]
  Product                                    9,283    (411) [b]     8,686
  Maintenance and service                    2,417    (277) [b]     2,140
    Total cost of revenues                  11,700    (874)        10,826
Gross margin                                39,370     874         40,244
Operating expenses:
                                                       (23) [a]
  Research & development                     9,782  (1,983) [b]     7,776
                                                       (35) [a]
  Sales & marketing                         20,162  (2,697) [b]    17,430
  General and administrative                 4,191    (724) [b]     3,467
    Total operating expenses                34,135  (5,462)        28,673
Income from operations                       5,235   6,336         11,571
Interest & other income, net                 1,063      --          1,063
Income before income taxes                   6,298   6,336         12,634
Provision for income taxes                  (3,086)  1,374  [c]    (1,712)
Net income                                  $3,212  $7,710        $10,922
Basic net income per share                   $0.04                  $0.14
Shares used in computing basic net income
 per share                                  77,003                 77,003
Diluted net income per share                 $0.04                  $0.13
Shares used in computing diluted net income
 per share                                  82,893                 82,893
Certain measures as a percentage of revenue:
  Product gross margin                       78.1%                  79.5%
  Maintenance and service gross margin       72.0%                  75.2%
  Gross Margin                               77.1%                  78.8%
  Research & development expenses            19.2%                  15.2%
  Sales & marketing expenses                 39.5%                  34.1%
  General and administrative expenses         8.2%                   6.8%
  Operating expenses                         66.8%                  56.1%
  Income from operations                     10.3%                  22.7%

Notes:  [a] reflects amortization of intangible assets
        [b] reflects amortization of stock-based compensation
        [c] primarily reflects the GAAP adjustments to provision for
            income taxes related to stock based compensation and
            amortization of intangible assets.


                     NETSCREEN TECHNOLOGIES, INC.
Estimated Incremental Operating Expenses Related to the Acquisition of
                          Neoteris, Inc. (3)
                            (in thousands)

                                         Three Months Ended Dec. 31, 2003
                                             Low (1)         High (2)
                                               $               $
GAAP incremental operating expense            8,672           7,272
  Stock based compensation                   (2,370)         (2,370)
  Amortization of intangible assets            (502)           (502)
Pro forma incremental operating expenses      4,000           4,400

(1) Low guidance reflects the high end of the estimated incremental
    operating expenses.
(2) High guidance reflects the low end of the estimated incremental
    operating expenses.
(3) Acquisition closed on November 14, 2003.


                         NETSCREEN TECHNOLOGIES, INC.
                               Guidance Summary
    Reconciliation of GAAP to Pro Forma Gross Margin and Operating Expense
                                 (Unaudited)
                      (in thousands, except percentages)
                                           Three Months Ending Mar. 31, 2004
                                              Low (1)           High (2)
                                                   % of                % of
                                            $     Revenue      $      Revenue
    Revenues - GAAP and Pro forma         89,119   100.0%     90,739   100.0%
    GAAP gross margin                     66,212    74.3%     68,366    75.3%
      Stock based compensation               558     0.6%        558     0.6%
      Amortization of intangible assets    1,852     2.1%      1,852     2.0%
    Pro Forma gross margin                68,622    77.0%     70,776    78.0%
    GAAP operating expenses               58,527    65.7%     57,646    63.5%
      Stock based compensation            (7,229)   -8.1%     (7,229)   -8.0%
      Amortization of intangible assets   (1,063)   -1.2%     (1,063)   -1.2%
    Pro forma operating expenses          50,235    56.4%     49,354    54.4%

    Notes:
      (1) Low guidance reflects 10% revenue increase over the prior quarter,
          77% pro forma gross margin and 14% pro forma operating expense
          increase over the prior quarter.
      (2) High guidance reflects 12% revenue increase over the prior quarter,
          78% pro forma gross margin and 12% pro forma operating expense
          increase over the prior quarter.


About NetScreen Technologies

NetScreen Technologies, Inc., is a leading developer of network security and access solutions for enterprises and carriers worldwide. NetScreen's solutions offer customers multiple layers of network and application-level protection in purpose-built appliances and systems that optimize performance and reduce total operating costs. NetScreen is located at 805 11th Ave., Sunnyvale, Calif., 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.

This press release contains forward-looking statements about events and circumstances that have not yet occurred. For example, words such as “will”, “can”, “allowing”, “believes”, “continue” and “continuing”, 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.