Isilon Systems Announces 2010 Third Quarter Financial Results

Posts Record Revenue and Profitability

Oct 21, 2010, 06:30 ET from Isilon

SEATTLE, Oct. 21 /PRNewswire-FirstCall/ -- Isilon® (Nasdaq: ISLN) today announced its financial results for the quarter ended September 30, 2010. Revenue for the quarter was $53.8 million, up 19% sequentially compared to $45.1 million in the second quarter of 2010 and up 77% from $30.5 million in the third quarter of 2009.  

"Isilon's record third quarter growth is the strongest indication to date that there is a fundamental shift occurring in the enterprise data center," said Sujal Patel, chief executive officer, Isilon.  "Enterprises have grown increasingly aware of the critically important role that scale-out architectures play in the future of their rapidly expanding data centers," said Patel. "As the leading provider of unified scale-out storage solutions, Isilon is very well-positioned to take an increasing share of this expanding sector."  

Financial results for the third quarter of 2010 included the following:  

  • Gross margin for the third quarter of 2010 was 63.5%, compared with 62.0% in the second quarter of 2010 and 56.9% in the third quarter of 2009.
  • Net income for the third quarter of 2010 was $4.0 million, or $0.05 per diluted share, compared with net income of $2.0 million, or $0.03 per diluted share in the second quarter of 2010.  Net loss in the third quarter of 2009 was $4.9 million, or $0.08 per diluted share. The third quarter 2009 net loss per share included $2.0 million, or $0.03 per share, of expenses related to the class action legal settlement.  Non-GAAP net income for the third quarter of 2010 was $6.9 million, or $0.09 per diluted share, compared with non-GAAP net income of $4.1 million, or $0.06 per diluted share in the second quarter of 2010.  Non-GAAP net loss in the third quarter of 2009 was $1.4 million, or $0.02 per diluted share.
  • In connection with the SEC's civil action against our former CFO, the Company, pursuant to its indemnification obligations, has incurred and will likely continue to incur substantial legal expenses.  Legal expenses associated with such indemnification obligations, along with discovery related costs incurred by the Company and certain other related costs, net for the third quarter of 2010 were $2.3 million, or $0.03 per diluted share, compared with $0.1 million, or $0.00 per diluted share, in the third quarter of 2009. These expenses are included in both our GAAP and non-GAAP results of operations.
  • Cash flows generated from operations in the third quarter of 2010 were $13.1 million compared with $10.0 million in the second quarter of 2010 and $0.9 million in the third quarter of 2009.  
  • As of September 30, 2010, cash, cash equivalents and marketable securities were $114 million, compared with $100 million as of June 30, 2010.

Conference Call

Isilon management will host a conference call today at 5:30 a.m. PT (8:30 a.m. ET) to discuss Isilon's third quarter financial results.  The conference call will be webcast on the Investor Relations section of Isilon's website at http://www.isilon.com/company/ where it will be archived. In addition, the live conference call will be accessible by telephone at 866-770-7051 or 617-213-8064, passcode 80081247.

A replay of the call will be available by telephone approximately two hours after the call ends until 12:00 midnight ET, October 28, 2010, at 888-286-8010 or 617-801-6888. The replay passcode is 20621487.

About Isilon

As a global leader in scale-out storage, Isilon delivers powerful yet simple solutions for enterprises that want to manage their data, not their storage. Learn more at http://www.isilon.com.

Use of Non-GAAP Financial Measures  

To supplement our consolidated financial statements prepared in accordance with GAAP, this press release includes non-GAAP gross margin, non-GAAP income (loss) from operations, non-GAAP net income (loss), and non-GAAP income (loss) per share.  Isilon provides non-GAAP information to enhance investors' overall understanding of the company's current financial performance and the company's prospects for the future and to aid in comparing current operating results with those of past periods.  The company believes the non-GAAP measures provide useful information to management and investors by excluding certain items that may not be indicative of Isilon's core operating results and business outlook.  

Non-GAAP gross margin, non-GAAP income (loss) from operations, non-GAAP net income (loss), and non-GAAP income (loss) per share exclude stock-based compensation expenses, restructuring charges and expenses related to the settlement of our shareholder litigation. Isilon excludes stock-based compensation expenses from its non-GAAP measures primarily because they are non-cash expenses that Isilon does not believe reflect core operating results.  Stock-based compensation expense is dependent on a number of factors over which management has limited control and is not a factor management utilizes in operating the business.  Non-GAAP results also exclude a restructuring charge related to expenses incurred during the second quarter of 2009 in connection with a reduction in the company's workforce, and charges from the settlement of the shareholder class action incurred during the third quarter of 2009. The restructuring and legal settlement charges are excluded because management believes that they are not indicative of on-going results.

These non-GAAP measures are not calculated in accordance with GAAP and should be considered supplemental to, and not a substitute for, measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies.  In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles.  Isilon believes that non-GAAP measures have inherent limitations in that they do not reflect all of the amounts associated with Isilon's results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate Isilon's results of operations in conjunction with the corresponding GAAP measures.  We compensate for these limitations by analyzing current and future results on a GAAP basis as well as a non-GAAP basis, prominently disclosing GAAP results and providing reconciliations from GAAP results to non-GAAP measures.  We expect to continue to incur expenses similar to the non-GAAP adjustments described above and the exclusion or inclusion of these items from our non-GAAP financial measures should not be construed as an inference that these costs are unusual or infrequent.

A table following the financial statements provides a reconciliation of the most directly comparable GAAP measures to the non-GAAP measures used by management.

Safe Harbor for Forward Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning our ability to increase market share,  foundation for continued growth, and our expectations regarding ongoing legal expenses.    These statements are not guarantees of future performance, but are based on management's expectations as of the date of this press release and assumptions that are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.  Forward-looking statements involve risks, uncertainties, and assumptions.  If the risks or uncertainties ever materialize, or the assumptions prove incorrect, our actual results may differ materially from those expressed or implied by our forward-looking statements.  There can be no assurances that forward-looking statements will be achieved.  Important factors that could cause actual results to differ materially from those indicated in forward-looking statements include the following: risks associated with anticipated growth in data;  competitive factors, including changes in the competitive environment, pricing pressures, sales cycle time and increased competition; our ability to build and expand our direct sales operations and reseller distribution channels; our ability to build sales backlogs and improve sales linearity; general economic and industry conditions, including expenditure trends for storage-related products; new product introductions and our ability to develop and deliver innovative products; our ability to provide high-quality service and support offerings; our reliance on a limited number of suppliers and our ability to forecast demand for our products and potential shortages or price fluctuations in our supply chain; risks associated with international operations; and macro-economic conditions.    These and other important risk factors and assumptions are detailed in documents filed with the Securities and Exchange Commission, including our most recent  Form 10-Q,  our Annual Report on Form 10-K for 2009 and other reports and filings with the Securities and Exchange Commission, and could cause actual results to vary from expectations.  The Company makes no commitment to revise or update any forward-looking statements in order to reflect subsequent events or circumstances.

Isilon Systems, Inc.

Consolidated Statements of Operations

(unaudited)

(in thousands, except per share data)

Three Months Ended

Nine Months Ended

September  30,

2010

September 30,

2009

September  30,

2010

September 30,

2009

Revenue:

Product

$             42,912

$            22,835

$           107,790

$            64,531

Services

10,934

7,669

30,397

21,849

Total revenue

53,846

30,504

138,187

86,380

Cost of revenue:

Product

15,228

9,631

40,038

29,691

Services (1)

4,435

3,510

11,708

11,972

Total cost of revenue

19,663

13,141

51,746

41,663

Gross profit

34,183

17,363

86,441

44,717

Operating expenses:

Research and development  (1)

6,745

5,902

18,597

18,148

Sales and marketing  (1)

17,348

10,843

45,557

32,443

General and administrative (1)

4,070

3,439

10,968

10,776

Restructuring charges

-

-

-

357

Legal settlement

-

2,000

-

2,000

Legal expenses associated with securities/derivative

litigation, indemnification obligations and other related

costs, net

2,300

124

3,551

405

Total operating expenses

30,463

22,308

78,673

64,129

Income (loss) from operations

3,720

(4,945)

7,768

(19,412)

Other income (expense), net

332

164

(239)

702

Income (loss) before income tax expense

4,052

(4,781)

7,529

(18,710)

Income tax expense

(64)

(86)

(413)

(304)

Net income (loss)

$               3,988

$            (4,867)

$               7,116

$          (19,014)

Net income (loss) per share, basic

$                 0.06

$              (0.08)

$                 0.11

$              (0.30)

Net income (loss) per share, diluted

$                 0.05

$              (0.08)

$                 0.10

$              (0.30)

Shares used in computing basic net income (loss)   per share

66,036

64,550

65,533

64,184

Shares used in computing diluted net income (loss)   per share

73,547

64,550

71,697

64,184

(1) Includes stock-based compensation as follows:

Cost of revenue

$                  118

$                   60

$                  299

$                 202

Research and development

531

402

1,602

1,256

Sales and marketing

1,247

418

2,692

1,339

General and administrative

1,048

545

2,260

1,536

Isilon Systems, Inc.

Consolidated Balance Sheets

(unaudited)

(in thousands)

As of

September 30, 2010

December  31, 2009

ASSETS

Current assets:

Cash and cash equivalents

$            19,843

$           23,135

Marketable securities

93,963

56,019

Trade receivables, net

26,508

20,824

Inventories

7,526

5,636

Other current assets

7,053

5,819

Total current assets

154,893

111,433

Property and equipment, net

6,584

6,660

Total assets

$          161,477

$         118,093

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$            10,589

$             7,313

Accrued liabilities

6,024

5,155

Accrued compensation and related benefits

9,654

6,828

Deferred revenue

32,313

24,421

Total current liabilities

58,580

43,717

Deferred revenue, net of current portion

23,096

13,380

Deferred rent, net of current portion

2,247

2,717

Total liabilities

83,923

59,814

Commitments and contingencies

Stockholders' equity:

Common stock

1

1

Additional paid-in capital

217,353

205,192

Accumulated other comprehensive loss

(375)

(373)

Accumulated deficit

(139,425)

(146,541)

Total stockholders' equity

77,554

58,279

Total liabilities and stockholders' equity

$          161,477

$         118,093

Isilon Systems, Inc.

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

Three Months Ended

Nine Months Ended

September 30, 2010

September 30, 2009

September 30, 2010

September 30, 2009

(in thousands)

(in thousands)

Cash flows from operating activities

Net income (loss)

$               3,988

$               (4,867)

$                7,116

$             (19,014)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization

1,014

1,445

3,242

4,629

Amortization of discount on marketable securities

372

187

926

327

Stock-based compensation expense

2,943

1,425

6,852

4,333

Changes in operating assets and liabilities:

Accounts receivable, net

(6,339)

(2,361)

(5,697)

(3,519)

Inventories, net

(574)

62

(1,890)

6,467

Other current assets

2,397

(37)

(1,232)

(6)

Accounts payable

413

1,164

2,814

(840)

Accrued liabilities, compensation and deferred

rent

929

1,404

3,231

1,877

Deferred revenue

7,931

2,457

17,608

5,394

Net cash provided by (used in) operating activities

13,074

879

32,970

(352)

Cash flows from investing activities

Purchases of property and equipment

(1,513)

(212)

(2,757)

(1,483)

Purchases of marketable securities

(34,707)

(9,110)

(95,876)

(35,092)

Proceeds from sales and maturities of marketable securities

21,698

6,850

57,007

31,175

Net cash (used in) investing activities

(14,522)

(2,472)

(41,626)

(5,400)

Cash flows from financing activities

Proceeds from exercise of common stock

1,626

1,139

3,695

1,566

Proceeds from employee stock purchase plan

1,103

-

1,676

-

Net cash provided by financing activities

2,729

1,139

5,371

1,566

Effect of exchange rate changes on cash and cash equivalents

63

9

(7)

110

Net increase (decrease) in cash and cash equivalents

1,344

(445)

(3,292)

(4,076)

Cash and cash equivalents at beginning of period

18,499

30,711

23,135

34,342

Cash and cash equivalents at end of period

$             19,843

$               30,266

$              19,843

$               30,266

Isilon Systems, Inc.

Reconciliation of GAAP to non-GAAP results

(in thousands, except percentages and per share data)

Gross margin %

Operating Expenses

Income (loss) from operations

Net income (loss)

Net income (loss) per common share, diluted

Three Months Ended

September 30, 2010

GAAP

63.5%

$      30,463

3,720

$        3,988

$                  0.05

Adjustments:

Stock-based

compensation

0.2%

(2,826)

2,944

2,944

$                  0.04

Non-GAAP

63.7%

$      27,637

$        6,664

$        6,932

$                  0.09

June 30, 2010

GAAP

62.0%

$      25,507

2,429

$        2,013

$                  0.03

Adjustments:

Stock-based

compensation

0.2%

(1,988)

2,095

2,095

$                  0.03

Non-GAAP

62.2%

$      23,519

$        4,524

$        4,108

$                  0.06

September 30, 2009

GAAP

56.9%

$      22,308

$      (4,945)

$      (4,867)

$                (0.08)

Adjustments:

Stock-based

compensation

0.2

(1,365)

1,425

1,425

0.03

Legal settlement

-

(2,000)

2,000

2,000

0.03

Non-GAAP

57.1%

$      18,943

$      (1,520)

$      (1,442)

$                (0.02)

Nine Months Ended

September 30, 2010

GAAP

62.6%

$      78,673

$        7,768

$        7,116

$                  0.10

Adjustments:

Stock-based

compensation

0.2

(6,554)

6,853

6,853

$                  0.09

Non-GAAP

62.8%

$      72,119

$      14,621

$      13,969

$                  0.19

September 30, 2009

GAAP

51.8%

$      64,129

$    (19,412)

$    (19,014)

$                (0.30)

Adjustments:

Stock-based

compensation

0.2

(4,131)

4,333

4,333

0.07

Restructuring charges

-

(357)

357

357

0.01

Legal settlement

-

(2,000)

2,000

2,000

0.04

Non-GAAP

52.0%

$      57,641

$    (12,722)

$    (12,324)

$                (0.18)

SOURCE Isilon



RELATED LINKS

http://www.isilon.com