Avocent Reports Third Quarter 2009 Results

Avocent Corporation (NASDAQ:AVCT) today reported results for the third quarter and nine months ended September 30, 2009. The Company reported net sales of $137.6 million for the third quarter of 2009, compared to $128.6 million for the second quarter of 2009. Operational earnings per diluted share was $0.45 compared to $0.32 in the second quarter of 2009 while GAAP net income per diluted share was $0.16 compared to a net loss of $0.08 in the second quarter of 2009. (See “Use of Non-GAAP Financial Measures” discussion below.)

Third Quarter Results

Avocent’s third quarter sales increased sequentially from the second quarter of 2009 by approximately $9.0 million. Sales, however, declined 25% to $137.6 million compared with $183.0 million in the third quarter of 2008 due to ongoing weaker IT spending, particularly for our server-linked products. Total branded product sales were $100.5 million for the third quarter of 2009, a decrease of 19% from $124.6 million in the third quarter 2008. Branded product sales rose to 73% of total third quarter 2009 net sales compared with 68% in the third quarter of 2008. Total OEM product sales were $37.1 million for the third quarter of 2009, a decrease of 36% from $58.4 million in the third quarter 2008. OEM product sales represented 27% of third quarter 2009 net sales compared with 32% in the third quarter of 2008. U.S. sales declined 21% to $74.9 million and international sales were down 29% to $62.7 million compared with the third quarter of 2008.

“As we expected, our third quarter revenue increased from the second quarter due primarily to higher government product sales, and we continued to experience a soft market for our server-linked products,” stated Mike Borman, Avocent’s CEO.

Third quarter 2009 operational net income, which is income prior to acquired in-process research and development, intangible amortization, restructuring and integration costs, and stock compensation expenses, decreased 34% to $20.1 million, or $0.45 per diluted share, compared with operational net income of $30.4 million, or $0.67 per diluted share, in the third quarter of 2008. (See “Use of Non-GAAP Financial Measures” discussion below.)

GAAP net income for the third quarter of 2009 was $7.1 million, or $0.16 per diluted share, compared with GAAP net income of $11.0 million, or $0.24 per diluted share, in the third quarter of 2008. Net adjustments to reconcile operational net income to GAAP net income were $13.1 million in the third quarter of 2009, compared to $19.5 million in the third quarter of 2008.

Operational gross profit for the third quarter of 2009 was $89.3 million compared with $118.6 million in the third quarter of 2008. Operational gross margin rose to 64.9% in the third quarter of 2009 compared with 64.8% in the third quarter of 2008. GAAP gross profit for the third quarter of 2009 was $84.6 million compared with $114.0 million in the third quarter of 2008. GAAP gross margin was 61.5% in the third quarter of 2009 compared with 62.3% in the third quarter of 2008.

Research and development expenses excluding stock-based compensation, were down 18.3% to $18.7 million ($19.6 million on a GAAP basis, which includes stock-based compensation of $869,000), or 13.6% of sales, compared with $22.9 million ($24.4 million on a GAAP basis, which includes stock based compensation of $1.5 million), or 12.5% of sales, in the third quarter of 2008.

Selling, general and administrative expenses, excluding stock-based compensation declined 16.5% to $47.0 million ($52.2 million on a GAAP basis, which includes stock-based compensation of $5.2 million), or 34.2% of sales, compared with $56.3 million ($60.3 million on a GAAP basis, which includes stock-based compensation of $4.0 million), or 30.7% of sales, in the third quarter of 2008.

Operational operating income, excluding restructuring and integration costs, stock-based compensation and intangible asset amortization, was $23.7 million in the third quarter of 2009 compared with $19.2 million in the second quarter of 2009 and $39.4 million in the third quarter of 2008. GAAP operating income was $2.3 million in the third quarter of 2009 compared with $693,000 in the second quarter of 2009 and $13.8 million in the third quarter of 2008.

“Our operating income benefited from the restructuring programs we implemented earlier in 2009,” continued Mr. Borman.

Operational net income for the third quarter of 2009 includes the benefit of certain one-time items. Other income for the third quarter of 2009 included a foreign exchange gain of approximately $1.5 million, primarily the result of migrating our Touchpaper United Kingdom business to Ireland. Our income tax rate provision for the quarter included benefits of approximately $1.6 million related to receiving regulatory approvals for favorable tax treatments on certain deductions and revenues in Ireland.

Avocent’s cash flow from operations was $23.4 million in the third quarter of 2009 compared to $25.9 million in the second quarter of 2009. At the end of the third quarter, Avocent’s cash and cash equivalents totaled approximately $110 million and the outstanding balance on Avocent’s credit facility was $125 million.

Third Quarter Business Unit Results

Revenue from Management Systems was $100.3 million in the third quarter of 2009 compared to $91.0 million in the second quarter of 2009, while operating income from this unit improved to $23.5 million in the third quarter of 2009 from $18.4 million in the second quarter of 2009.

Revenue from LANDesk totaled $36.5 million in the third quarter of 2009 and contributed $4.9 million in operating profit for the quarter. This compares with revenue of $36.7 million and a contribution of $6.6 million in operating profit for the second quarter of 2009.

Use of Non-GAAP Financial Measures

To supplement Avocent’s consolidated financial statements presented in accordance with GAAP, we present investors with certain non-GAAP operational measures, including gross profit, operating expenses, and the resulting operating income, income before taxes, operational net income, and operational earnings per share, all of which primarily exclude the effects of restructuring, CEO retirement and integration costs, amortization related to purchase accounting adjustments, stock-based compensation and acquired in-process research and development expenses. Specifically, we use the following non-GAAP measures:

• The non-GAAP gross profit operational measure consists of the non-GAAP net sales operational measure described above, less cost of sales excluding the impact of stock-based compensation and intangible amortization related to purchase accounting adjustments as they relate to cost of sales.
• The non-GAAP operating expense operational measure consists of GAAP operating expenses, excluding the impact of restructuring and integration costs, stock-based compensation, goodwill impairment expense and amortization of intangible assets arising from purchase accounting.
• The non-GAAP operating income operational measure consists of GAAP operating income adjusted for the non-GAAP operational measures described above.
• The non-GAAP net income operational measure consists of GAAP net income, adjusted by the non-GAAP operational measures described above and the tax effects of these non-GAAP operational measures, plus the income tax benefit realized from deducting the amortization of LANDesk goodwill for tax purposes (which is not amortized under GAAP).
• The non-GAAP earnings per share operational measure is calculated by dividing the non-GAAP net income operational measure described above by weighted average basic and diluted shares outstanding.

We believe that excluding amortization associated with purchase accounting adjustments and the estimated goodwill impairment, as well as the tax impact of certain purchase accounting elections for prior acquisitions provides important supplemental information and an alternative presentation useful to investors’ understanding Avocent’s core operating results and trends between periods. Not only are these amortization and tax impact adjustments based on amounts assigned in purchase accounting that may have little bearing on present or future replacement costs, but they also are based on management’s estimates of remaining useful lives.

We believe that excluding restructuring, CEO retirement and integration costs (which consist primarily of one time severance compensation and related employee benefits) provides important supplemental information and an alternative presentation useful to investors’ understanding Avocent’s core operating results and trends between periods as these costs are not part of our ongoing operating expenses.

Similarly, we believe that excluding stock-based compensation expense provides important supplemental information and an alternative presentation useful to investors’ understanding of our core operating results and trends, especially when comparing those results on a consistent basis to results for previous periods and anticipated results for future periods.

We also believe that, in excluding restructuring, CEO retirement and integration costs, stock-based compensation expense, estimated goodwill impairment expense and amortization associated with purchase accounting adjustments (together with the related tax effects), our non-GAAP financial measures provide investors with transparency into the information and basis used by management and our board of directors to measure and forecast our results of operations, to compare on a consistent basis our results of operations for the current period to that of prior periods, to compare our results of operations on a more consistent basis against that of other companies in making financial and operating decisions, and to establish targets for management incentive compensation.

These non-GAAP operational measures have historically been used as internal operating targets and key performance metrics by Avocent’s senior management and board of directors as they evaluate both the performance of the consolidated financial results as well as those of individual business segments. These non-GAAP operational measures are reviewed individually as well as in total in measuring our performance against internal and external expectations for the period and the expectations for such key non-GAAP operational measures are the basis for any financial guidance provided by management for future periods. We believe that the use of each of these non-GAAP financial measures provides enhanced consistency and comparability with our past financial reports, and also facilitates comparisons with other companies in our industry, many of which use similar non-GAAP financial measures to supplement their GAAP results. We provide this information to investors to enable them to perform additional analyses of past, present and future operating performance, compare us to other companies, and evaluate our ongoing financial operations.

These non-GAAP operational measures are not calculated in accordance with GAAP, and should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. These operational measures have limitations in that they do not reflect all of the costs or reductions to revenue associated with the operations of our business as determined in accordance with GAAP. In addition, these operational measures may not be comparable to non-GAAP financial measures reported by other companies. As a result, one should not consider these measures in isolation or as a substitute for analysis of Avocent’s results as reported under GAAP. 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 operational 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. The non-GAAP operational measures are limited in that they do not include the impact of stock-based compensation expense or amortization of intangible purchase accounting adjustments.

About Avocent Corporation

Avocent delivers IT operations management solutions that reduce operating costs, simplify management and increase the availability of critical IT environments 24/7 via integrated, centralized software. Additional information is available at www.avocent.com.