Foundry Networks Reports Third Quarter 2008 Results

SANTA CLARA, Calif., Oct. 23 /PRNewswire-FirstCall/ -- Foundry
Networks(TM), Inc. (Nasdaq: FDRY), a performance and total solutions leader
for end-to-end switching and routing, today announced financial results for
its third quarter ended September 30, 2008.
Foundry's revenue for the third quarter of 2008 was $165.9 million,
compared to $159.5 million in the third quarter of 2007, and compared to
$160.7 million in the second quarter of 2008. Net income was $17.8 million or
$0.12 per diluted share, compared to net income of $27.6 million, or $0.18 per
diluted share in the third quarter of 2007, and net income of $18.3 million,
or $0.12 per diluted share in the second quarter of 2008.
Revenue for the first nine months of 2008 was $476.6 million, compared to
$438.6 million for the first nine months of 2007. Net income for the first
nine months of 2008 was $50.1 million, or $0.33 per diluted share, compared to
net income of $52.3 million, or $0.34 per diluted share, for the same period
in 2007.
Included in Foundry's results for the third quarter of 2008 were $13.4
million of non-cash stock-based compensation expense and $2.8 million of
expense for costs arising out of the pending acquisition by Brocade
Communications Systems, Inc. and related litigation. Excluding these expenses
and the related tax effect, non-GAAP net income in the third quarter of 2008
was $28.4 million and non-GAAP net income per diluted share was $0.19 per
share. Please refer to the table below for a reconciliation of GAAP to non-
GAAP net income.
In the third quarter of 2008, North American non-Federal commercial
revenue represented 47.6% of total revenue, representing a decrease of
approximately 15.6% from the prior quarter. This was offset by sales to the
U.S. Federal Government, which represented 28.3% of total revenue and was up
68.7% sequentially, a record high for Foundry. Sales to Europe, the Middle
East and Africa (EMEA) represented 14.7% of total revenue, representing an
increase of 2.3% from the prior quarter. Sales to Japan represented 4.1% of
total revenue while the rest of Asia represented 5.4%. The Company ended the
quarter with $1,006.7 million in cash and securities and the book-to-bill
ratio was equal to one.
About Non-GAAP Financial Measures
Foundry uses non-GAAP net income and non-GAAP net income per share for
internal planning purposes, to assess the results of its business on an
ongoing basis, to determine management compensation, and for the convenience
of analysts and investors. These measures are not in accordance with, or an
alternative to, similarly-named measures under GAAP. The measures are
intended to supplement GAAP financial information, and may be different from
non-GAAP financial measures used by other companies. Foundry believes these
measures provide useful information to its management, board of directors and
investors regarding Foundry's performance when used in conjunction with GAAP
information. Foundry believes it is useful to investors to receive
information about how items in the statement of operations are affected by
stock-based compensation, the expenses related to the stock option
investigation and restatement of the Company's consolidated financial
statements, costs related to the pending acquisition by Brocade Communications
Systems, Inc., litigation expense incurred related to an action brought
against the Board of Directors of Foundry as a result of the pending
acquisition and the related income tax effect of these items. Stock-based
compensation expense consists of expenses recorded under SFAS 123(R), "Share-
Based Payment," in connection with awards granted under the Company's equity
incentive plans and shares issued pursuant to the Company's employee stock
purchase plan. The Company excludes stock-based compensation expense from
non-GAAP financial measures because it is a non-cash measurement that does not
reflect the Company's ongoing business and because the Company believes that
investors want to understand the impact on the Company of the adoption of SFAS
123(R). The Company believes that the provision of non-GAAP information that
excludes stock-based compensation improves the ability of investors to compare
its period-over-period operating results, as there is significant variability
and unpredictability across companies with respect to this expense. The
Company also excludes legal, accounting and one-time employee compensation
costs related to the stock option investigation and restatement of the
Company's consolidated financial statements in addition to costs related to
the pending acquisition by Brocade Communications Systems, Inc. and litigation
expense related to the pending acquisition because these expenses do not
reflect the Company's ongoing business and the exclusion of these expenses
improves the ability of investors to compare its period-over-period operating
results. However, investors should be aware that non-GAAP measures have
inherent limitations and should be read in conjunction with our consolidated
financial statements prepared in accordance with GAAP.
About Foundry Networks
Foundry Networks, Inc. (NASDAQ: FDRY) is a leading provider of high-
performance enterprise and service provider switching, routing, security and
Web traffic management solutions, including Layer 2/3 LAN switches, Layer 3
Backbone switches, Layer 4-7 application switches, wireless LAN and access
points, metro and core routers. Foundry's customers include the world's
premier ISPs, metro service providers, and enterprises, including e-commerce
sites, universities, entertainment, health and wellness, government, financial
and manufacturing companies. For more information about the company and its
products, call 1.888.TURBOLAN or visit http://www.foundrynet.com.

FOUNDRY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(in thousands, except per share data)

Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Net revenue:
Product $137,494 $136,974 $398,200 $372,976
Service 28,408 22,523 78,436 65,574
Total net revenue 165,902 159,497 476,636 438,550

Cost of revenue:
Product 51,788 55,032 151,795 157,864
Service 7,333 4,395 23,112 15,305
Total cost of
revenue 59,121 59,427 174,907 173,169
Gross margin 106,781 100,070 301,729 265,381

Operating expenses:
Research and
development 24,032 18,425 67,685 57,528
Sales and marketing 46,580 38,425 140,106 116,985
General and
administrative 11,267 10,271 33,311 32,975
Other charges, net 2,773 60 2,773 5,660
Total operating
expenses 84,652 67,181 243,875 213,148

Income from operations 22,129 32,889 57,854 52,233
Interest and other
income, net 4,685 11,440 20,413 32,337

Income before provision
for income taxes 26,814 44,329 78,267 84,570
Provision for income
taxes 8,972 16,761 28,193 32,279

Net income $17,842 $27,568 $50,074 $52,291

Basic net income per
share $0.12 $0.19 $0.34 $0.35

Weighted average shares
used in computing
basic net income
per share 147,301 148,897 146,542 147,768

Diluted net income
per share $0.12 $0.18 $0.33 $0.34

Weighted average
shares used in
computing diluted net
income per share 153,103 156,486 151,098 154,776

FOUNDRY NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

September 30, December 31,
2008 2007
ASSETS (unaudited) (2)
Assets:
Cash and investments (1) $1,006,727 $965,668
Accounts receivable, net 115,611 124,234
Inventories 51,874 42,384
Prepaid expenses and other current assets 23,428 12,439
Deferred tax assets 79,731 79,214
Property and equipment, net 6,948 9,658
Other long-term assets 5,874 5,234
Total assets $1,290,193 $1,238,831

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $23,426 $23,892
Accrued payroll and related expenses 37,863 50,806
Other accrued expenses 12,045 12,382
Income taxes payable 12,296 11,860
Deferred product and support revenue 92,762 80,767
Other long-term liabilities 364 475
Total liabilities 178,756 180,182

Stockholders' equity 1,111,437 1,058,649
Total liabilities and shareholders' equity $1,290,193 $1,238,831

(1) Includes $87.4 million of long-term marketable securities at
September 30, 2008 and $58.1 million at December 31, 2007.
(2) Derived from audited condensed consolidated financial statements as
of December 31, 2007.

FOUNDRY NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)

Nine Months Ended
September 30,
2008 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $50,074 $52,291
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,378 8,395
Stock-based compensation expense 38,586 32,801
Provision for doubtful accounts 361 (359)
Provision for sales returns (533) (592)
Inventory provisions 6,050 3,138
Benefit for deferred income taxes (516) (3,243)
Excess tax benefits from stock-based
compensation (4,302) (6,342)
Changes in operating assets and liabilities:
Accounts receivable 8,795 (35,562)
Inventories (15,476) (11,144)
Prepaid expenses and other assets (12,528) (11,668)
Accounts payable (466) (3,049)
Accrued payroll and related expenses (12,943) 6,337
Income taxes payable 4,675 17,640
Other accrued expenses (449) (1,457)
Deferred product and support revenue 11,994 10,098
Net cash provided by operating
activities 80,700 57,284

CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities and purchases of investments, net 138,314 (22,905)
Purchases of property and equipment, net (2,425) (4,180)
Net cash provided by (used in)
investing activities 135,889 (27,085)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock under
stock plans, net of repurchases 46,759 38,045
Repurchase and retirement of common stock (75,580) (37,975)
Excess tax benefits from stock-based
compensation 4,302 6,342
Net cash provided by (used in)
financing activities (24,519) 6,412

Increase in cash and cash equivalents 192,070 36,611
Effect of exchange rate changes on cash 692 (312)
Cash and cash equivalents, beginning of period 331,961 258,137
Cash and cash equivalents, end of period $524,723 $294,436

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes, net of refunds
received $35,735 $25,957

FOUNDRY NETWORKS, INC.
RECONCILIATION OF GAAP TO NON-GAAP NET INCOME AND EPS (unaudited)
(in thousands, except per share data)

Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Net income excluding
certain charges and
benefits (Non-GAAP) $28,448 $35,903 $76,735 $80,770
Stock-based
compensation
expense (1) (13,427) (13,286) (38,586) (32,801)
Stock option
investigation and
related compensation
costs (2) - (60) - (13,246)
Acquisition related
costs (3) (2,773) - (2,773) -
Income tax effect 5,594 5,011 14,698 17,568
Net income $17,842 $27,568 $50,074 $52,291

Diluted net income
per share excluding
certain charges and
benefits (Non-GAAP) $0.19 $0.23 $0.51 $0.52
Stock-based compensation
expense (1) (0.09) (0.08) (0.26) (0.21)
Stock option
investigation and
related compensation
costs (2) - - - (0.09)
Acquisition related
costs (3) (0.02) - (0.02) -
Income tax effect 0.04 0.03 0.10 0.12
Diluted net income per
share $0.12 $0.18 $0.33 $0.34

(1) Includes stock-based compensation expense as follows:

Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007

Cost of product revenue $421 $385 $1,326 $1,019
Cost of service revenue 891 601 2,613 1,464
Research and development 4,899 4,956 13,617 11,734
Sales and marketing 5,150 5,108 15,122 12,705
General and
administrative 2,066 2,236 5,908 5,879
Total $13,427 $13,286 $38,586 $32,801

(2) Reflects expenses related to the independent review of our stock
option practices, which began in June 2006, and related legal,
accounting, and compensation costs as follows:

Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007

Cost of product revenue $- $- $- $250
Cost of service revenue - - - 228
Research and development - - - 3,305
Sales and marketing - - - 3,128
General and
administrative - - - 675
Other charges, net - 60 - 5,660
Total $- $60 $- $13,246

(3) Reflects expenses due to our pending acquisition by Brocade
Communications Systems, Inc. and litigation expense related to an
action brought against the Board of Directors of Foundry as a result
of the pending acquisition. The costs are included in other charges,
net in our condensed consolidated statements of income.

SOURCE Foundry Networks, Inc.

Dan Fairfax, Chief Financial Officer, +1-408-207-1700,
dfairfax@foundrynet.com, or Michael Iburg, Treasurer, +1-408-207-1305,
miburg@foundrynet.com, both of Foundry Networks, Inc.; or Investor Relations,
Brendan Lahiff of FD, +1-415-293-4425, brendan.lahiff@fd.com, for Foundry
Networks, Inc.