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Radisys Returns to Non-GAAP Profitability

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Radisys Corporation (NASDAQ:RSYS) , a market leader providing wireless infrastructure solutions for telecom, aerospace and defense applications, announced third quarter 2014 revenues of $50.8 million and a GAAP net loss of $4.5 million or $0.12 per diluted share. Third quarter non-GAAP profit was $0.7 million or $0.02 per diluted share.

Commenting on third quarter financial and business highlights, Brian Bronson, Radisys President and Chief Executive Officer stated, “As we continue the transformation of Radisys, I’m pleased we met the guidance set in August and returned the company to non-GAAP profitability. Our continued progress in driving our strategy combined with a relentless focus on improving operational efficiencies and reducing cost have yielded steadily improving financial results over the prior four quarters.

  • Q3 Revenue increased sequentially with improvement in Software-Solutions revenue enabled primarily by Media Resource Function (MRF) deployments in support of Voice over LTE applications.
  • During the quarter, we announced several next generation platforms products as well as our innovative FlowEngine software, which enables wire-speed packet classification and load balancing. Taken together, we are uniquely positioned to capitalize on telecom’s shift towards software defined networking and network function virtualization architectures.
    • In October, a large North American carrier placed their first lab order for product that incorporates these advanced capabilities. We expect to ship these units in the first half of 2015.
  • We have 30+ MRF trials in support of both Voice over LTE (VoLTE) and WebRTC deployments that leverage our media processing expertise with either our full media processing platform or our virtualized software-only MRF. These trials continue to progress well with certain customers preparing for 2014 and 2015 network deployments.
  • GAAP R&D and SG&A expense was $16.2 million, with non-GAAP expense of $15.5 million at its lowest level in eight years. This lower spending level has been enabled by efficiency gains and continues to support the investment necessary to drive our long-term strategy.
  • Our contract manufacturing transition, which in large part was completed at the end of September, is expected to result in approximately $6 million in annual cost of goods sold savings or approximately 3 gross margin points as we exit 2014.
  • Inventory decreased sequentially by nearly $3.0 million to $17.0 million and represents over a 30% reduction from the end of 2013. We expect to further reduce inventory during the fourth quarter.
  • Cash and cash equivalents were $31.9 million at the end of the third quarter.”

Fourth Quarter Outlook

  • Fourth quarter revenue is expected between $47 million and $53 million.
  • Non-GAAP gross margin in the fourth quarter is expected between 36% and 39% of sales and non-GAAP R&D and SG&A expenses are expected to approximate $16 million.
  • Fourth quarter non-GAAP earnings are expected to range from breakeven to a profit of $0.12 per share and our cash balance in the quarter is expected to remain relatively unchanged.

Mr. Bronson continued, “Over the last two years we have made significant strategic progress in our core focus areas and have significantly improved the operational execution of the company. At the same time, we have simplified and dramatically reduced our cost structure by nearly 40%. All of these actions combined to enable us to return to non-GAAP profitability in the third quarter and moving forward.”

Conference Call and Webcast Information

Radisys will host a conference call on Thursday, November 6, 2014 at 5:00 p.m. ET to discuss its third quarter 2014 results and financial outlook.

To participate in the live conference call, dial 888-333-0027 in the U.S. and Canada or 706-634-4990 for all other countries and reference conference ID # 24800971. The live conference call will also be available via webcast on the Radisys investor relations website at http://investor.radisys.com/.

A replay of the conference call will be available two hours after the call is complete until 11:59 p.m. on November 20, 2014. To access the replay, dial 855-859-2056 or 404-537-3406 and reference conference ID# 24800971. A replay of the webcast will be available for an extended period of time on the Radisys investor relations website at http://investor.radisys.com/.

Forward-Looking Statements

This press release contains forward-looking statements, including statements about the Company’s business strategy, financial outlook and expectations for the fourth quarter 2014 and statements related to expense savings or reductions, operational and administrative efficiencies, revenue growth, margin improvement, financial performance and other attributes of the Company. These forward-looking statements are based on the Company’s expectations and assumptions, as of the date such statements are made, regarding the Company’s future operating performance and financial condition, the economy and other future events or circumstances. Actual results could differ materially from the outlook guidance and expectations in these forward-looking statements as a result of a number of risk factors, including, among others, (a) the Company’s dependence on certain customers and high degree of customer concentration, (b) the Company’s use of one contract manufacturer for a significant portion of the production of its products, including the success of transitioning contract manufacturing partners, (c) the anticipated amount and timing of revenues from design wins due to the Company’s customers’ product development time, cancellations or delays, (d) matters affecting the embedded system industry, including changes in industry standards, changes in customer requirements and new product introductions, (e) actions by regulatory authorities or other third parties, (f) cash generation, (g) changes in tariff and trade policies and other risks associated with foreign operations, (h) fluctuations in currency exchange rates, (i) the ability of the Company to successfully complete any restructuring, acquisition or divestiture activities, (j) other factors listed in the Company’s reports filed with the Securities and Exchange Commission (SEC), including those listed under “Risk Factors” in Radisys’ Annual Report on Form 10-K for the year ended December 31, 2013, copies of which may be obtained by contacting the Company at 503-615-1100, from the Company’s investor relations web site at http://investor.radisys.com/, or at the SEC’s website at http://www.sec.gov. Although forward-looking statements help provide additional information about Radisys, investors should keep in mind that forward-looking statements are inherently less reliable than historical information. Should one or more of these risks or uncertainties materialize (or the other consequences of such a development worsen), or should underlying assumptions prove incorrect, actual outcomes may vary materially from those forecasted or expected. The Company believes its expectations and assumptions are reasonable, but there can be no assurance that the expectations reflected herein will be achieved. All information in this press release is as of November 6, 2014. The Company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the Company’s expectations.

Non-GAAP Financial Measures

To supplement its consolidated financial statements in accordance with generally accepted accounting principles (GAAP), the Company’s earnings release contains non-GAAP financial measures that exclude certain expenses, gains and losses, such as the effects of (a) amortization of acquired intangible assets, (b) stock-based compensation expense, (c) restructuring and other charges (reversals), net, (d) non-cash income tax expense, and (e) gain on life insurance asset. The Company believes that the use of non-GAAP financial measures provides useful information to investors to gain an overall understanding of its current financial performance and its prospects for the future. Specifically, the Company believes the non-GAAP results provide useful information to both management and investors by excluding certain expenses, gains and losses that the Company believes are not indicative of its core operating results. In addition, non-GAAP financial measures are used by management for budgeting and forecasting as well as subsequently measuring the Company’s performance, and the Company believes that it is providing investors with financial measures that most closely align to its internal measurement processes. These non-GAAP measures are considered to be reflective of the Company’s core operating results as they more closely reflect the essential revenue-generating activities of the Company and direct operating expenses (resulting in cash expenditures) needed to perform these revenue-generating activities. The Company also believes, based on feedback provided to the Company during its earnings calls’ Q&A sessions and discussions with the investment community, that the non-GAAP financial measures it provides are necessary to allow the investment community to construct their valuation models to better align its results and projections with its competitors and market sector, as there is significant variability and unpredictability across companies with respect to certain expenses, gains and losses.

The non-GAAP financial information is presented using a consistent methodology from quarter-to-quarter and year-to-year. These measures should be considered in addition to results prepared in accordance with GAAP. In addition, these non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles. The Company believes that non-GAAP financial measures have limitations in that they do not reflect all of the amounts associated with the Company’s results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate the Company’s results of operations in conjunction with the corresponding GAAP financial measures.

A reconciliation of non-GAAP information to GAAP information is included in the tables below. The non-GAAP financial measures disclosed by the Company should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP, and reconciliations between GAAP and non-GAAP financial measures included in this earnings release should be carefully evaluated. The non-GAAP financial measures used by the Company may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies.

About Radisys

Radisys (NASDAQ:RSYS) is a market leader enabling wireless infrastructure solutions for telecom, aerospace, and defense applications. Radisys’ market-leading ATCA, MRF (Media Resource Function), COM Express, and Network Appliance platforms coupled with Trillium Software and services enable customers to bring high-value products and services to market faster with lower investment and risk.

Radisys(R) and Trillium(R) are registered trademarks of Radisys.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2014 2013 2014 2013
Revenues $ 50,805 $ 54,109 $ 144,568 $ 187,725
Cost of sales:
Cost of sales 34,052 37,874 100,551 127,936
Amortization of purchased technology 2,056 2,069 6,165 6,504
Gross margin 14,697 14,166 37,852 53,285
Operating expenses:
Research and development 7,657 11,456 24,484 35,011
Selling, general and administrative 8,554 10,522 27,103 31,145
Intangible assets amortization 1,260 1,303 3,817 3,911
Restructuring and other charges, net 1,329 2,881 3,444 4,037
Loss from operations (4,103 ) (11,996 ) (20,996 ) (20,819 )
Interest expense (317 ) (300 ) (949 ) (913 )
Other income, net 463 200 799 573
Loss before income tax expense (3,957 ) (12,096 ) (21,146 ) (21,159 )
Income tax expense 512 624 1,968 2,230
Net loss $ (4,469 ) $ (12,720 ) $ (23,114 ) $ (23,389 )
Net loss per share:
Basic $ (0.12 ) $ (0.44 ) $ (0.68 ) $ (0.82 )
Diluted $ (0.12 ) $ (0.44 ) $ (0.68 ) $ (0.82 )
Weighted average shares outstanding
Basic 36,332 28,931 34,097 28,692
Diluted 36,332 28,931 34,097 28,692
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)

September 30,

2014

December 31,

2013

ASSETS
Current assets:
Cash and cash equivalents $ 31,938 $ 25,482
Accounts receivable, net 43,860 41,359
Inventories and inventory deposit, net 17,046 25,409
Other current assets 10,327 8,443
Total current assets 103,171 100,693
Property and equipment, net 10,597 14,854
Intangible assets, net 46,529 56,510
Other assets, net 3,541 4,128
Total assets $ 163,838 $ 176,185
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 31,559 $ 35,081
Deferred revenue 6,124 8,167
Other accrued liabilities 13,044 15,525
Line of credit 10,000 15,000
Convertible senior notes 18,000
Total current liabilities 78,727 73,773
Convertible senior notes 18,000
Other long-term liabilities 3,132 3,276
Total liabilities 81,859 95,049
Shareholders’ equity:
Common stock 333,281 309,370
Accumulated deficit (252,204 ) (229,090 )
Accumulated other comprehensive income 902 856
Total shareholders’ equity 81,979 81,136
Total liabilities and shareholders’ equity $ 163,838 $ 176,185
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
2014 2013 2014 2013
Cash flows from operating activities:
Net loss $ (4,469 ) $ (12,720 ) $ (23,114 ) $ (23,389 )
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 5,021 5,480 15,357 16,586
Stock-based compensation expense 778 1,639 3,359 3,761
Write-off of purchased computer software 2,868
Net gain from sale of software assets (1,532 )
Other 44 (87 ) 3,614 58
Changes in operating assets and liabilities:
Accounts receivable (1,767 ) 3,272 (2,332 ) 9,943
Inventories 1,841 (1,066 ) 6,179 2,027
Other receivables 3,784 164 (3,312 ) 395
Accounts payable (3,071 ) 101 (3,391 ) (4,860 )
Deferred revenue (6,379 ) 1,070 (2,043 ) (1,673 )
Other operating assets and liabilities 2,568 952 (1,289 ) (279 )
Net cash (used in) provided by operating activities (1,650 ) (1,195 ) (6,972 ) 3,905
Cash flows from investing activities:
Capital expenditures (584 ) (965 ) (1,861 ) (4,343 )
Proceeds from sale of software assets 25 1,107
Net cash used in investing activities (584 ) (940 ) (1,861 ) (3,236 )
Cash flows from financing activities:
Borrowings (payments) on line of credit (5,000 ) 15,000
Repayment of convertible senior notes (16,919 )
Proceeds from issuance of common stock 61 208 21,081 626
Other financing activities, net (250 ) (370 ) (551 ) (783 )
Net cash provided by (used in) financing activities (189 ) (162 ) 15,530 (2,076 )
Effect of exchange rate changes on cash and cash equivalents (245 ) (70 ) (241 ) (216 )
Net increase (decrease) in cash and cash equivalents (2,668 ) (2,367 ) 6,456 (1,623 )
Cash and cash equivalents, beginning of period 34,606 33,926 25,482 33,182
Cash and cash equivalents, end of period $ 31,938 $ 31,559 $ 31,938 $ 31,559
REVENUES BY GEOGRAPHY
(In thousands, unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2014 2013 2014 2013
North America $ 17,730 34.9 % $ 21,975 40.6 % $ 54,164 37.5 % $ 79,189 42.2 %
Asia Pacific 21,303 41.9 19,257 35.6 54,398 37.6 65,211 34.7
Europe, the Middle East and Africa 11,772 23.2 12,877 23.8 36,006 24.9 43,325 23.1
Total $ 50,805 100.0 % $ 54,109 100.0 % $ 144,568 100.0 % $ 187,725 100.0 %
REVENUES BY PRODUCT GROUP
(In thousands, unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2014 2013 2014 2013
ATCA Platforms $ 20,736 40.8 % $ 27,744 51.3 % $ 66,894 46.3 % $ 94,284 50.2 %
Software-Solutions 11,620 22.9 9,563 17.7 29,861 20.6 33,824 18.0
COM Express and Rackmount Server 15,923 31.3 13,380 24.7 39,840 27.6 42,225 22.5
Other Products 2,526 5.0 3,422 6.3 7,973 5.5 17,392 9.3
Total Revenues $ 50,805 100.0 % $ 54,109 100.0 % $ 144,568 100.0 % $ 187,725 100.0 %
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES AND AS A PERCENT OF REVENUES
(In thousands, except per share amounts, unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2014 2013 2014 2013
GROSS MARGIN:
GAAP gross margin $ 14,697 28.9 % $ 14,166 26.2 % $ 37,852 26.2 % $ 53,285 28.4 %
(a) Amortization of acquired intangible assets 2,056 2,069 6,165 6,504
(b) Stock-based compensation 44 167 326 408
(c) Restructuring and other charges, net
Non-GAAP gross margin $ 16,797 33.1 % $ 16,402 30.3 % $ 44,343 30.7 % $ 60,197 32.1 %
RESEARCH AND DEVELOPMENT:
GAAP research and development $ 7,657 15.1 % $ 11,456 21.2 % $ 24,484 16.9 % $ 35,011 18.7 %
(b) Stock-based compensation 131 361 684 844
Non-GAAP research and development $ 7,526 14.8 % $ 11,095 20.5 % $ 23,800 16.5 % $ 34,167 18.2 %
SELLING, GENERAL AND ADMINISTRATIVE:
GAAP selling, general and administrative $ 8,554 16.8 % $ 10,522 19.4 % $ 27,103 18.7 % $ 31,145 16.6 %
(b) Stock-based compensation 603 1,111 2,349 2,509
Non-GAAP selling, general and administrative $ 7,951 15.7 % $ 9,411 17.4 % $ 24,754 17.1 % $ 28,636 15.3 %
INCOME (LOSS) FROM OPERATIONS:
GAAP loss from operations $ (4,103 ) (8.1 )% $ (11,996 ) (22.2 )% $ (20,996 ) (14.5 )% $ (20,819 ) (11.1 )%
(a) Amortization of acquired intangible assets 3,316 3,372 9,982 10,415
(b) Stock-based compensation 778 1,639 3,359 3,761
(c) Restructuring and acquisition-related charges, net 1,329 2,881 3,444 4,037
Non-GAAP income (loss) from operations $ 1,320 2.6 % $ (4,104 ) (7.6 )% $ (4,211 ) (2.9 )% $ (2,606 ) (1.4 )%
NET INCOME (LOSS):
GAAP net loss $ (4,469 ) (8.8 )% $ (12,720 ) (23.5 )% $ (23,114 ) (16.0 )% $ (23,389 ) (12.5 )%
(a) Amortization of acquired intangible assets 3,316 3,372 9,982 10,415
(b) Stock-based compensation 778 1,639 3,359 3,761
(c) Restructuring and acquisition-related charges, net 1,329 2,881 3,444 4,037
(d) Income taxes 93 233 689 1,206
(e) Gain on life insurance asset (361 ) (361 )
Non-GAAP net income (loss) $ 686 1.4 % $ (4,595 ) (8.5 )% $ (6,001 ) (4.2 )% $ (3,970 ) (2.1 )%
GAAP weighted average diluted shares 36,332 28,931 34,097 28,692
Escrow shares
Dilutive equity awards included in
non-GAAP earnings per share 524
Non-GAAP weighted average diluted shares 36,856 28,931 34,097 28,692
GAAP net loss per share (diluted) $ (0.12 ) $ (0.44 ) $ (0.68 ) $ (0.82 )
Non-GAAP adjustments detailed above 0.14 0.28 0.50 0.68
Non-GAAP net income (loss) per share (diluted) $ 0.02 $ (0.16 ) $ (0.18 ) $ (0.14 )
RECONCILIATION OF GAAP TO NON-GAAP GUIDANCE
NET INCOME (LOSS) PER SHARE
(In millions, except per share amounts, unaudited)
Three Months Ended
December 31, 2014
Low End High End
GAAP net loss $

(4.8

) $

(0.7

)
(a) Amortization of acquired intangible assets 3.4 3.4
(b) Stock-based compensation 0.8 0.8
(c) Restructuring and acquisition-related charges, net 0.6 0.6
(d) Income taxes 0.2 0.2
Total adjustments 5.0 5.0

Non-GAAP net income

$

0.2

$

4.3

GAAP weighted average shares

36,600

36,600

Non-GAAP adjustments

500

2,600

Non-GAAP weighted average shares (diluted) (I)

37,100

39,200

GAAP net loss per share $ (0.13 ) $ (0.02 )
Non-GAAP adjustments detailed above 0.13 0.14

Non-GAAP net income per share (diluted) (I)

$ 0.00 $ 0.12
(I)

For the three months ended December 31, 2014 the diluted earnings per share calculation at the high end of the guidance range includes the effects of the Company’s 2015 convertible senior notes of 2.1 million shares and the add-back of associated interest expense of $0.2 million.

RECONCILIATION OF GAAP TO NON-GAAP GUIDANCE
GROSS MARGIN
(unaudited)

Estimates at the

midpoint of the

guidance range

Three Months Ended
December 31, 2014
GAAP 34.0 %
(a) Amortization of acquired intangible assets 3.4
(b) Stock-based compensation 0.1
Non-GAAP 37.5 %
RECONCILIATION OF GAAP TO NON-GAAP GUIDANCE
RESEARCH AND DEVELOPMENT EXPENSE AND
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
(In millions, unaudited)

Estimates at the

midpoint of the

guidance range

Three Months Ended
December 31, 2014
GAAP $

16.7

(b) Stock-based compensation (0.7 )
Non-GAAP $

16.0

The Company excludes the following expenses, reversals, gains and losses from its non-GAAP financial measures, when applicable:

(a) Amortization of acquired intangible assets: Amortization of acquisition-related intangible assets primarily relate to core and existing technologies, trade name and customer relationships that were acquired with the acquisitions of Continuous Computing and Pactolus. The Company excludes the amortization of acquisition-related intangible assets because it does not reflect the Company’s ongoing business and it does not have a direct correlation to the operation of the Company’s business. In addition, in accordance with GAAP, the Company generally recognizes expenses for internally-developed intangible assets as they are incurred, notwithstanding the potential future benefit such assets may provide. Unlike internally-developed intangible assets, however, and also in accordance with GAAP, the Company generally capitalizes the cost of acquired intangible assets and recognizes that cost as an expense over the useful lives of the assets acquired. As a result of their GAAP treatment, there is an inherent lack of comparability between the financial performance of internally-developed intangible assets and acquired intangible assets. Accordingly, the Company believes it is useful to provide, as a supplement to its GAAP operating results, non-GAAP financial measures that exclude the amortization of acquired intangibles in order to enhance the period-over-period comparison of its operating results, as there is significant variability and unpredictability across companies with respect to this expense.

(b) Stock-based compensation: Stock-based compensation consists of expenses recorded under GAAP, in connection with stock awards such as stock options, restricted stock awards and restricted stock units 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 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 the applicable GAAP surrounding share based payments; 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.

(c) Restructuring and other charges, net: Restructuring and other charges, net relates to costs associated with non-recurring events. These include costs incurred for employee severance, acquisition or divestiture activities, excess facility costs, certain legal costs, asset related charges and other expenses associated with business restructuring activities. Restructuring and other charges are excluded from non-GAAP financial measures because they are not considered core operating activities. Although the Company has engaged in various restructuring activities over the past several years, each has been a discrete event based on a unique set of business objectives. The Company does not engage in restructuring activities in the ordinary course of business. As such, the Company believes it is appropriate to exclude restructuring charges from its non-GAAP financial measures because it enhances the ability of investors to compare the Company’s period-over-period operating results.

(d) Income taxes: Non-GAAP income tax expense is equal to the Company’s projected cash tax expense. Adjustments to GAAP income tax expense are required to eliminate the recognition of tax expense from profitable entities where we utilize deferred tax assets to offset current period tax liabilities. We believe that providing this non-GAAP figure is useful to our investors as it more closely represents the true economic impact of our tax positions.

(e) Gain on life insurance asset: Includes a death benefit received from life insurance assets which were a component of the Company’s deferred compensation plan. This transaction is not part of the Company’s ordinary course of business and therefore has been excluded from its non-GAAP financial measures because it enhances the ability of investors to compare the Company’s period-over-period operating results.

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