Procera Networks (PKT) 8-K Procera Networks Announces Third Quarter 2014

Exhibit 99.1

Procera Networks Announces Third Quarter 2014

 Financial Results

Fremont, CA – November 3, 2014 – Procera Networks, Inc. (NASDAQ: PKT),the global Subscriber Experience company, today reported financial results for its third quarter ended on September 30, 2014.

Third Quarter 2014 Financial & Business Highlights

· Reports revenue of $16.1 million

· The ratio of bookings to revenue was above one

· Added three new service provider customers

· Received over $5 million in first-time orders from a Tier 1 European MSO for our Service Plan Assurance solution offering

· Established as a leader in the NFV (Network Function Virtualization) performance arena by the European Advanced Network Test Center at 40Gbps/s on COTS Equipment

Revenue for the third quarter of 2014 was $16.1 million, compared with $21.3 million in the third quarter of 2013.

GAAP net loss for the third quarter of 2014 was $15.7 million, or $0.77 per diluted share, which includes a $12.4 million impairment charge to write-down the goodwill and purchased intangible assets related to an acquisition, and compared with a GAAP net loss of $3.0 million, or $0.15 per diluted share, for the third quarter of 2013.  Non-GAAP net loss for the third quarter of 2014 was $1.5 million, or $0.08 per diluted share, compared with a non-GAAP net loss of $0.2 million, or $0.01 per diluted share, for the third quarter of 2013.  The ratio of bookings to revenue was above one for the third quarter of 2014.

A description of the non-GAAP financial measures and reconciliation to comparable GAAP measures is provided in the accompanying table entitled “Use of Non-GAAP Financial Information” below.

“Our results for the quarter reflect our previously announced expectations, and although they are below our initial plans, we believe we have laid a solid technology and customer foundation to improve the financial fundamentals and drive shareholder value,” said James Brear, president and chief executive officer of Procera Networks. “With the recent customer wins and successes in R&D, we are achieving our strategic goals in the areas of analytics and virtualization, and are focused on returning Procera to a long term growth trajectory.”

Guidance

Revenue for the fiscal year ending December 31, 2014 is expected to be in the range of $70 million to $75 million.

This guidance is an estimate only and actual performance could differ. Procera’s financial results historically have been volatile, and a number of uncertainties and other factors may cause Procera’s future results, performance or achievements to be materially different from prior results.

Conference Call Information

Procera Networks, Inc. is hosting a conference call for analysts and investors to discuss its third quarter 2014 results at 1:30 p.m. Pacific time (4:30 p.m. Eastern time) today, November 3, 2014. A live audio webcast of the conference call along with supplemental financial information will also be accessible from the “Investor Relations” section of Procera’s website at http://proceranetworks.com/investors. A replay will be available following the call on Procera’s Investor Relations website and for one week at the following numbers: 1-877-870-5176 (domestic), 1-858-384-5517 (international) using ID# 13592573.

Cautionary Note Regarding Forward-Looking Statements

This press release contains forward-looking statements related to Procera Networks, Inc., including statements about Procera's expectations for 2014 revenue, long-term growth and the market opportunity, the estimated future value of Procera’s recently awarded business, potential applications for Procera’s products, as well as Procera’s general outlook. Statements in this release that are not historical or current facts are forward-looking statements. All forward-looking statements in this release are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that may cause Procera’s actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, without limitation, risks and uncertainties related to the acceptance and adoption of Procera’s products; Procera’s ability to service and upgrade its products; lengthy sales cycles and lab and field trial delays by service providers; its ability to obtain any follow-on orders from major customers; its customers canceling orders or awards; its ability to achieve revenue recognition on awarded business; its dependence on a limited product line and key customers; its dependence on key employees; its ability to compete in our industry with companies that are significantly larger and have greater resources than us; its ability to manage costs effectively; its ability to protect its intellectual property rights in a global market; its ability to manufacture product quickly enough to meet potential demand; and other risks and uncertainties described more fully in Procera’s documents filed with or furnished to the Securities and Exchange Commission. More information about these and other risks that may impact Procera Networks’ business are described in the "Risk Factors" sections of its Form 10-K filed for the year ended December 31, 2013 and its Form 10-Qs filed for the quarters ended March 31, 2014, and June 30, 2014, and other reports filed with the SEC, which are available free of charge on the SEC's website at http://www.sec.gov and on Procera’s website at http://www.proceranetworks.com. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. All forward-looking statements in this press release are based on information available to Procera as of the date hereof, and Procera undertakes no obligation to update, amend or clarify any forward-looking statement for any reason.

Use of Non-GAAP Financial Information

In addition to the financial results presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP), this press release and the accompanying tables and the related earnings conference call contain certain non-GAAP financial measures. Our management regularly uses these supplemental non-GAAP financial measures internally to understand and manage our business and forecast future periods and believes that these non-GAAP financial measures, when taken together with the corresponding GAAP measures, provide incremental insight into the underlying factors and trends affecting both Procera’s performance and its cash-generating potential.

Our non-GAAP financial measures include adjustments for stock-based compensation expenses; business development expenses; cost reduction efforts; and acquisition-related intangible asset and deferred compensation amortization, impairment and tax effects. We have excluded the effect of stock-based compensation; the cost of outside professional services for negotiating and performing legal, accounting and tax due diligence for potential mergers and acquisitions; expenses connected with cost reduction efforts; and acquisition-related intangible asset and deferred compensation amortization, impairment, and tax effects, from our non-GAAP gross profit, operating expenses and net income measures. Stock-based compensation, which represents the estimated fair value of stock options, restricted stock and restricted stock units granted to employees, is excluded since grant activities vary significantly from quarter to quarter in both quantity and fair value. In addition, although stock-based compensation will recur in future periods, excluding this expense allows us to better compare core operating results with those of our competitors who also generally exclude stock-based compensation from their core operating results, and who may have different granting patterns and types of equity awards and who may use different option valuation assumptions than we do. Business development expenses are necessary as part of certain growth strategies, such as through mergers and acquisitions, and will occur when such transactions are pursued. We have excluded these expenses because they can vary materially from period-to-period and transaction-to-transaction and expenses associated with these business development activities are not considered a key measure of Procera's operating performance. Cost reduction efforts occur with shifts in objectives and evolving requirements of the business and can result in fluctuating expenses connected with reducing employment in certain areas. We have excluded these expenses because they can vary significantly from period-to-period and are not considered a key measure of Procera’s operating performance. Acquisition-related intangible asset and deferred compensation amortization, impairment and tax effects represent non-cash charges and benefits that result from the accounting for acquisitions. We have excluded these items because, in any period, they may not directly correlate to the underlying performance of Procera’s business and these items can vary materially from period-to-period and transaction-to-transaction. In addition, we exclude these acquisition-related costs and benefits when evaluating our current operating performance.

Our non-GAAP financial measures may not reflect the full economic impact of Procera’s activities. Further, these non-GAAP financial measures may be unique to Procera, as they may be different from non-GAAP financial measures used by other companies, including Procera’s competitors. As such, this presentation of non-GAAP financial measures may not enhance the comparability of Procera’s results to the results of other companies. Investors are cautioned not to place undue reliance on our non-GAAP financial measures. In addition, investors are cautioned that these non-GAAP financial measures are not intended to be considered in isolation and should be read in conjunction with our consolidated financial statements prepared in accordance with GAAP.

For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, please see the section of the accompanying tables titled, "GAAP to Non-GAAP Reconciliations.”

About Procera Networks Inc.

Procera Networks, Inc. (NASDAQ: PKT), the Global Subscriber Experience company, is revolutionizing the way operators and vendors monitor, manage and monetize their network traffic. Elevate your business value and improve customer experience with Procera’s sophisticated intelligence solutions. For more information, visit www.proceranetworks.com or follow Procera on Twitter at @ProceraNetworks.

Investor Relations Contact

Michael Bishop

Blueshirt Group (for Procera Networks)

mike@blueshirtgroup.com

1-415-217-4968

Media Contact

Bob Eastwood

Engage PR (for Procera Networks)

beastwood@engagepr.com

1-510-748-8200 x215

Procera Networks, Inc.

Condensed Consolidated Statements of Operations

Unaudited

(in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Sales:
Product sales	$	11,164		$	16,301		$	35,792		$	40,328
Support sales		4,945			5,032			15,466			13,015
Total sales		16,109			21,333			51,258			53,343
Cost of sales:
Product cost of sales		4,774			10,080			17,645			22,451
Support cost of sales		1,118			896			3,269			2,442
Total cost of sales		5,892			10,976			20,914			24,893
Gross profit		10,217			10,357			30,344			28,450
		63.4	%		48.5	%		59.2	%		53.3	%
Operating expenses:
Research and development		4,096			3,945			12,360			12,532
Sales and marketing		6,497			7,322			20,425			21,293
General and administrative		2,760			2,510			8,311			9,498
Impairment of goodwill and purchased intangible assets		12,380			-			12,380			-
Total operating expenses		25,733			13,777			53,476			43,323
Loss from operations		(15,516	)		(3,420	)		(23,132	)		(14,873	)
Interest and other income (expense), net		(356	)		232			(245	)		203
Loss before income taxes		(15,872	)		(3,188	)		(23,377	)		(14,670	)
Income tax benefit		(160	)		(205	)		(281	)		(1,688	)
Net loss	$	(15,712	)	$	(2,983	)	$	(23,096	)	$	(12,982	)
Net loss per share - basic and diluted	$	(0.77	)	$	(0.15	)	$	(1.13	)	$	(0.65	)
Shares used in computing net loss per share:
Basic and diluted		20,500			20,031			20,395			20,007

Procera Networks, Inc.

Condensed Consolidated Balance Sheets

(in thousands) 

	September 30, 2014			December 31, 2013
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	14,248		$	90,774
Short-term investments		87,921			15,789
Accounts receivable, net of allowance		19,941			25,008
Inventories, net		15,917			18,836
Prepaid expenses and other		3,351			2,128
Total current assets		141,378			152,535
Property and equipment, net		7,603			7,121
Intangible assets, net		3,320			6,270
Goodwill		960			12,326
Deferred tax asset		866			1,101
Other non-current assets		120			83
Total assets	$	154,247		$	179,436
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	3,811		$	7,305
Deferred revenue		11,944			11,633
Accrued liabilities		5,691			6,721
Total current liabilities		21,446			25,659
Non-current liabilities:
Deferred revenue		3,116			3,273
Deferred tax liability		866			1,690
Deferred rent		122			143
Total liabilities		25,550			30,765
Commitments and contingencies		-			-
Stockholders' equity:
Common stock		21			21
Additional paid-in capital		223,844			219,763
Accumulated other comprehensive loss		(2,856	)		(1,897	)
Accumulated deficit		(92,312	)		(69,216	)
Total stockholders' equity		128,697			148,671
Total liabilities and stockholders' equity	$	154,247		$	179,436

Procera Networks, Inc.

GAAP to Non-GAAP Reconciliation; and Supplemental Financial Information

Unaudited

(in thousands, except per share data)

	Three Months Ended									Nine Months Ended
	September 2014			June 2014			September 2013			September 2014			September 2013
Sales:
Product sales	$	11,164		$	15,124		$	16,301		$	35,792		$	40,328
Support sales		4,945			5,484			5,032			15,466			13,015
Total sales		16,109			20,608			21,333			51,258			53,343
Cost of sales:
Product cost of sales, GAAP		4,774			7,780			10,080			17,645			22,451
Non-GAAP adjustments:
Stock-based compensation (1)		(7	)		(7	)		(19	)		(29	)		(58	)
Amortization of intangibles (2)		(264	)		(267	)		(275	)		(793	)		(819	)
Cost reduction efforts (3)		-			-			-			(237	)		-
Product cost of sales, non-GAAP		4,503			7,506			9,786			16,586			21,574
Support cost of sales, GAAP		1,118			1,085			896			3,269			2,442
Non-GAAP adjustments:
Stock-based compensation (1)		(85	)		(86	)		(82	)		(253	)		(223	)
Support cost of sales, non-GAAP		1,033			999			814			3,016			2,219
Total cost of sales, non-GAAP		5,536			8,505			10,600			19,602			23,793
Gross profit, non-GAAP		10,573			12,103			10,733			31,656			29,550
		65.6	%		58.7	%		50.3	%		61.8	%		55.4	%
Operating expenses:
Research and development		4,096			3,716			3,945			12,360			12,532
Non-GAAP adjustments:
Stock-based compensation (1)		(314	)		(296	)		(218	)		(998	)		(933	)
Cost reduction efforts (3)		-			-			-			(206	)		-
Deferred compensation (5)		-			-			(753	)		(65	)		(2,193	)
Research and development, non-GAAP		3,782			3,420			2,974			11,091			9,406
Sales and marketing		6,497			7,051			7,322			20,425			21,293
Non-GAAP adjustments:
Stock-based compensation (1)		(443	)		(398	)		(385	)		(1,249	)		(1,348	)
Amortization of intangibles (2)		(114	)		(115	)		(117	)		(342	)		(353	)
Cost reduction efforts (3)		(327	)		(114	)		-			(515	)		-
Deferred compensation (5)		-			-			(716	)		-			(2,086	)
Sales and marketing, non-GAAP		5,613			6,424			6,104			18,319			17,506
General and administrative		2,760			2,442			2,510			8,311			9,498
Non-GAAP adjustments:
Stock-based compensation (1)		(429	)		(351	)		(365	)		(1,200	)		(1,252	)
Cost reduction efforts (3)		-			-			-			(27	)		-
Business development expenses (6)		-			-			-			-			(1,616	)
General and administrative, non-GAAP		2,331			2,091			2,145			7,084			6,630
Impairment of goodwill and purchased intangible assets		12,380			-			-			12,380			-
Non-GAAP adjustments:
Impairment of goodwill and purchased intangible assets (4)		(12,380	)		-			-			(12,380	)		-
Impairment of goodwill and purchased intangible assets, non-GAAP		-			-			-			-			-
Total operating expenses, non-GAAP		11,726			11,935			11,223			36,494			33,542
Income (loss) from operations, non-GAAP		(1,153	)		168			(490	)		(4,838	)		(3,992	)
Interest and other income (expense), net		(356	)		83			232			(245	)		203
Income (loss) before income taxes, non-GAAP		(1,509	)		251			(258	)		(5,083	)		(3,789	)
Income tax provision (benefit)		(160	)		25			(205	)		(281	)		(1,688	)
Non-GAAP adjustment (7)		192			207			136			578			1,550
Income tax provision (benefit), non-GAAP		32			232			(69	)		297			(138	)
Net income (loss), non-GAAP	$	(1,541	)	$	19		$	(189	)	$	(5,380	)	$	(3,651	)
Net income (loss) per share - diluted, non-GAAP	$	(0.08	)	$	0.00		$	(0.01	)	$	(0.26	)	$	(0.18	)
Shares used in computing diluted net income (loss) per share		20,500			20,356			20,031			20,395			20,007
Reconciliation of Net Income (Loss):
U.S. GAAP as reported	$	(15,712	)	$	(1,408	)	$	(2,983	)	$	(23,096	)	$	(12,982	)
Non-GAAP adjustments:
Stock-based compensation (1)		1,278			1,138			1,069			3,729			3,814
Amortization of intangibles (2)		378			382			392			1,135			1,172
Cost reduction efforts (3)		327			114			-			985			-
Impairment of goodwill and purchased intangible assets (4)		12,380			-			-			12,380			-
Deferred compensation (5)		-			-			1,469			65			4,279
Business development expenses (6)		-			-			-			-			1,616
Income tax adjustment (7)		(192	)		(207	)		(136	)		(578	)		(1,550	)
As Adjusted	$	(1,541	)	$	19		$	(189	)	$	(5,380	)	$	(3,651	)
					-
Reconciliation of Diluted Net Income (Loss) Per Share:
U.S. GAAP as reported	$	(0.77	)	$	(0.07	)	$	(0.15	)	$	(1.13	)	$	(0.65	)
Non-GAAP adjustments:
Stock-based compensation (1)		0.06			0.05			0.05			0.18			0.19
Amortization of intangibles (2)		0.02			0.02			0.02			0.06			0.06
Cost reduction efforts (3)		0.02			0.01			-			0.04			-
Impairment of goodwill and purchased intangible assets (4)		0.60			-			-			0.61			-
Deferred compensation (5)		-			-			0.08			-			0.22
Business development expenses (6)		-			-			-			-			0.08
Income tax adjustment (7)		(0.01	)		(0.01	)		(0.01	)		(0.02	)		(0.08	)
As Adjusted	$	(0.08	)	$	0.00		$	(0.01	)	$	(0.26	)	$	(0.18	)
Shares used in computing diluted net income (loss) per share		20,500			20,356			20,031			20,395			20,007

(1) Stock-based compensation expense is calculated in accordance with the fair value recognition provisions of ASC Topic 718.

(2) Amortization expense associated with intangible assets acquired in the Vineyard Networks acquisition.

(3) Severance and other employee-related costs in connection with the Company’s cost-reduction efforts.

(4) Impairment charges to write-down the carrying value of goodwill and purchased intangible assets associated with the Vineyard acquisition as a result of lower than anticipated total addressable market and revenue growth of NAVL products.

(5) Amortization of amounts paid under retention agreements with Vineyard's three founders. These amounts were paid during the first quarter of fiscal year 2014, after one year of continuous employment with the Company.

(6) Includes the cost of outside professional services for negotiating and performing legal, accounting and tax due diligence for potential mergers, acquisitions and other significant partnership arrangements.

(7) Income tax benefit associated with the following Vineyard acquisition related items:

- reversal of Vineyard’s pre-existing income tax valuation allowance upon acquisition;

- amortization of acquired intangible assets; and

- Canadian valuation allowance and book to tax differences on deferred revenue.