EXHIBIT 99.2
AVOCENT CORPORATION
COMMENTS BY MANAGEMENT ON FINANCIAL RESULTS
FOR THE QUARTER ENDED DECEMBER 31, 2006
Concurrently with the filing of these comments, Avocent Corporation has issued a
press release containing financial information for the quarter ended December
31, 2006. The following commentary should be read in conjunction with that press
release including its financial tables.
Overview for the Quarter and Year
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We were very pleased with our results for both the fourth quarter and year.
Operational revenue of $168.9 million for the fourth quarter was within our
guidance range and represents an increase of 58.1% from the fourth quarter of
2005 and an increase of 18.7% from the third quarter of 2006. Operational
revenue of $523.7 million for the year represents an increase of 41.6% from
2005. After joining our company on August 31, 2006, LANDesk contributed $29.7
million to our revenues for the fourth quarter and $43.2 million for the year.
The Management Systems Division recorded revenue of $124.3 million, up 30.8%
from the fourth quarter of last year and up 8.2% from the third quarter of this
year. For the fourth quarter, revenue from the sale of KVM products was
approximately $98.8 million, while revenue from serial products was
approximately $15.8 million. Our KVM and serial management products benefited
from continuing demand from our data center customers for our integrated digital
products and growing demand from new market opportunities such as the branch
market.
As planned, our Cyclades integration efforts were completed in the fourth
quarter. Our operations group has successfully transitioned Cyclades product
manufacturing to Avocent contract manufacturers with fulfillment accomplished
through our Huntsville and Shannon facilities. The integration of the finance,
administrative and human resources functions from Cyclades is also complete.
LANDesk revenue increased to $29.7 million in the fourth quarter of 2006 from
$24.8 million in the fourth quarter of 2005. Contract bookings increased 22.0%
in the fourth quarter of 2006 from the same period in 2005. Revenue and bookings
benefited from increases in new license sales of the LANDesk Management Suite
and new subscriptions of the LANDesk Security Suite. The security products have
increased to 19.2% of LANDesk revenue this quarter versus 12.7% in the fourth
quarter of 2005. The change in mix has an impact on revenue recognized as
license sales usually are recognized upon delivery of the license keys whereas
subscription revenues are deferred and amortized to revenue over the
subscription term. LANDesk deferred revenues reflected a net increase of $7.2
million during the fourth quarter of 2006.
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As mentioned previously, our integration plans for LANDesk are much different
from our Cyclades plans, and LANDesk will operate as a separate division. Our
teams across all functions are working together to build the relationships
needed to make this acquisition a success. We will begin limited cross-selling
efforts between our LANDesk and Management Systems Divisions during 2007. We are
also coordinating product roadmaps, and we will integrate the software platforms
over the next 18 months.
Our AESS Division also provided a solid contribution to our fourth quarter and
recorded $9.4 million in revenue compared to $7.0 million in the fourth quarter
of 2005. The increase resulted from growth in underlying server units where our
technologies are embedded and from the addition of certain products acquired
from Agilent in March 2006.
Our other, smaller entrepreneurial divisions continue to make progress. As
expected, our Desktop Solutions Division recorded its first revenue in the
fourth quarter of 2006 with its launch of the first generation of a high-end
desktop/extension over IP product. Our Connectivity & Control Division recently
delivered the first managed high definition wired and wireless media extender.
We are encouraged by the progress we have made building our presence in the
emerging digital signage and wireless extension market and believe we are
positioned to take advantage of the market growth. We moved the Mobile Solutions
Division to LANDesk after the fourth quarter. The mobile device technology fits
well with the LANDesk products and customer base. LANDesk has already
incorporated this technology into its Management Suite, and we are beginning to
see interest from customers. One of the keys to our long term success has been
our ability to identify and enter niche markets early in their evolution. These
entrepreneurial business units and our continued focus on emerging technologies
serve to provide Avocent the potential to continue this long term success.
GAAP basis revenue was $167.7 million for the fourth quarter and $522.0 million
for the year. Operational revenue includes $1.2 million and $1.7 million in the
fourth quarter and year, respectively, of amortization of LANDesk deferred
revenue, which was not recognized on a GAAP basis as it was reduced in the
application of purchase accounting. Had we not acquired LANDesk, the $1.2
million and $1.7 million represent the portion of deferred revenue LANDesk would
have recognized as earned during the fourth quarter and year.
Gross Margin
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Total gross profit was $112.6 million for the quarter. Our fourth quarter gross
margin set a new Avocent record, at 66.7%, up 3.0 percentage points compared to
63.7% for the third quarter of 2006, and up 5.8 percentage points compared to
60.9% for Q4 2005. The increase in gross profit was driven primarily by the
addition of LANDesk software and maintenance revenue. LANDesk software and
maintenance revenues generated gross profit at 90.2% for the quarter. Legacy
Avocent, excluding LANDesk, produced $85.8 million in gross margin on $139.2
million in sales, or 61.3%, up 0.8% compared to the 60.5% experienced in Q3
2006. The increase in gross margin was primarily driven by higher volumes in
digital products combined with benefits from the transfer of Cyclades production
to Avocet's contract manufacturers.
2
Our sales of new products that were introduced or significantly refreshed during
the past 12 months contributed approximately $36.6 million to revenue in the
quarter at a combined gross margin higher than our average gross margin.
Operating Expenses
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R&D costs were $18.2 million, inclusive of $4.9 million for LANDesk operations,
and represented 10.8% of sales. This is compared to $14.9 million for Q3 of
2006, with the increase primarily attributable to the impact of LANDesk
operations for the full quarter versus only one month during Q3 2006. Compared
to Q4 of 2005, R&D expenses increased $5.1 million due primarily to the addition
of LANDesk.
Selling, General and Administrative expenses were $50.2 million, or 29.7% of
sales, inclusive of $17.8 million from LANDesk operations. This compares to
$35.0 million for Q3 2006 and represents an increase of $15.2 million, $12.9
million of which is due to the inclusion of LANDesk operations for the full
quarter compared to only one month during Q3 of 2006.
Our R&D and SG&A expenses during the fourth quarter of 2006 benefited from a
full quarter's impact of the cost saving measures implemented in the Cyclades
integration activities earlier in 2006.
As anticipated, integration expenses associated with acquisitions dropped during
the quarter. We expensed $0.3 million during the fourth quarter of 2006 compared
to $1.3 million during the third quarter of 2006.
Our operating profit increased $14.8 million compared to the fourth quarter of
2005 and $4.4 million compared to the third quarter of 2006, to $43.9 million,
inclusive of $4.0 million from LANDesk operations, resulting in an operating
margin of 26.0% for the fourth quarter of 2006.
Other Income Statement Items
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Other income and expense netted to an expense of $1.3 million for Q4, down $1.6
million compared to Q3 and $3.6 million compared to Q4 2005. The reduction is
related directly to our reduced amounts available for investment and the
interest expense on our line of credit as we funded the acquisition of Cyclades
at the end of the first quarter of 2006 and LANDesk at the end of August 2006.
Also, we used approximately $35.4 and $30.7 million of cash during the third and
fourth quarters of 2006, respectively, for our share repurchase program.
3
Our effective tax rate for the quarter was 23.7% compared to 23.6% for Q3 2006
and 21.7% for Q4 2005. The mix of pretax profit among our U.S. and foreign based
companies affects the rate. We are currently integrating our tax planning
strategies and reviewing recent legislative changes to the US R&D tax credits
that may have an impact on our future effective tax rates.
Income before the effects of intangible asset amortization and stock-based
compensation was $32.5 mi1lion or 19.2% of sales. This compares to $30.4 million
for the third quarter of 2006 and $24.6 million for the fourth quarter of 2005.
Operational earnings per share (before the effects of intangible amortization,
and stock-based compensation) amounted to 62 cents per diluted share for the
quarter versus 49 cents for the fourth quarter of 2005. Our weighted average
diluted shares outstanding increased year over year by approximately 2.3 million
to 52.1 million this quarter related to the net new shares issued in the LANDesk
acquisition (offset by shares we repurchased).
During the fourth quarter, we bought back 850,000 shares of Avocent stock at a
cost of $30.7 million. These shares combined with the shares of Avocent stock
bought back in prior quarters total 9.8 million shares out of the 10 million
shares authorized for repurchase under our repurchase programs. The shares
repurchased during the fourth quarter were used to offset the 668,000 options
exercised during the quarter and a portion of the restricted stock units vesting
on January 1, 2007. Proceeds from option exercises totaled $15 million in the
fourth quarter of 2006.
Balance Sheet Items
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At the end of the fourth quarter we had approximately $108 million in cash and
investments. Cash flow from operations was approximately $13 million for the
quarter and $66 million for the year.
Our accounts receivable balance increased, as did our DSO (to 70.9), due to an
increased amount of sales occurring in the last month of the quarter and adding
LANDesk customer balances which tend to have longer payment terms than legacy
Avocent balances have. Excluding LANDesk, our DSO was 57.18, within our target
of 60 for legacy Avocent.
While our inventories increased in the fourth quarter, our inventory turns
increased slightly to 5.5. Our inventory levels continued to grow as we
completed the transition of the Cyclades purchasing, warehousing and order
fulfillment functions from Fremont to Huntsville in the United States and from
Germany to Shannon in Europe. In addition, the product transitions in relation
to the integration of the Avocent and Cyclades product roadmaps and introduction
of RoHS-compliant products affected inventories.
During the quarter, we invested approximately $2.8 million for capital
expenditures for a variety of projects. At December 31, 2006, the balance
outstanding on our line of credit was approximately $150 million, a $12 million
decline from the end of our third quarter.
4
Based on preliminary estimates, we expect to pay earn-out consideration to the
former LANDesk shareholders of approximately $27.0 million during the first
quarter of 2007, following the filing of our 2006 Annual Report on Form 10-K. We
expect to fund this primarily through our line of credit.
Forward-Looking Statements
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This commentary contains statements that are forward-looking statements as
defined within the Private Securities Litigation Reform Act of 1995. These
include statements regarding the integration and operation of LANDesk and its
operations, roadmap, and software platforms, the size and growth of the current
and future markets our products and technologies, our effective tax rate in the
future, and the expected earnout payable to LANDesk shareholders. These
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from the statements made, including
the risks associated with general economic conditions, risks attributable to
future product demand, sales, and expenses, risks associated with reliance on a
limited number of customers, component suppliers, and single source components,
risks associated with acquisitions and acquisition integration, risks associated
with product design efforts and the introduction of new products and
technologies, and risks associated with obtaining and protecting intellectual
property rights. Other factors that could cause operating and financial results
to differ are described in our annual report on Form 10-K filed with the
Securities and Exchange Commission on March 6, 2006 and our quarterly reports on
Form 10-Q filed with the SEC on May 10, 2006, August 4, 2006 and November 7,
2006. Other risks may be detailed from time to time in reports to be filed with
the SEC. Avocent does not undertake any obligation to publicly update its
forward-looking statements based on events or circumstances after the date
hereof.
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