SOURCE: Websense, Inc.

Websense, Inc.

October 29, 2009 10:43 ET

Websense Reports Growth in Billings and Cash Flow From Operations for Third Quarter 2009

Billings of $84.5 Million Reflect Strong Sales of Strategic Product Offerings, Including the V10000 Web Security Gateway Appliance, Data Loss Prevention and SaaS Web Security Solutions

SAN DIEGO, CA--(Marketwire - October 29, 2009) - Websense, Inc. (NASDAQ: WBSN) today announced financial results for the third quarter of 2009.

Third Quarter 2009 GAAP Financial Highlights

--  Revenue, calculated in accordance with generally accepted accounting
    principles (GAAP), increased 5 percent from the third quarter of 2008 to
    $78.6 million.
--  Operating expenses of $64.2 million decreased 4 percent from the third
    quarter of 2008 and included approximately $1.2 million in severance
    expenses associated with third quarter cost reduction actions,
    approximately $6.2 million in acquisition related amortization and
    restructuring and integration expenses and approximately $5.8 million in
    stock based compensation.
--  Operating income was $1.3 million, compared to an operating loss of
    $4.3 million in the third quarter of 2008.
--  Net loss was $1.9 million, or 4 cents per share, compared to a net
    loss of $4.8 million, or 11 cents per share, in the third quarter of 2008.
--  Cash flow from operations was $22.5 million, compared to $17.8 million
    in the third quarter of 2008.  Year to date, the company has generated
    approximately $65.4 million in cash flow from operations.
    

Third Quarter 2009 Non-GAAP Financial Highlights

--  Billings, which represent the full amount of subscription contracts
    billed to customers during the period, totaled $84.5 million, an increase
    of 2 percent compared to $82.7 million in the third quarter of 2008. Using
    the same currency exchange rates that prevailed in the third quarter of
    2008, billings in the third quarter of 2009 would have been approximately
    $87.4 million, an increase of 6 percent from the third quarter of 2008.
--  International billings were approximately $41.7 million, compared to
    $39.1 million in the third quarter of 2008.
--  Non-GAAP revenue of $82.2 million included approximately $3.6 million
    of revenue from SurfControl that would have been recognized during this
    period had SurfControl remained an independent operating company reporting
    under GAAP.  This subscription revenue was included in SurfControl's
    deferred revenue as of the date of the acquisition, but was not recognized
    as revenue on a post-acquisition basis under GAAP due to a required write-
    down of SurfControl's deferred revenue to fair value as of the acquisition
    date.  Non-GAAP revenue in the third quarter of 2008 was $85.5 million, and
    included approximately $10.6 million of revenue from SurfControl that would
    have been recognized during this period had SurfControl remained an
    independent company.
--  Non-GAAP operating expenses were $51 million, a decrease of
    approximately $636,000 from the second quarter of 2009 and a decrease of
    approximately $653,000 from the third quarter of 2008.
--  Non-GAAP operating income was $21.6 million, representing 26.2 percent
    of non-GAAP revenue.  This compares to $25.0 million in the third quarter
    of 2008, representing 29.2 percent of non-GAAP revenue.
--  Non-GAAP net income was $13.6 million, or 31 cents per diluted share,
    compared to $14.7 million, or 32 cents per diluted share, in the third
    quarter of 2008.
    

"Our Q3 performance confirms our belief that our new products can drive incremental growth in the coming quarters given continued improvement in the economic climate. The incremental business we received from selling our market leading Web security gateway, SaaS security and data loss prevention products continued to grow, with incremental Web security gateway sales up 37 percent sequentially. Recessionary impact from distressed customers on Websense business decreased during Q3, but still remained significant," said Websense Chief Executive Officer Gene Hodges. "This performance validates our strategy and demonstrates the resiliency of a subscription based business model in a tough economic climate."

"The strength of our cash flow performance and profitability outlook for the remainder of the year has prompted us to increase the amount allocated for share repurchases in the fourth quarter to up to $12 million, compared to $7.5 million per quarter in the first three quarters of the year," added Hodges. "We have generated more than $65 million in cash flow from operations so far this year, and we are confident we will exceed our expectation of operating cash flow of approximately $80 million for the year."

Quarterly Business Metrics Summary:

Dollars in thousands, except earnings per diluted share, product seats under subscription, average contract value, average contract duration and all percentage metrics.

                                               Q3'09           Q3'08
                                          ---------------  ---------------
Billings                                  $        84,454  $        82,683
                                          ---------------  ---------------
                                                           (as restated)**
                                          ---------------  ---------------
GAAP revenue                                       78,601         74,884**
                                          ---------------  ---------------
GAAP operating income (loss)                        1,263        (4,325)**
                                          ---------------  ---------------
GAAP net loss                                      (1,925)       (4,813)**
                                          ---------------  ---------------
GAAP net loss per share                   $         (0.04) $      (0.11)**
                                          ---------------  ---------------

                                          ---------------  ---------------
Non-GAAP* revenue                                  82,193           85,475
                                          ---------------  ---------------
Non-GAAP* operating income                         21,567           24,967
                                          ---------------  ---------------
Non-GAAP* net income                               13,604           14,695
                                          ---------------  ---------------
Non-GAAP* earnings per diluted share      $          0.31  $          0.32
                                          ---------------  ---------------

                                          ---------------  ---------------
Product seats under subscription
 (millions)                                          42.9             43.3
                                          ---------------  ---------------
International billings (% of total)                    49%              47%
                                          ---------------  ---------------
Average contract value                    $         8,100  $         7,900
                                          ---------------  ---------------
Billings from renewals (% of total)                 75-80%           75-80%
                                          ---------------  ---------------
Average contract duration (months)                   23.9             22.1
                                          ---------------  ---------------

*A detailed description of the company's non-GAAP financial data appears under "Non-GAAP Financial Measures" and a full reconciliation of GAAP to non-GAAP results is included at the end of this news release in the table "Reconciliation of GAAP to Non-GAAP Financial Measures."

** The Company restated its results for the third quarter of 2008 to correct for errors in the method of recognizing royalty revenue related to contracts with original equipment manufacturer (OEM) customers and to correct a miscalculation of the 2008 tax provision, as described below.

Balance Sheet and Operating Cash Flow Metrics

Highlights of the balance sheet and cash flow performance compared to the third quarter of 2008 included:

--  Cash and cash equivalents worldwide of $76.3 million, compared with
    $60.4 million at the end of the third quarter of 2008.
--  Total GAAP deferred revenue of $341.5 million, an increase of 8
    percent compared to $315.0 million at the end of the third quarter of 2008.
--  Non-GAAP deferred revenue of $349.4 million, an increase of 1 percent
    compared to non-GAAP deferred revenue of $344.9 million at the end of the
    third quarter of 2008.  Non-GAAP deferred revenue at the end of the third
    quarter of 2009 included approximately $7.9 million of deferred revenue
    from SurfControl that was included in SurfControl's deferred revenue as of
    the date of the acquisition, but is not included in the company's GAAP
    deferred revenue on a post-acquisition basis due to a required write-down
    of SurfControl's deferred revenue to fair value as of the acquisition date.
    Non-GAAP deferred revenue at the end of the third quarter of 2008 included
    $29.4 million of deferred revenue from SurfControl that was included in
    SurfControl's deferred revenue as of the date of acquisition, but was
    written down as of the acquisition date.
--  Accounts receivable of $56.8 million, representing 63 days of sales
    outstanding. This compares to 66 days outstanding at the end of the second
    quarter of 2009 and 67 days outstanding at the end of the third quarter of
    2008.
--  Cash flow from operations during the third quarter of 2009 of $22.5
    million, compared to $17.8 million in the third quarter of 2008.
--  Capital expenditures of $2.9 million in the quarter, compared to $2.7
    million in the second quarter of 2009 and $2.2 million in the third quarter
    of 2008.
    

During the quarter, the company repurchased a total of approximately 473,000 shares for approximately $7.5 million under a 10b5-1 stock repurchase plan.

Restatement of Historical Results Completed

On October 29, 2009, Websense completed the restatement of its historical financial results and filed an amendment number one to Annual Report on Form 10-K/A to restate consolidated financial statements for the years ended December 31, 2007 and 2008 and amendment number one to Quarterly Reports on Form 10-Q/A for the quarters ended March 31, 2009 and June 30, 2009. The restatements relate to an error in the method of recognizing royalty revenue related to contracts with original equipment manufacturer (OEM) customers and an error in the income tax provision computation that overstated the company's estimate of taxable income for the purposes of the income tax provision. Additionally, the restated consolidated financial statements also include other adjustments that were identified but not previously recorded as they were determined not to be material, either individually or in the aggregate.

Outlook for Fiscal Year 2009

Websense updates its annual guidance on its anticipated financial performance for the fiscal year each quarter based on its assessment of the current business environment and historical seasonal trends in its business and prevailing exchange rates between the US dollar and other major currencies. In providing guidance, the company emphasizes that its forward-looking statements are based on current expectations and prevailing currency exchange rates on the date the guidance is provided and disclaims any obligation to update the statements as circumstances change.

                                             Adjustment for
                                                Restated
                                             Financials and
                                              Revised OEM
                                                Revenue      Revised 2009
                             2009 Outlook      Recognition     Outlook
                            (as of 7/28/09)     Policy     (as of 10/29/09)
                            --------------  --------------- --------------
                            $   340 - 350                   $   340 - 350
Billings                           million               --        million
                            --------------  --------------- --------------
                            $   318 - 322    approximately  $   312 - 314
GAAP revenue                       million  $     6 million        million
                            --------------  --------------- --------------
                            $   334 - 338    approximately  $    329 - 331
Non-GAAP revenue                   million  $     6 million        million
                            --------------  --------------- --------------

Stock-based compensation    $     26 - 28                   $     26 - 28
 expense                           million               --        million
                            --------------  --------------- --------------

Amortization of intangible  approximately                   approximately
 assets (non-cash)          $   39 million               -- $   39 million
                            --------------  --------------- --------------
                            $       5 - 6                   $       5 - 6
Net cash interest expense          million               --        million
                            --------------  --------------- --------------

Non-GAAP earnings per                        approximately
 diluted share              $  1.23 - 1.27  $          0.08 $  1.15 - 1.18
                            --------------  --------------- --------------
Estimated Non-GAAP tax rate        33 - 34%              --        33 - 34%
                            --------------  --------------- --------------

Average diluted shares             44 - 46                         44 - 46
 outstanding                       million               --        million
                            --------------  --------------- --------------


Billings guidance for 2009 assumes an average contract duration in the range of 22 to 24 months. GAAP cash flow from operations for the year is expected to exceed $80 million, compared to $65.8 million in GAAP cash flow from operations in 2008.

Non-GAAP guidance for 2009 revenue and diluted earnings per share includes approximately $17.2 million in subscription revenue of SurfControl that would have been recognized under subscriptions that were included in deferred revenue as of the date of the acquisition that will not be recognized as revenue during the applicable period as revenue on a post acquisition basis under GAAP due to the impact of the write-down of the majority of SurfControl's deferred revenue to fair value as of the acquisition date.

Conference Call

Management will host a conference call and simultaneous webcast to discuss the final results today, October 29, at 6:00 a.m. Pacific time. To participate in the conference call, investors should dial 888-503-8171 (domestic) or 719-457-2626 (international) ten minutes prior to the scheduled start of the call. A simultaneous audio-only webcast of the call may be accessed on the Internet at www.websense.com/investors.

An archive of the webcast will be available on the company's Web site through December 31, 2009, and a taped replay of the call will be available for one week at 719-457-0820 or 888-203-1112, passcode 8405935.

Non-GAAP Financial Measures

This news release provides financial measures, including measures for revenue, operating expenses, income from operations, net income and earnings per diluted share, that include revenue from SurfControl that would have been recognized during the applicable periods under subscriptions that were included in deferred revenue as of the date of the acquisition but will not be recognized as revenue on a post-acquisition basis under GAAP due to the impact of the write-down of a majority of SurfControl's deferred revenue to fair value as of the acquisition date. In addition, non-GAAP operating results exclude certain cash and non-cash expenses relating to the company's acquisitions, including amortization of intangible assets and deferred financing fees, restructuring and integration related costs, as well as severance related costs for our reduction in force in the third quarter of 2009, stock based compensation expense and related tax effects. Based on the foregoing, the company's presentation of non-GAAP revenue, operating expenses, income from operations, net income and earnings per diluted share are not calculated in accordance with GAAP. Management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance that enhances management's and investors' ability to evaluate the company's operating results, trends and prospects and to compare current operating results with historic operating results. A reconciliation of the GAAP and non-GAAP financial measures and a more detailed explanation of each non-GAAP financial measure and its uses are provided at the end of this news release.

This news release also provides guidance for the fiscal year 2009, including guidance for revenue and earnings per diluted share, that include revenue from SurfControl that would have been recognized during the full year 2009 under subscriptions that were included in deferred revenue as of the date of the acquisition but will not be recognized as revenue on a post-acquisition basis under GAAP due to the impact of the write-down of a majority of SurfControl's deferred revenue to fair value as of the acquisition date.

This news release also includes financial measures and guidance for billings that are not numerical measures that can be calculated in accordance with GAAP. Websense provides this measurement in news releases reporting financial performance because this measurement provides a consistent basis for understanding the company's sales activities in the current period. The company believes the billings measurement is useful to investors because the GAAP measurements of revenue and deferred revenue in the current period include subscription contracts commenced in prior periods. The roll-forwards of deferred revenue for the third quarter of 2009 are set forth at the end of this news release.

About Websense, Inc.

Websense, Inc. (NASDAQ: WBSN), a global leader in integrated Web, data and email security solutions, provides Essential Information Protection™ for more than 40,000 customers worldwide. Distributed through its global network of channel partners, Websense software and hosted security solutions help organizations block malicious code, prevent the loss of confidential information and enforce Internet use and security policies. For more information, visit www.websense.com.

Websense is a registered trademark of Websense, Inc. in the United States and certain international markets. Websense has numerous other registered and unregistered trademarks in the United States and internationally. All other trademarks are the property of their respective owners.

This news release contains forward-looking statements that involve risks, uncertainties, assumptions and other factors which, if they do not materialize or prove correct, could cause Websense's results to differ materially from historical results or those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, our guidance and financial outlook for the company's 2009 fiscal year, and statements about our technology and product leadership, growth trends and expense management, and statements containing the words "planned," "expects," "believes," "strategy," "opportunity," "anticipates" and similar words. The potential risks and uncertainties which contribute to the uncertain nature of these statements include, among others, risks associated with launching new product offerings, customer acceptance of the company's services, products and fee structures in a changing market; the success of Websense's brand development efforts; the volatile and competitive nature of the Internet and security industries; changes in domestic and international market conditions, risks relating to currency exchange rates and impacts of macro-economic conditions on our customers, risks relating to the required use of cash for debt servicing, the risks of ongoing compliance with the covenants in the senior secured credit facility, risks related to changes in accounting interpretations and the other risks and uncertainties described in Websense's public filings with the Securities and Exchange Commission, available at www.websense.com/investors. Websense assumes no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made.

                              Websense, Inc.
                  Consolidated Statements of Operations
          (Unaudited and in thousands, except per share amounts)



                           September     Three Months Ended
                            30, 2009           September 30, 2008
                           ----------  -----------------------------------
                                       Previously                   As
                                        Reported   Adjustments   Restated

Revenue                    $   78,601  $   76,663  $    (1,779) $   74,884
Cost of revenues:
    Cost of revenues            9,946       9,181            6       9,187
    Amortization of
     acquired technology        3,223       3,108            -       3,108
                           ----------  ----------  -----------  ----------
       Total cost of
        revenues               13,169      12,289            6      12,295
                           ----------  ----------  -----------  ----------
Gross margin                   65,432      64,374       (1,785)     62,589
Operating expenses:
    Selling and marketing      40,739      42,952           41      42,993
    Research and
     development               13,696      13,139           19      13,158
    General and
     administrative             9,734      10,753           10      10,763
                           ----------  ----------  -----------  ----------
       Total operating
        expenses               64,169      66,844           70      66,914
                           ----------  ----------  -----------  ----------
Income (loss) from
 operations                     1,263      (2,470)      (1,855)     (4,325)
Interest expense               (1,700)     (2,985)           -      (2,985)
Other income (expense),
 net                              184         (94)         (34)       (128)
                           ----------  ----------  -----------  ----------
Loss before income taxes         (253)     (5,549)      (1,889)     (7,438)
Provision (benefit) for
 income taxes                   1,672      (2,052)        (573)     (2,625)
                           ----------  ----------  -----------  ----------
Net loss                   $   (1,925) $   (3,497) $    (1,316) $   (4,813)
                           ==========  ==========  ===========  ==========

Basic net loss per share   $    (0.04) $    (0.08)              $    (0.11)
                           ==========  ==========               ==========
Diluted net loss per share $    (0.04) $    (0.08)              $    (0.11)
                           ==========  ==========               ==========

Basic common shares            44,131      45,097                   45,097
                           ==========  ==========               ==========
Diluted common shares          44,131      45,097                   45,097
                           ==========  ==========               ==========

Financial Data:
Total deferred revenue     $  341,476  $  307,339  $     7,697  $  315,036
                           ==========  ==========  ===========  ==========



                              Websense, Inc.
                  Consolidated Statements of Operations
          (Unaudited and in thousands, except per share amounts)



                           September      Nine Months Ended
                            30, 2009           September 30, 2008
                           ----------  -----------------------------------
                                       Previously  Adjustments      As
                                        Reported                 Restated
Revenue                    $  234,004  $  216,605  $    (6,339) $  210,266
Cost of revenues:
    Cost of revenues           27,663      26,635          (38)     26,597
    Amortization of
     acquired technology        9,737       9,261            -       9,261
                           ----------  ----------  -----------  ----------
       Total cost of
        revenues               37,400      35,896          (38)     35,858
                           ----------  ----------  -----------  ----------
Gross margin                  196,604     180,709       (6,301)    174,408
Operating expenses:
    Selling and marketing     122,073     130,109          243     130,352
    Research and
     development               39,147      39,798          110      39,908
    General and
     administrative            30,894      35,441           47      35,488
                           ----------  ----------  -----------  ----------
       Total operating
        expenses              192,114     205,348          400     205,748
                           ----------  ----------  -----------  ----------
Income (loss) from
 operations                     4,490     (24,639)      (6,701)    (31,340)
Interest expense               (5,659)    (10,357)           -     (10,357)
Other income (expense),
 net                              612         908         (135)        773
                           ----------  ----------  -----------  ----------
Loss before income taxes         (557)    (34,088)      (6,836)    (40,924)
Benefit for income taxes         (880)    (16,161)      (3,638)    (19,799)
                           ----------  ----------  -----------  ----------
Net income (loss)          $      323  $  (17,927) $    (3,198) $  (21,125)
                           ==========  ==========  ===========  ==========

Basic net income (loss)
 per share                 $     0.01  $    (0.40)              $    (0.47)
                           ==========  ==========               ==========
Diluted net income (loss)
 per share                 $     0.01  $    (0.40)              $    (0.47)
                           ==========  ==========               ==========

Basic common shares            44,444      45,233                   45,233
                           ==========  ==========               ==========
Diluted common shares          44,812      45,233                   45,233
                           ==========  ==========               ==========

Financial Data:
Total deferred revenue     $  341,476  $  307,339  $     7,697  $  315,036
                           ==========  ==========  ===========  ==========



                              Websense, Inc.
                        Consolidated Balance Sheets
                       (Unaudited and in thousands)


                           September
                            30, 2009            December 31, 2008
                           ----------  -----------------------------------
                                       Previously                   As
                                        Reported   Adjustments   Restated
Assets
Current assets:
    Cash and cash
     equivalents           $   76,256  $   64,310  $      (214) $   64,096
    Cash and cash
     equivalents -
     restricted                 1,863       2,673         (173)      2,500
    Accounts receivable,
     net                       56,804      82,032           67      82,099
    Income tax receivable      11,276       3,723        7,204      10,927
    Current portion of
     deferred income taxes     33,571      33,125        1,073      34,198
    Other current assets       11,037       9,029            -       9,029
                           ----------  ----------  -----------  ----------
       Total current
        assets                190,807     194,892        7,957     202,849
Cash and cash equivalents
 - restricted, less
 current portion                  168           -          215         215
Property and equipment,
 net                           15,631      14,312            -      14,312
Intangible assets, net         76,996     106,493            -     106,493
Goodwill                      372,445     374,410       (1,786)    372,624
Deferred income taxes,
 less current portion          29,211      21,092        3,145      24,237
Deposits and other assets       2,946       3,933            -       3,933
                           ----------  ----------  -----------  ----------
Total assets               $  688,204  $  715,132  $     9,531  $  724,663
                           ==========  ==========  ===========  ==========

Liabilities and
 stockholders' equity
Current liabilities:
    Accounts payable       $    2,666  $    2,719  $         -  $    2,719
    Accrued compensation
     and related benefits      19,175      19,087           42      19,129
    Other accrued expenses     25,359      28,440         (494)     27,946
    Current portion of
     income taxes payable       3,606       8,010         (875)      7,135
    Current portion of
     senior secured term
     loan                      13,063       4,112            -       4,112
    Current portion of
     deferred tax
     liability                    119       1,053            -       1,053
    Current portion of
     deferred revenue         218,566     220,607        3,337     223,944
                           ----------  ----------  -----------  ----------
       Total current
        liabilities           282,554     284,028        2,010     286,038
Other long term
 liabilities                       10       2,617           (1)      2,616
Income taxes payable, less
 current portion               12,920      10,098            -      10,098
Senior secured term loan,
 less current portion          85,938     120,888            -     120,888
Deferred tax liability,
 less current portion           7,083      10,523            -      10,523
Deferred revenue, less
 current portion              122,910     112,157        5,683     117,840
                           ----------  ----------  -----------  ----------
    Total liabilities         511,415     540,311        7,692     548,003
Stockholders' equity:
  Common stock                    527         522            -         522
  Additional paid-in
   capital                    321,672     299,657          393     300,050
  Treasury stock, at cost    (182,667)   (159,842)           -    (159,842)
  Retained earnings            39,435      37,937        1,176      39,113
  Accumulated other
   comprehensive loss          (2,178)     (3,453)         270      (3,183)
                           ----------  ----------  -----------  ----------
    Total stockholders'
     equity                   176,789     174,821        1,839     176,660
                           ----------  ----------  -----------  ----------
Total liabilities and
 stockholders' equity      $  688,204  $  715,132  $     9,531  $  724,663
                           ==========  ==========  ===========  ==========



                              Websense, Inc.
                  Consolidated Statements of Cash Flows
                       (Unaudited and in thousands)


                                           Nine Months Ended
                             ---------------------------------------------
                             September
                             30, 2009           September 30, 2008
                             ---------  ----------------------------------
                                        Previously                   As
                                         Reported   Adjustments  Restated
 Operating activities:
 Net income (loss)           $     323  $  (17,927) $    (3,198) $ (21,125)
 Adjustments to reconcile
  net income (loss) to net
  cash provided by operating
  activities:
  Depreciation and
   amortization                 38,457      47,156            -     47,156
  Share-based compensation      18,412      18,009          346     18,355
  Deferred income taxes         (9,378)    (34,108)      (2,295)   (36,403)
  Unrealized loss (gain) on
   foreign exchange                141        (211)         135        (76)
  Tax shortfall from stock
   option exercises              1,810         569           40        609
  Changes in operating
   assets and liabilities:
   Accounts receivable          23,388      11,784            -     11,784
   Other assets                 (2,654)      2,907       (1,600)     1,307
   Accounts payable                139      (1,874)           -     (1,874)
   Accrued compensation and
    related benefits              (256)     (8,450)           -     (8,450)
   Other liabilities            (2,236)     (3,283)          15     (3,268)
   Deferred revenue               (307)     21,380        6,339     27,719
   Income taxes payable         (2,465)      7,337       (1,342)     5,995
                             ---------  ----------  -----------  ---------
 Net cash provided by
  operating activities          65,374      43,289       (1,560)    41,729
                             ---------  ----------  -----------  ---------
 Investing activities:
 Change in restricted cash
  and cash equivalents             747           -       (1,240)    (1,240)
 Purchase of property and
  equipment                     (9,013)     (6,289)           -     (6,289)
 Purchase of intangible
  assets                             -      (1,815)           -     (1,815)
 Cash refunded from
  PortAuthority acquisition          -         147            -        147
 Cash received from sale of
  CyberPatrol assets                 -       1,400            -      1,400
 Purchases of marketable
  securities                         -     (20,160)           -    (20,160)
 Maturities of marketable
  securities                         -      39,963            -     39,963
                             ---------  ----------  -----------  ---------
 Net cash (used in) provided
  by investing activities       (8,266)     13,246       (1,240)    12,006
                             ---------  ----------  -----------  ---------
 Financing activities:
 Principal payments on
  senior secured term loan     (26,000)    (50,000)           -    (50,000)
 Proceeds from exercise of
  stock options                  2,237       3,790            -      3,790
 Proceeds from issuance of
  common stock for stock
  purchase plan                  2,787       2,903            -      2,903
 Tax shortfall from stock
  option exercises              (1,810)       (569)         (40)      (609)
 Purchase of treasury stock    (22,454)    (14,998)           -    (14,998)
                             ---------  ----------  -----------  ---------
 Net cash used in financing
  activities                   (45,240)    (58,874)         (40)   (58,914)
                             ---------  ----------  -----------  ---------
 Effect of exchange rate
  changes on cash and cash
  equivalents                      292        (680)         155       (525)
 Increase (decrease) in cash
  and cash equivalents          12,160      (3,019)      (2,685)    (5,704)
 Cash and cash equivalents
  at beginning of period        64,096      66,383         (293)    66,090
                             ---------  ----------  -----------  ---------
 Cash and cash equivalents
  at end of period           $  76,256  $   63,364  $    (2,978) $  60,386
                             =========  ==========  ===========  =========



                              Websense, Inc.
          Reconciliation of GAAP to Non-GAAP Financial Measures
          (Unaudited and in thousands, except per share amounts)


                                         Three Months Ended
                           -----------------------------------------------
                           September
                            30, 2009           September 30, 2008
                           ----------  -----------------------------------
                                       Previously                   As
                                        Reported   Adjustments   Restated

GAAP Revenue               $   78,601  $   76,663  $    (1,779) $   74,884
   Deferred revenue
    related to SurfControl
    acquisition (1)             3,592      10,158          433      10,591
                           ----------  ----------  -----------  ----------
Non-GAAP Revenue           $   82,193  $   86,821  $    (1,346) $   85,475
                           ==========  ==========  ===========  ==========

GAAP Gross margin          $   65,432  $   64,374  $    (1,785) $   62,589
   Deferred revenue
    related to SurfControl
    acquisition (1)             3,592      10,158          433      10,591
   Amortization of
    acquired technology
    (3)                         3,036       2,943            -       2,943
   Restructuring and
    integration related
    items (4)                       -         130            -         130
   Severance charges from
    Q3 2009 reduction in
    force                         115           -            -           -
   Stock-based
    compensation (2)              345         314            6         320
                           ----------  ----------  -----------  ----------
     Gross margin
      adjustment                7,088      13,545          439      13,984
                           ----------  ----------  -----------  ----------
Non-GAAP Gross margin      $   72,520  $   77,919  $    (1,346) $   76,573
                           ==========  ==========  ===========  ==========

GAAP Operating expenses    $   64,169  $   66,844  $        70  $   66,914
   Severance charges from
    Q3 2009 reduction in
    force                      (1,202)          -            -           -
   Amortization of other
    intangible assets (3)      (6,591)     (9,364)           -      (9,364)
   Restructuring and
    integration related
    items (4)                     387        (358)           -        (358)
   Stock-based
    compensation (2)           (5,810)     (5,516)         (70)     (5,586)
                           ----------  ----------  -----------  ----------
     Operating expense
      adjustment              (13,216)    (15,238)         (70)    (15,308)
                           ----------  ----------  -----------  ----------
Non-GAAP Operating
 expenses                  $   50,953  $   51,606  $         -  $   51,606
                           ==========  ==========  ===========  ==========

GAAP Income (loss) from
 operations                $    1,263  $   (2,470) $    (1,855) $   (4,325)
     Gross margin
      adjustment                7,088      13,545          439      13,984
     Operating expense
      adjustment               13,216      15,238           70      15,308
                           ----------  ----------  -----------  ----------
Non-GAAP Income from
 operations                $   21,567  $   26,313  $    (1,346) $   24,967
                           ==========  ==========  ===========  ==========

GAAP Net loss              $   (1,925) $   (3,497) $    (1,316) $   (4,813)
     Gross margin
      adjustment                7,088      13,545          439      13,984
     Operating expense
      adjustment               13,216      15,238           70      15,308
     Amortization of
      deferred financing
      fees (5)                    322         513            -         513
     Impact of favorable
      tax ruling (6)                -           -            -           -
     Income tax effect on
      the above items (7)      (5,097)    (10,197)        (100)    (10,297)
                           ----------  ----------  -----------  ----------
Non-GAAP Net income        $   13,604  $   15,602  $      (907) $   14,695
                           ==========  ==========  ===========  ==========

GAAP Net loss per share    $    (0.04) $    (0.08) $     (0.03) $    (0.11)
   Non-GAAP adjustments as
    described above per
    share, net of tax
    (1-7)                        0.35        0.42         0.01        0.43
                           ----------  ----------  -----------  ----------
Non-GAAP Net income per
 share                     $     0.31  $     0.34  $     (0.02) $     0.32
                           ==========  ==========  ===========  ==========

GAAP Diluted common shares     44,131      45,097            -      45,097
   Effect of dilutive
    securities (8)                467         517            -         517
                           ----------  ----------  -----------  ----------
Non-GAAP Diluted common
 shares                        44,598      45,614            -      45,614
                           ==========  ==========  ===========  ==========



                              Websense, Inc.
          Reconciliation of GAAP to Non-GAAP Financial Measures
          (Unaudited and in thousands, except per share amounts)


                                    Nine Months Ended
                ----------------------------------------------------------
                September
                30, 2009                 September 30, 2008
                ---------  -----------------------------------------------
                           Previously Reported  Adjustments   As Restated

GAAP Revenue    $ 234,004  $           216,605  $     (6,339) $    210,266
   Deferred
    revenue
    related to
    SurfControl
    acquisition
    (1)            14,390               44,936         1,232        46,168
                ---------  -------------------  ------------  ------------
Non-GAAP
 Revenue        $ 248,394  $           261,541  $     (5,107) $    256,434
                =========  ===================  ============  ============

GAAP Gross
 margin         $ 196,604  $           180,709  $     (6,301) $    174,408
   Deferred
    revenue
    related to
    SurfControl
    acquisition
    (1)            14,390               44,936         1,232        46,168
   Amortization
    of acquired
    technology
    (3)             9,109                8,827             -         8,827
   Restructuring
    and
    integration
    related
    items (4)           3                  996             -           996
   Severance
    charges
    from Q3
    2009
    reduction
    in force          115                    -             -             -
   Stock-based
    compensation
    (2)             1,012                  991            28         1,019
                ---------  -------------------  ------------  ------------
     Gross
      margin
      adjustment   24,629               55,750         1,260        57,010
                ---------  -------------------  ------------  ------------
Non-GAAP Gross
 margin         $ 221,233  $           236,459  $     (5,041) $    231,418
                =========  ===================  ============  ============

GAAP Operating
 expenses       $ 192,114  $           205,348  $        400  $    205,748
   Severance
    charges
    from Q3
    2009
    reduction
    in force       (1,202)                   -             -             -
   Amortization
    of other
    intangible
    assets (3)    (19,771)             (28,092)            -       (28,092)
   Restructuring
    and
    integration
    related
    items (4)         166               (5,540)            -        (5,540)
   Stock-based
    compensation
    (2)           (17,400)             (17,010)         (320)      (17,330)
                ---------  -------------------  ------------  ------------
     Operating
      expense
      adjustment  (38,207)             (50,642)         (320)      (50,962)
                ---------  -------------------  ------------  ------------
Non-GAAP
 Operating
 expenses       $ 153,907  $           154,706  $         80  $    154,786
                =========  ===================  ============  ============

GAAP Income
 (loss) from
 operations     $   4,490  $           (24,639) $     (6,701) $    (31,340)
     Gross
      margin
      adjustment   24,629               55,750         1,260        57,010
     Operating
      expense
      adjustment   38,207               50,642           320        50,962
                ---------  -------------------  ------------  ------------
Non-GAAP Income
 from
 operations     $  67,326  $            81,753  $     (5,121) $     76,632
                =========  ===================  ============  ============

GAAP Net (loss)
 income         $     323  $           (17,927) $     (3,198) $    (21,125)
     Gross
      margin
      adjustment   24,629               55,750         1,260        57,010
     Operating
      expense
      adjustment   38,207               50,642           320        50,962
     Amortization
      of
      deferred
      financing
      fees (5)        911                1,878             -         1,878
     Impact of
      favorable
      tax
      ruling
      (6)               -               (2,682)            -        (2,682)
     Income tax
      effect on
      the above
      items (7)   (22,207)             (38,861)       (1,839)      (40,700)
                ---------  -------------------  ------------  ------------
Non-GAAP Net
 income         $  41,863  $            48,800  $     (3,457) $     45,343
                =========  ===================  ============  ============

GAAP Net (loss)
 income per
 share          $    0.01  $             (0.40) $      (0.07) $      (0.47)
   Non-GAAP
    adjustments
    as
    described
    above per
    share, net
    of tax
    (1-7)            0.92                 1.47         (0.01)         1.46
                ---------  -------------------  ------------  ------------
Non-GAAP Net
 income per
 share          $    0.93  $              1.07  $      (0.08) $       0.99
                =========  ===================  ============  ============

GAAP Diluted
 common shares     44,812               45,233             -        45,233
   Effect of
    dilutive
    securities
    (8)                 -                  400             -           400
                ---------  -------------------  ------------  ------------
Non-GAAP
 Diluted common
 shares            44,812               45,633             -        45,633
                =========  ===================  ============  ============

The non-GAAP financial measures included in the tables above are non-GAAP revenues, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP income from operations, non-GAAP net income and non-GAAP net income per share, which adjust for the following items: acquisition related adjustments, stock-based compensation expense, amortization of intangible assets and certain other items. We believe the presentation of these non- GAAP financial measures, when taken together with the corresponding GAAP financial measures, provides meaningful supplemental information regarding the Company's operating performance for the reasons discussed below. Our management uses these non-GAAP financial measures in assessing the Company's operating results, as well as when planning, forecasting and analyzing future periods. The annual operating plan approved by our Board of Directors is based upon non-GAAP financial measures and our management incentive plans also use non-GAAP financial measures as performance objectives. We believe that these non-GAAP financial measures also facilitate comparisons of the Company's performance to prior periods and to our peers and that investors benefit from an understanding of these non- financial measures.

(1) Deferred revenue related to SurfControl. We completed our acquisition of SurfControl in October 2007. At the time of the acquisition, SurfControl had recorded deferred revenue related to subscriptions commenced in the past for which revenue would be recognized in future periods (during the term of the subscription) as revenue recognition criteria are satisfied. The purchase accounting rules required us to write down a significant portion of this deferred revenue to its then current fair value. Consequently, in post acquisition periods, we do not recognize the full amount of this deferred revenue. When measuring the performance of our business, however, we add back non-GAAP revenue associated with the SurfControl deferred revenue that would have been recognized during the relevant accounting period that was excluded as a result of these purchase accounting adjustments, as we believe this provides information about the impact on operations of the acquired business in a manner consistent with the revenue recognition for our pre-existing services. We further believe that the inclusion of non-GAAP revenue enables investors to better understand the impact of the acquisition on the baseline revenue of the combined company and provides useful information to investors on revenue trends impacting the combined business.

(2) Stock-based compensation. Consists of non-cash expenses for employee stock options, restricted stock units and our employee stock purchase plan determined in accordance with SFAS 123(R). When evaluating the performance of our business and developing short and long-term plans, we do not consider stock-based compensation charges. Although stock-based compensation is necessary to attract and retain quality employees, our consideration of stock-based compensation places its primary emphasis on overall shareholder dilution rather than the accounting charges associated with such grants. Because of varying available valuation methodologies, subjective assumptions and the variety of award types, we believe that the exclusion of stock-based compensation allows for more accurate comparison of our financial results to previous periods. In addition, we believe it is useful to investors to understand the specific impact of the application of SFAS 123(R) on our operating results.

(3) Amortization of acquired technology and other intangible assets. When conducting internal development of intangible assets (including developed technology, customer relationships, trade-marks, etc.), accounting rules require that we expense the costs as incurred. In the case of acquired businesses, however, we are required to allocate a portion of the purchase price to the accounting value assigned to intangible assets acquired and amortize this amount over the estimated useful lives of the acquired intangibles. The acquired company, in most cases, has itself previously expensed the costs incurred to develop the acquired intangible assets, and the purchase price allocated to these assets is not necessarily reflective of the cost we would incur in developing the intangible asset. We eliminate these amortization charges from our non-GAAP operating results to provide better comparability of pre and post-acquisition operating results and comparability to results of businesses utilizing internally developed intangible assets.

(4) Restructuring and integration. We have engaged in various restructuring and integration activities in connection with our acquisitions that have resulted in costs associated with severance, benefits, excess facilities, integration travel, retention bonuses and professional fees. Each restructuring and integration has been a discrete event based on a unique set of business objectives or circumstances, and each has differed from the others in terms of its operational implementation, business impact and scope. We do not engage in these activities in the ordinary course of our business. We believe that it is important to understand these charges; however, we do not believe that these charges are indicative of future operating results and that investors benefit from an understanding of our operating results without giving effect to them, including in comparison to operating results for periods where no restructuring and integration costs were incurred.

(5) Amortization of deferred financing fees. This is a non-cash charge that can vary significantly in size and frequency depending on the optional prepayments we make on our senior secured term loan and, therefore, are disregarded by the Company's management when evaluating our ongoing performance and/or predicting our earnings trends, and excluded by us when presenting our non-GAAP financial measures. Further, we believe it is useful to investors to understand the specific impact of this charge on our operating results.

(6) Impact of favorable tax ruling. During the first quarter of 2008, we received a favorable state tax ruling regarding unrecognized state income tax benefits. Because the impact is non-recurring, we excluded the impact when presenting non-GAAP financial measures.

(7) Income tax effect on the above items. This amount adjusts the provision (benefit) for income taxes to reflect the effect of the non-GAAP adjustments on non-GAAP net income.

(8) Effect of dilutive securities. The effect of dilutive securities was excluded from GAAP diluted common shares due to the reported net loss under GAAP, but are included for non-GAAP diluted common shares since we have non- GAAP net income.



                              Websense, Inc.
                   Rollforward of GAAP Deferred Revenue
                       (Unaudited and in thousands)


GAAP deferred revenue balance at June 30, 2009                   $ 335,623
Net billings during third quarter 2009                              84,454
Less GAAP revenue recognized during third quarter 2009             (78,601)
                                                                 ---------
GAAP deferred revenue balance at September 30, 2009              $ 341,476
                                                                 =========



                              Websense, Inc.
                  Rollforward of Non-GAAP Deferred Revenue
                        (Unaudited and in thousands)


Non-GAAP deferred revenue balance at June 30, 2009               $ 347,113
Net billings during third quarter 2009                              84,454
Less Non-GAAP revenue recognized during third quarter 2009         (82,193)
                                                                 ---------
Non-GAAP deferred revenue balance at September 30, 2009          $ 349,374
                                                                 =========



                              Websense, Inc.
             Reconciliation of GAAP to Non-GAAP Deferred Revenue
                        (Unaudited and in thousands)


GAAP deferred revenue balance at September 30, 2009              $ 341,476
Addback:  Deferred revenue related to SurfControl acquisition        7,898
                                                                 ---------
Non-GAAP deferred revenue balance at September 30, 2009          $ 349,374
                                                                 =========



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