SOURCE: Websense, Inc.

Websense, Inc.

February 01, 2011 16:15 ET

Websense Closes 2010 With Record Revenue and Momentum in Sales of TRITON-Based Web and Data Security Solutions to Enterprise Customers

-- Revenue, billings, net income and operating cash flow within guidance ranges for quarter and year

-- Record year-end deferred revenue of $394 million

-- 2011 outlook anticipates growth in billings, revenue and net income

-- Quarterly share repurchases under Rule 10b5-1 buyback plan increased to $25 million

SAN DIEGO, CA--(Marketwire - February 1, 2011) - Websense, Inc. (NASDAQ: WBSN) today announced financial results for the fourth quarter and fiscal year 2010. Commenting on the company's market position and outlook, Websense CEO Gene Hodges said,

"We began to gain traction in 2010 with our new generation of TRITON™-based Web and data security solutions. After a period of investment and transformation, our sales productivity began to improve in the fourth quarter, and we enter 2011 with a strong team capable of generating continued top-line growth."

"Our multi-year investment in new product innovation is fundamental to our future, and is paying dividends. Incremental end-user billings increased 14.9 percent in 2010, and the momentum and mix of our business have shifted to our TRITON-based Web Security Gateway family. We successfully closed multiple seven-figure transactions in the fourth quarter, further substantiating the positive market response for our most advanced technologies," Hodges added.

Commenting on the company's financial performance, Websense CFO Art Locke said, "Our continued financial discipline has allowed us to support our investments in our global operations and product innovation, and still generate strong operating cash flow and increased net income. We also reduced our share count through increased share repurchases, reduced our total indebtedness, and implemented a new credit facility with more favorable terms and increased operating flexibility. Our confidence in our long-term business model supports our decision to increase our planned share repurchases to $100 million in 2011."

Fourth Quarter 2010 GAAP Financial Highlights

--  Revenue of $86.4 million, up 8.4 percent from the fourth quarter of
    2009.
--  Operating income of $7.7 million, compared with a loss of
    $1.4 million, in the fourth quarter of 2009.
--  Net income of $8.9 million, or 21 cents per diluted share, compared
    with a net loss of $11.0 million, or 25 cents per diluted share, in
    the fourth quarter of 2009.
--  Weighted average diluted shares outstanding of 42.2 million, compared
    with 43.7 million in the fourth quarter of 2009.
--  Share repurchases of approximately 1.2 million shares of its common
    stock for approximately $25 million.
--  Cash flow from operations of $14.0 million, compared with
    $29.0 million in the fourth quarter of 2009.
--  Quarter-end accounts receivable of $82.2 million, compared with
    $53.5 million at the end of the third quarter of 2010 and
    $82.5 million at the end of the fourth quarter of 2009.
--  Days billings outstanding of 67 days, an increase of 5 days from the
    end of the third quarter of 2010 and the fourth quarter of 2009.
--  Deferred revenue of $394.3 million, up 3.7 percent compared with the
    end of 2009. Current deferred revenue of $251.9 million, an increase
    of 5.4 percent compared with the end of 2009. Long term deferred
    revenue of $142.4 million, an increase of 0.9 percent compared with
    the end of 2009.

Fourth Quarter 2010 Non-GAAP(1) Financial Highlights

--  Net billings of $111.2 million, down 6.0 percent compared with the
    fourth quarter of 2009.  Changes in currency exchange rates, compared
    with exchange rates prevailing in the fourth quarter of 2009, reduced
    net billings in the quarter by approximately $2.5 million.  OEM
    billings in the fourth quarter declined $3.3 million compared with the
    fourth quarter of 2009.
--  Non-GAAP revenue of $86.6 million, compared to $82.5 million in 2009,
    including approximately $0.2 million and $2.8 million of revenue,
    respectively, from SurfControl that would have been recognized during
    these periods had SurfControl remained an independent operating
    company reporting under GAAP.(2)
--  Non-GAAP operating income of $19.5 million, an increase of
    11.4 percent compared with the fourth quarter of 2009.
--  Non-GAAP net income of $13.3 million, or 32 cents per diluted share, 
    an increase of 17.6 percent compared in the fourth quarter of 2009.


                        Quarterly Billings Metrics

                                                  Q4'10    Q4'09     Y/Y
Millions, except contract value and duration     Reported Reported Change
                                                 -------- -------- -------
Total net billings:                              $  111.2 $  118.3    -6.0%
                                                 -------- -------- -------
  Net billings to end-user customers             $  109.5 $  113.2    -3.3%
                                                 -------- -------- -------
    Incremental end-user net billings(3)         $   32.6 $   31.1     4.8%
                                                 -------- -------- -------
    Net end-user billings from renewals          $   76.8 $   82.1    -6.5%
                                                 -------- -------- -------
  OEM billings                                   $    1.8 $    5.1   -64.7%
                                                 -------- -------- -------
International net billings to end-user customers $   58.0 $   60.8    -4.6%
                                                 -------- -------- -------
Average annualized contract value                $ 11,200 $  9,800    14.3%
                                                 -------- -------- -------
Average contract duration (months)                   24.6     24.2     1.7%
                                                 -------- -------- -------

Exchange rates used in FX-neutral calculations
      Euro                                       $   1.33 $   1.49   -10.7%
                                                 -------- -------- -------
      Pound Sterling                             $   1.57 $   1.64    -4.3%
                                                 -------- -------- -------

(1) A detailed description of the company's non-GAAP financial measures
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 tables "Reconciliation of GAAP to Non-GAAP Financial Measures."
(2) 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.
(3) Incremental billings include upgrades to new products by
existing/renewing customers (i.e., data security, Hosted, and the
incremental portion of Web security gateway family migrations)
and new customer product purchases.

Fiscal Year 2010 GAAP Financial Highlights

--  Revenue of $332.8 million, an increase of 6.1 percent from 2009.
--  Operating income of $30.8 million, compared with operating income of
    $3.1 million in 2009.
--  Net income of $18.7 million, or 43 cents per diluted share, compared
    with a net loss of $10.7 million, or 24 cents per diluted share, in
    2009.
--  Cash flow from operations of $90.1 million, down 2.9 percent compared
    with 2009.
--  Weighted average diluted shares outstanding of 43.3 million, a
    decrease of approximately 0.9 million shares compared with 2009.
--  Share repurchases of about 4.1 million shares of its common stock
    for approximately $85 million.

Fiscal Year 2010 Non-GAAP(1) Financial Highlights

--  Net billings of $347.0 million, a decrease of 1.4 percent compared
    with 2009.  Differences in currency exchange rates, compared with
    exchange rates prevailing in 2009, reduced net billings for the year
    by approximately $2.5 million.  OEM billings declined $7.1 million
    from 2009.
--  Non-GAAP revenue of $337.0 million, up 1.8 percent compared with
    $330.9 million in 2009.  Non-GAAP revenue included approximately
    $4.3 million and $17.2 million of revenue, respectively, from
    SurfControl that would have been recognized during these periods had
    SurfControl remained an independent operating company reporting under
    GAAP.(2)
--  Non-GAAP operating income of $83.6 million, a decrease of 1.4% from
    2009.
--  Non-GAAP net income of $54.5 million, an increase of 2.5 percent from
    2009.
--  Non-GAAP earnings per diluted share of $1.26, up 5.9% from 2009.


                          Annual Billings Metrics

                                                  FY2010   FY2009    Y/Y
Millions, except contract value and duration     Reported Reported Change
                                                 -------- -------- -------
Total net billings:                              $  347.0 $  352.0    -1.4%
                                                 -------- -------- -------
  Net billings to end-user customers             $  336.2 $  334.2     0.6%
                                                 -------- -------- -------
    Incremental end-user net billings(3)         $   97.7 $   85.0    14.9%
                                                 -------- -------- -------
    Net end-user billings from renewals          $  238.5 $  249.2    -4.3%
                                                 -------- -------- -------
  OEM billings                                   $   10.7 $   17.8   -39.9%
                                                 -------- -------- -------
International net billings to end-user customers $  172.9 $  173.0    -0.1%
                                                 -------- -------- -------
Average annualized contract value                $  9,100 $  8,000    13.8%
                                                 -------- -------- -------

(1) A detailed description of the company's non-GAAP financial measures
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 tables "Reconciliation of GAAP to Non-GAAP Financial Measures."
(2) 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.
(3) Incremental billings include upgrades to new products by
existing/renewing customers (i.e., data security, Hosted, and the
incremental portion of Web security gateway family migrations)
and new customer product purchases.

Share Repurchases Under 10b5-1 Plan Increased

Reflecting confidence in the company's 2011 outlook, as well as increased operating flexibility under the company's new credit facility, the Board of Directors increased the value of the shares to be repurchased under the company's existing Rule 10b5-1 Plan to $25 million per quarter, or $100 million for the year. Rule 10b5-1 permits the company to repurchase shares when it might otherwise be precluded from doing so under insider trading laws, allowing the company to make regular purchases throughout the quarter.

Restatement of Previously Issued Consolidated Financial Statements for 2007 Tax Event

Websense filed a Form 8-K with the SEC this afternoon announcing a restatement of its 2007 financial statements relating to an error in the calculation of its deferred tax assets dating back to 2003. The error resulted in the company reporting overstated deferred tax assets of approximately $5.8 million in its financial statements for fiscal years 2003 through 2008. In 2009, the company reclassified the amount from deferred tax assets to income tax receivable because of a belief at the time that the amount was related to monthly-to-daily revenue adjustments for fiscal years 2006 through 2008 and would be recoverable by amending the company's tax returns for those years. The company subsequently discovered the amount was instead related to an error in the calculation of the deferred tax assets when it changed its tax method of accounting for deferred revenue in 2003. The statute of limitations allowing the company to amend its 2003 tax return to correct the error and to claim a refund for the 2003 tax year expired in September 2007, thus there is substantial uncertainty as to whether the company will be able to realize the amount. As a result of this uncertainty, the company's 2007 financial statements should have reflected a write-off of the $5.8 million deferred tax asset. The financial statements included in this press release reflect the correction, and the error will be corrected in the company's Form 10-K for the 2010 fiscal year that the company plans to file with the SEC on or about February 10, 2011. The correction will also include related adjustments to reflect the write-off on the deferred income taxes, income taxes receivable and retained earnings balances in the Company's consolidated balance sheets and consolidated statements of stockholders' equity for the years ended December 31, 2008 and 2009.

Retirement of Doug Wride, Chief Operating Officer

The company announced today that Doug Wride, who has served as an executive officer of the company since 1999, including as the company's chief operating officer since January 2009, will retire effective February 15, 2011. Wride joined Websense in 1999 as chief financial officer and has served in various capacities, including president and chief financial officer, in addition to chief operating officer. During Wride's tenure, Websense completed its initial public offering and grew annual revenue from less than $10 million to more than $300 million. After the acquisition of SurfControl in 2007, Wride led the integration of the two companies, eliminating more than $60 million in annual operating costs from the combined entity. Most recently, Wride focused on further developing the company's solution provider relationships and distribution channels, including the company's Enterprise Alliance Partner initiative.

Future Outlook

Websense provides annual guidance on anticipated financial performance for the year based on an assessment of the current business environment, historical seasonal business trends, and prevailing exchange rates between the U.S. dollar and other major currencies. In providing guidance, the company emphasizes that all forward-looking statements are based on current expectations, including average contract duration between 22 and 24 months, and currency exchange rates of $1.36 for the Euro and $1.58 for the Pound Sterling, and disclaims any obligation to update the statements as circumstances change. The company updates its annual outlook quarterly with its release of interim results.

                                                        2011 Outlook
                                                      (as of 02/01/11)
                                                  -------------------------

  Net billings                                       $357 - $374 million

  Net billings to end-user customers                 $351 - $368 million

  OEM billings                                    Approximately $6 million

  GAAP revenue                                       $358 - $368 million

  Non-GAAP gross margin                               Approximately 84%

  Non-GAAP operating expenses                         Increase 8-9% y/y

  Non-GAAP earnings per diluted share                   $1.50 - $1.60

  Estimated non-GAAP tax rate                         Approximately 20%

  Average diluted shares outstanding              Approximately 40 million

  Cash flow from operations                           $80 - $90 million

  Capital expenditures                            Approximately $10 million

Management further expects:

--  Sequential growth in billings trends to follow historical seasonal
    patterns for the year.
--  First quarter billings to be approximately flat compared with the
    first quarter of 2010, and trend higher in subsequent quarters as
    sales productivity improves and TRITON-based Web, email, and data
    products continue to gain momentum.
--  Growth in cash flow from operations to reach the mid-teens in 2012,
    compared with expected operating cash flow of between $80 and
    $90 million in 2011.

The Company's future outlook reflects the following changes in policy, effective January 1, 2011:

--  Adoption of ASU 2009-13, Revenue Arrangements with Multiple
    Deliverables and ASU 2009-14, Certain Revenue Arrangements that
    Contain Software Elements
    Websense is required to implement new revenue recognition rules
    under which revenue for sales of appliances and the related costs
    will be recognized when sold and all other revenue recognition
    criteria are met. In general, this means Websense will no longer
    amortize the revenue and costs for appliance sales booked in 2011 over
    the software subscription period. Adoption of the new rules will not
    change recognition of subscription software revenue or how billings
    are reported.  The adoption of these rules, compared with our previous
    method of ratable appliance recognition, could increase the
    variability in revenue and net income in any given quarter.  The range
    of expected annual appliance billings provided for 2011 reflects this
    variability between quarterly reporting periods.

    The new rules are not being adopted retroactively and approximately
    $20 million in deferred revenue and approximately $9 million in
    deferred costs as of December 31, 2010 associated with past appliance
    sales will be recognized ratably over the remaining subscription terms.
    For 2011, revenue and non-GAAP net income guidance includes
    approximately $11.4 million in revenue and $5.1 million in costs
    associated with past appliance sales, as well as revenue and costs
    associated with 2011 appliance billings.   The Company expects to
    recognize $3.5 million of past appliance subscription revenue in the
    first quarter, declining to $2.1 million in the fourth quarter.  2011
    guidance assumes that billings for appliances will total 6 to 7
    percent of total 2011 net billings and will be recognized as revenue
    immediately.  Based on the total net billings guidance range and
    recognition of $11.4 million in appliance revenue from current
    deferred revenue, appliances are expected to account for between 9
    and 10 percent of total revenue.  Accelerated recognition of appliance
    revenue is expected to positively impact non-GAAP earnings per fully
    diluted share by approximately 14 cents in 2011.

--  International Distribution Restructuring
    Effective in 2011, the company has restructured its international
    distribution operations, which will reduce the complexity and
    compliance risks associated with its global distribution activities.
    The new structure also is expected to reduce the company's long-term
    non-GAAP effective tax rate by approximately six percentage points.
    The new long-term effective rate will be applied to non-GAAP income
    before tax beginning with the first quarter of 2011 and is expected to
    increase the company's non-GAAP earnings per fully diluted share by
    approximately 12 cents in 2011.

--  Change in Policy Used to Determine Non-GAAP Effective Tax Rate
    Beginning with the first quarter of 2011, the company's non-GAAP tax
    rate will reflect estimated tax benefits from the company's
    equity-based compensation plan and other tax deductible amortization.
    These benefits are fully reflected in the calculation of the GAAP tax
    provision and have the effect of reducing the company's cash tax
    obligations.  By including these tax benefits in the non-GAAP
    effective tax rate, the company's non-GAAP tax provision will more
    closely reflect the company's cash tax obligations over time.  The
    company will continue to exclude share-based compensation expense and
    amortization from its operating expenses when reporting its non-GAAP
    net income and non-GAAP earnings per fully diluted shares.

    The company estimates this policy change will reduce its 2011 non-GAAP
    effective tax rate by about six percentage points compared with 2010.
    This policy change is also expected to increase the company's non-GAAP
    earnings per fully diluted share by approximately 11 cents in 2011.

Conference Call Details

Management will host a conference call and simultaneous webcast to discuss the financial results and outlook today, February 1, at 2 p.m. Pacific Standard Time. To participate in the conference call, investors should dial 866-757-5630 (domestic) or 707-287-9356 (international) 10 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 website through March 31, 2011, and a recorded replay of the call will be available for one week at 800-642-1687 or 706-645-9291, pass code 35027915.

Non-GAAP Financial Measures

This news release provides financial measures for the fourth quarter and fiscal years 2010 and 2009, including measures for revenue, income from operations, net income, and earnings per diluted share, that include revenue from SurfControl that would have been recognized during the respective periods of 2010 and 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 SurfControl's deferred revenue to fair value as of the acquisition date. In addition, non-GAAP operating results for the respective periods of both years exclude certain cash and non-cash expenses relating to the company's acquisitions, primarily including amortization of intangible assets and deferred financing fees, as well as share-based compensation expense and related tax effects for the fiscal years 2009 and 2010. As described below, guidance for future periods excludes the related tax effects as the company implements the change in policy used to determine the non-GAAP effective tax rates. Based on the foregoing, the company's presentation of non-GAAP revenue, 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 for the current and prior year quarters and year-to-date periods 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 non-GAAP guidance for the fiscal years 2011 and future periods, including guidance for gross margin, operating expenses, earnings per diluted share and effective tax rate that are based on non-GAAP operating expenses that are calculated in the same manner used to calculate historical non-GAAP operating expenses as described above, except that the company has implemented a change for 2011 in the policy used to determine its non-GAAP effective tax rate to better reflect the current tax code by giving effect to the tax benefits the company receives from equity-based compensation programs and the amortization of certain other items.

This news release also includes financial measures for net billings for the fourth quarter and fiscal years 2010 and 2009, net billings outlook for 2011 and 2012, and other billings-related measures that are not numerical measures that can be calculated in accordance with GAAP. Websense provides these measurements in reporting financial performance because these measurements provide a consistent basis for understanding the company's sales activities in the current period. The company believes these measurements are useful to investors because the GAAP measurements of revenue and deferred revenue in the current period include subscription contracts commenced in prior periods. The rollforwards of deferred revenue (which includes net billings and revenue) for the fourth quarter of 2010 are set forth at the end of this news release.

About Websense, Inc.

Websense, Inc. (NASDAQ: WBSN), a global leader in unified Web security, email security, and data loss prevention (DLP) solutions, delivers the best content security for modern threats at the lowest total cost of ownership to tens of thousands of enterprise, mid-market and small organizations around the world. Distributed through a global network of channel partners and delivered as software, appliance and Security-as-a-Service (SaaS), Websense content security solutions help organizations leverage Web 2.0 and cloud communication, collaboration, and social media while protecting from advanced persistent threats, preventing the loss of confidential information and enforcing Internet use and security policies. Websense is headquartered in San Diego, California with offices around the world. For more information, visit www.websense.com.

Follow Websense on Twitter: www.twitter.com/websense

Join the discussion on Facebook: www.facebook.com/websense

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 financial estimates, the statements of Gene Hodges and Art Locke, statements about our sales execution and competitive position, billings, revenue and growth trends, 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 company's 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)


                                 Three Months Ended       Years Ended
                                    December 31,          December 31,
                                --------------------  --------------------
                                  2010       2009       2010       2009
                                ---------  ---------  ---------  ---------
Revenues                        $  86,374  $  79,709  $ 332,762  $ 313,713
Cost of revenues (1)               14,417     13,406     53,090     50,806
                                ---------  ---------  ---------  ---------
Gross profit                       71,957     66,303    279,672    262,907
Operating expenses (1):
    Selling and marketing          41,624     44,837    157,758    166,910
    Research and development       13,368     13,496     54,325     52,643
    General and administrative      9,300      9,401     36,779     40,295
                                ---------  ---------  ---------  ---------
       Total operating expenses    64,292     67,734    248,862    259,848
                                ---------  ---------  ---------  ---------
Income from operations              7,665     (1,431)    30,810      3,059
Interest expense                     (881)    (1,425)    (3,715)    (7,084)
Other income (expense), net           115       (228)      (834)       384
                                ---------  ---------  ---------  ---------
Income (loss) before income
 taxes                              6,899     (3,084)    26,261     (3,641)
(Benefit) provision for income
 taxes                             (2,017)     7,936      7,609      7,056
                                ---------  ---------  ---------  ---------
Net income (loss)               $   8,916  $ (11,020) $  18,652  $ (10,697)
                                =========  =========  =========  =========

Basic net income (loss) per
 share                          $    0.22  $   (0.25) $    0.44  $   (0.24)
                                =========  =========  =========  =========
Diluted net income (loss) per
 share                          $    0.21  $   (0.25) $    0.43  $   (0.24)
                                =========  =========  =========  =========
Weighted average shares - basic    41,387     43,720     42,313     44,262
                                =========  =========  =========  =========
Weighted average shares -
 diluted                           42,172     43,720     43,342     44,262
                                =========  =========  =========  =========

Financial Data:
Total deferred revenue          $ 394,304  $ 380,112  $ 394,304  $ 380,112
                                =========  =========  =========  =========


(1) Includes share-based
     compensation as follows:

Cost of revenues                $     281  $     368  $   1,270  $   1,381
Selling and marketing               1,711      2,032      7,160      7,964
Research and development            1,150      1,402      5,285      5,206
General and administrative          1,928      2,551      8,850     10,214




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

                                                  December 31, December 31,
                                                     2010         2009
                                                  -----------  -----------
Assets
Current assets:
    Cash and cash equivalents                     $    77,390  $    82,862
    Cash and cash equivalents - restricted                256          267
    Accounts receivable, net                           82,182       82,529
    Income tax receivable/prepaid income tax            2,760        7,589
    Current portion of deferred income taxes           36,191       35,269
    Other current assets                               14,708       11,461
                                                  -----------  -----------
       Total current assets                           213,487      219,977
Cash and cash equivalents - restricted, less
 current portion                                          434          167
Property and equipment, net                            16,944       16,494
Intangible assets, net                                 41,078       67,563
Goodwill                                              372,445      372,445
Deferred income taxes, less current portion             6,352       11,106
Deposits and other assets                              11,203        8,094
                                                  -----------  -----------
Total assets                                      $   661,943  $   695,846
                                                  ===========  ===========

Liabilities and stockholders' equity
Current liabilities:
    Accounts payable                              $     6,858  $     5,135
    Accrued compensation and related benefits          22,168       21,953
    Other accrued expenses                             18,704       19,965
    Current portion of income taxes payable               549        1,938
    Current portion of secured loan                         -       12,429
    Current portion of deferred tax liability             367        4,572
    Current portion of deferred revenue               251,890      239,010
                                                  -----------  -----------
       Total current liabilities                      300,536      305,002
Other long term liabilities                             2,388        1,298
Income taxes payable, less current portion             16,065       15,988
Secured loan, less current portion                     67,000       74,571
Deferred tax liability, less current portion            1,877          970
Deferred revenue, less current portion                142,414      141,102
                                                  -----------  -----------
    Total liabilities                                 530,280      538,931
Stockholders' equity:
  Common stock                                            548          529
  Additional paid-in capital                          373,229      330,451
  Treasury stock, at cost                            (282,570)    (194,672)
  Retained earnings                                    41,253       22,601
  Accumulated other comprehensive loss                   (797)      (1,994)
                                                  -----------  -----------
    Total stockholders' equity                        131,663      156,915
                                                  -----------  -----------
Total liabilities and stockholders' equity        $   661,943  $   695,846
                                                  ===========  ===========




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

                                                  Years Ended December 31,
                                                  ------------------------
                                                      2010         2009
                                                  -----------  -----------
Operating activities:
Net income (loss)                                 $    18,652  $   (10,697)
Adjustments to reconcile net income (loss) to
 net cash provided by operating activities:
  Depreciation and amortization                        37,873       51,374
  Share-based compensation                             22,565       24,765
  Deferred income taxes                                  (264)        (586)
  Unrealized loss on foreign exchange                     490          512
  Excess tax benefit from share-based
   compensation                                        (1,552)        (208)
  Changes in operating assets and liabilities:
    Accounts receivable                                 1,712         (535)
    Other assets                                       (5,121)     (10,256)
    Accounts payable                                    2,346        2,659
    Accrued compensation and related benefits            (274)       3,431
    Other liabilities                                  (2,246)      (7,785)
    Deferred revenue                                   14,191       38,329
    Income taxes payable and receivable/prepaid         1,747        1,852
                                                  -----------  -----------
Net cash provided by operating activities              90,119       92,855
                                                  -----------  -----------
Investing activities:
Change in restricted cash and cash equivalents           (199)       2,347
Purchase of property and equipment                     (9,259)     (12,167)
Purchase of intangible assets                               -         (320)
                                                  -----------  -----------
Net cash used in investing activities                  (9,458)     (10,140)
                                                  -----------  -----------
Financing activities:
Proceeds from secured loan                              5,000            -
Principal payments on secured loan                    (25,000)     (38,000)
Principal payments on capital lease obligation           (532)           -
Deferred financing fees under secured loan               (864)           -
Proceeds from exercise of stock options                15,992        2,433
Proceeds from issuance of common stock for
 employee stock purchase plan                           5,991        5,432
Excess tax benefit from share-based compensation        1,552          208
Tax payments related to restricted stock unit
 issuances                                             (2,896)        (329)
Purchase of treasury stock                            (84,854)     (34,158)
                                                  -----------  -----------
Net cash used in financing activities                 (85,611)     (64,414)
                                                  -----------  -----------
Effect of exchange rate changes on cash and cash
 equivalents                                             (522)         465
(Decrease) increase in cash and cash equivalents       (5,472)      18,766
Cash and cash equivalents at beginning of year         82,862       64,096
                                                  -----------  -----------
Cash and cash equivalents at end of year          $    77,390  $    82,862
                                                  ===========  ===========

  Income taxes paid, net of refunds               $     6,792  $     9,899




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

                                 Three Months Ended       Years Ended
                                    December 31,          December 31,
                                --------------------  --------------------
                                  2010       2009       2010       2009
                                ---------  ---------  ---------  ---------
GAAP Revenues                   $  86,374  $  79,709  $ 332,762  $ 313,713
   Deferred revenue related to
    SurfControl acquisition (1)       244      2,796      4,254     17,185
                                ---------  ---------  ---------  ---------
Non-GAAP Revenues               $  86,618  $  82,505  $ 337,016  $ 330,898
                                =========  =========  =========  =========

GAAP Gross profit               $  71,957  $  66,303  $ 279,672  $ 262,907
   Deferred revenue related to
    SurfControl acquisition (1)       244      2,796      4,254     17,185
   Amortization of acquired
    technology (3)                  2,124      3,043      8,498     12,151
   Restructuring and integration
    related items (4)                   -          -          -          2
   Severance charges from Q3
    2009 reduction in force (5)         -          -          -        115
   Share-based compensation (2)       281        368      1,270      1,381
                                ---------  ---------  ---------  ---------
     Gross profit adjustment        2,649      6,207     14,022     30,834
                                ---------  ---------  ---------  ---------
Non-GAAP Gross profit           $  74,606  $  72,510  $ 293,694  $ 293,741
                                =========  =========  =========  =========

GAAP Operating expenses         $  64,292  $  67,734  $ 248,862  $ 259,848
   Amortization of other
    intangible assets (3)          (4,380)    (6,590)   (17,522)   (26,363)
   Restructuring and integration
    related items (4)                   -       (144)         -         21
   Severance charges from Q3
    2009 reduction in force (5)         -          -          -     (1,202)
   Share-based compensation (2)    (4,789)    (5,985)   (21,295)   (23,384)
                                ---------  ---------  ---------  ---------
     Operating expense
      adjustment                   (9,169)   (12,719)   (38,817)   (50,928)
                                ---------  ---------  ---------  ---------
Non-GAAP Operating expenses     $  55,123  $  55,015  $ 210,045  $ 208,920
                                =========  =========  =========  =========

GAAP Income (loss) from
 operations                     $   7,665  $  (1,431) $  30,810  $   3,059
     Gross profit adjustment        2,649      6,207     14,022     30,834
     Operating expense
      adjustment                    9,169     12,719     38,817     50,928
                                ---------  ---------  ---------  ---------
Non-GAAP Income from operations $  19,483  $  17,495  $  83,649  $  84,821
                                =========  =========  =========  =========

GAAP Net income (loss)          $   8,916  $ (11,020) $  18,652  $ (10,697)
     Gross profit adjustment        2,649      6,207     14,022     30,834
     Operating expense
      adjustment                    9,169     12,719     38,817     50,928
     Amortization of deferred
      financing fees (6)              463        306      1,049      1,217
     Income tax effect on the
      above items (7)              (7,911)     3,082    (18,039)   (19,125)
                                ---------  ---------  ---------  ---------
Non-GAAP Net income             $  13,286  $  11,294  $  54,501  $  53,157
                                =========  =========  =========  =========

GAAP Net income (loss) per
 share                          $    0.21  $   (0.25) $    0.43  $   (0.24)
   Non-GAAP adjustments as
    described above per share,
    net of tax (1-7)                 0.11       0.51       0.83       1.43
                                ---------  ---------  ---------  ---------
Non-GAAP Net income per share   $    0.32  $    0.26  $    1.26  $    1.19
                                =========  =========  =========  =========

GAAP Diluted common shares         42,172     43,720     43,342     44,262
   Effect of dilutive
    securities (8)                      -        553          -        416
                                ---------  ---------  ---------  ---------
Non-GAAP Diluted common shares     42,172     44,273     43,342     44,678
                                =========  =========  =========  =========


The non-GAAP financial measures included in the tables above are non-GAAP
revenues, non-GAAP gross profit, non-GAAP operating expenses, non-GAAP
income from operations, non-GAAP net income, non-GAAP net income per share
and non-GAAP diluted common shares, which adjust for the following items:
acquisition related adjustments, share-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 subscriptions) 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) Share-based compensation. Consists of non-cash expenses for employee
stock options, restricted stock units and our employee stock purchase plan
determined in accordance with the fair value method of accounting for
share-based compensation. When evaluating the performance of our business
and developing short and long-term plans, we do not consider share-based
compensation charges. Although share-based compensation is necessary to
attract and retain quality employees, our consideration of share-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 share-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 the fair value method
of accounting for share-based compensation 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.), GAAP 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) Severance charges from Q3 2009 reduction in force. We have excluded
this non-recurring charge as it is not indicative of future operating
results.

(6) Amortization of deferred financing fees. This is a non-cash charge that
is 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.

(7) Income tax effect on the above items. This amount adjusts the provision
for income taxes using our non-GAAP tax rate to reflect the effect of the
non-GAAP adjustments on non-GAAP net income.  Commencing in 2011, the
company will be implementing changes in how it calculates its non-GAAP
effective tax rate as compared to 2010 and prior periods.

(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 GAAP Deferred Revenue
                         (Unaudited and in thousands)

GAAP deferred revenue balance at September 30, 2010              $ 369,431
Net billings during fourth quarter 2010                            111,247
Less GAAP revenue recognized during fourth quarter 2010            (86,374)
                                                                 ---------
GAAP deferred revenue balance at December 31, 2010               $ 394,304
                                                                 =========



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

Non-GAAP deferred revenue balance at September 30, 2010          $ 370,522
Net billings during fourth quarter 2010                            111,247
Less Non-GAAP revenue recognized during fourth quarter 2010        (86,618)
Less adjustment to remove remaining Non-GAAP deferred
 revenue related to SurfControl acquisition at December 31, 2010      (847)
                                                                 ---------
Non-GAAP deferred revenue balance at December 31, 2010           $ 394,304
                                                                 =========

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