SOURCE: Websense, Inc.

May 01, 2008 16:15 ET

Websense Confirms Record Revenue for Q1'08

-- Strong Cash Flow Enabled Early Principal Payments of $30 Million on Long-Term Debt and Resumption of Share Repurchases

-- Non-GAAP Revenue and Operating Income at Record Levels, Reflecting Successful Integration of SurfControl

-- Guidance for 2008 Billings, Non-GAAP Revenue, Operating Margin and Diluted EPS Affirmed

SAN DIEGO, CA--(Marketwire - May 1, 2008) - Websense, Inc. (NASDAQ: WBSN) today announced financial results for the first quarter ended March 31, 2008, and reiterated its previously issued outlook for 2008.

First quarter revenue, calculated in accordance with U.S. generally accepted accounting principles (GAAP) was $67 million. The company posted a GAAP net loss of $6.2 million, or 14 cents per diluted share in the first quarter. GAAP operating results reflected the write-down of the majority of SurfControl's deferred revenue to fair value as of the acquisition date of October 3, 2007, and included certain operating expenses excluded from the non-GAAP results as described below. Operating cash flow for the quarter was approximately $19 million, after paying approximately $11 million in cash payments for acquisition-related costs and a legal settlement.

Non-GAAP Operating Results

Billings for the first quarter, which represent the full amount of subscription contracts billed to customers during the period, were $67.5 million. The average duration of first quarter contracts was 20.6 months, reflecting an increase in the mix of one-year contracts to 61 percent compared to 48 percent in one-year contracts in the first quarter of 2007.

First quarter non-GAAP revenue was a record $86.5 million, and included approximately $20 million in subscription revenue from past billings to SurfControl customers that would have been recognized during this period had SurfControl remained an independent company operating under GAAP. This subscription revenue was included in SurfControl's deferred revenue as of the acquisition date, but will not be recognized as subscription 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.

Non-GAAP operating income was a record $27.8 million, or 32.1 percent of non-GAAP revenue. First quarter non-GAAP operating expenses of $58.7 million exclude amortization of intangible assets, restructuring costs relating to headcount reduction and facility closures, integration travel, retention bonuses, professional fees for restructuring activities and stock-based compensation expense. In addition, the non-GAAP expenses exclude non-cash amortization of deferred financing fees and the non-recurring impact of a favorable tax ruling from the state of California.

First quarter non-GAAP net income was a record $16.1 million, or 35 cents per share. The excluded costs and reversal of a tax provision are detailed in the footnotes of the Reconciliation of GAAP to Non-GAAP Consolidated Statements of Operations.

"We have achieved our major cost cutting objectives in the integration of SurfControl," said Gene Hodges, Websense chief executive officer. "We are now focused on executing on the potential growth opportunities made possible through our expanded customer base, broader product offering, and increased global presence."

"Strong cash flow, driven by collections on record fourth quarter billings, allowed us to prepay $30 million against the principal balance of our long-term debt and repurchase $5 million of our common stock during the quarter," stated Dudley Mendenhall, Websense chief financial officer. "As anticipated, the acquisition of SurfControl became accretive to our cash flows almost immediately for recurring operations. The combined business generates substantial cash flows, reflecting our market leadership position and the strength of our subscription-based business model."

Balance Sheet Metrics

The company's balance sheet remains strong, with cash and marketable securities of $71.7 million and total GAAP deferred revenue of $287.6 million. During the quarter, the company repaid $30 million in long-term debt, bringing total early principal payments to date to $50 million and reducing long-term debt to $160 million from $210 million at the close of the SurfControl acquisition. The company also resumed share repurchases under a 10b5-1 plan, repurchasing a total of 264,400 shares for approximately $5 million, of which $2.2 million was paid after quarter end. Significant changes to the balance sheet compared to the prior quarter included:

--  A decrease in accounts receivable by $29.3 million, which reflected
    strong collections performance on fourth quarter billings.  Strong cash
    collections during the quarter resulted in a decline in days sales
    outstanding to 63 days from 66 days.
    
--  An increase of $0.9 million in GAAP deferred revenue, to a total of
    $287.6 million.  The increase primarily reflected the difference between
    billings booked and GAAP revenue recognized during the quarter and foreign
    exchange translation adjustments.
    

Quarterly Business Metrics

                                      Q1'08         Q4'07       Q1'07(1)
                                  ------------  ------------  ------------

Product seats under subscription  42.4 million  42.7 million  25.5 million

International billings (% of
 total)                                52%           55%           45%

Average annual contract value        $7,040        $8,100        $7,650

Average contract duration
 (months)                             20.6          23.4          23.4

Renewal rate                         75-80%        75-80%        75-80%

(1) Q1’07 metrics reflect Websense metrics prior to the acquisition of
SurfControl on October 3, 2007.

Outlook for Fiscal Year 2008

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, as well as assessments of historical SurfControl results adjusted to conform to GAAP. In providing fiscal year 2008 guidance, the company emphasizes that its forward-looking statements are based on current expectations and disclaims any obligation to update the statements as circumstances change.

                                                     2008 Guidance
                                                     (as of 5/1/08)
                                                ------------------------
Billings                                          $  345 - 355 million

Non-GAAP Revenue                                  $  325 - 335 million

GAAP revenue                                      $  274 - 284 million

Non-GAAP operating margin                               28 - 30%

Stock-based compensation expense                approximately $25 million

Amortization of intangible assets (non-cash)    approximately $50 million

Net cash interest expense                           $  9 - 11 million

Non-GAAP earnings per diluted share                  $1.15 - $1.25

Assumed non-GAAP tax rate                           approximately 35%

Average diluted shares outstanding                   46 - 47 million

Non-GAAP guidance for 2008 revenue includes approximately $51 million in subscription revenue from 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 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.

Websense continues to expect non-GAAP quarterly revenue to decline on a sequential basis and be within the range of $82 to $85 million for each of the remaining quarters of 2008.

Non-GAAP guidance for 2008 earnings per diluted share excludes stock-based compensation expense, as well as certain cash and non-cash expenses related to the acquisitions of PortAuthority and SurfControl and excludes the benefit of a favorable tax ruling from the state of California (as detailed in "Non-GAAP Financial Measures" below): Additionally, based on the current business outlook and collections trends, the company expects its cash flow from operations for 2008 to exceed $75 million, excluding acquisition related and legal settlement costs.

Conference Call

Management will host a conference call and simultaneous webcast to discuss these results today, May 1, at 2:00 p.m. Pacific Time. To participate in the call, investors should dial (877) 545-1414 (domestic) or (719) 325-4848 (international) ten minutes prior to the scheduled start of the call. Additionally, a live 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 June 30, 2008, and a taped replay of the call will be available for one week at (888) 203-1112 or (719) 457-0820, passcode 9919407.

Non-GAAP Financial Measures

This press release provides financial measures for the first quarter of 2008 and guidance for the full year, including guidance for revenue, operating margin, net income and earnings per diluted share, that include revenue from SurfControl that would have been recognized during the first quarter and full year 2008 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, first quarter non-GAAP operating results and full year guidance exclude certain cash and non-cash expenses relating to the PortAuthority and SurfControl acquisitions including restructuring costs relating to headcount reduction and facility closures, integration travel, retention bonuses, amortization of intangible assets and deferred financing fees, and professional fees, as well as stock based compensation expense and exclude the benefit of the reversal of a tax provision based upon a favorable tax ruling from the state of California. Based on the foregoing, the company's presentation of non-GAAP revenue, operating margin, 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 statements of operations for the first quarter is provided at the end of this press release.

This press release also includes financial measures for billings that are not numerical measures that can be calculated in accordance with GAAP. Websense provides this measurement in press 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 reconciliation of billings to deferred revenue for the first quarter of 2008 is set forth at the end of this press release.

About Websense, Inc.

Websense, Inc. (NASDAQ: WBSN), a global leader in integrated Web, messaging and data protection technologies, provides Essential Information Protection™ for more than 42 million employees at more than 50,000 organizations 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 and SurfControl are registered trademarks 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 press 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 statements attributed to Gene Hodges and Dudley Mendenhall, the guidance and financial outlook for the company's 2008 fiscal year, and statements containing the words "planned," "expects," "believes," "strategy," "opportunity," "anticipates" and similar words. These statements may include, among others, plans, strategies and objectives of management for future operations. The potential risks and uncertainties which contribute to the uncertain nature of these statements include, among others, risks associated with integrating acquired businesses and 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 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.

Tables to follow

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

                                                  Three Months Ended
                                            ------------------------------
                                            March 31, 2008  March 31, 2007

                                            --------------  ---------------

Revenue                                     $       66,984  $        49,747
Cost of revenues
    Cost of revenues                                 8,867            4,028
    Amortization of acquired technology              3,072              629
                                            --------------  ---------------
       Total cost of revenues                       11,939            4,657
                                            --------------  ---------------
Gross margin                                        55,045           45,090
Operating expenses:
    Selling and marketing                           42,821           24,913
    Research and development                        13,460            8,396
    General and administrative                      12,853            7,186
                                            --------------  ---------------
       Total operating expenses                     69,134           40,495
                                            --------------  ---------------
(Loss) income from operations                      (14,089)           4,595
Interest expense                                    (4,432)               -
Other (expense) income, net                           (109)           2,440
                                            --------------  ---------------
(Loss) income before income taxes                  (18,630)           7,035
(Benefit) provision for income taxes               (12,393)           3,168
                                            --------------  ---------------
Net (loss) income                           $       (6,237) $         3,867
                                            ==============  ===============

Basic net (loss) income per share           $        (0.14) $          0.09
                                            ==============  ===============
Diluted net (loss) income per share         $        (0.14) $          0.09
                                            ==============  ===============

Basic common shares                                 45,395           44,830
                                            ==============  ===============
Diluted common shares                               45,395           45,485
                                            ==============  ===============

Financial Data:
Total deferred revenue                      $      287,628  $       286,685
                                            ==============  ===============




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

                                               March 31,     December 31,
                                                 2008            2007
                                            --------------  --------------
Assets
Current assets:
    Cash and cash equivalents               $       71,037  $       66,383
    Marketable securities                              632          19,781
    Accounts receivable, net                        47,044          76,328
    Prepaid income taxes                             2,161           3,734
    Current portion of deferred income
     taxes                                          29,203          22,870
    Other current assets                            11,325          10,109
                                            --------------  --------------
       Total current assets                        161,402         199,205
Property and equipment, net                         17,288          17,657
Intangible assets, net                             140,875         152,906
Goodwill                                           377,726         385,916
Deferred income taxes, less current portion         28,940          19,048
Deposits and other assets                            5,076           5,798
                                            --------------  --------------
Total assets                                $      731,307  $      780,530
                                            ==============  ==============
Liabilities and stockholders' equity
Current liabilities:
    Accounts payable                        $          256  $        3,255
    Accrued payroll and related benefits            19,958          28,960
    Other accrued expenses                          31,132          30,463
    Current portion of income taxes payable          7,677           1,531
    Current portion of deferred tax
     liability                                       7,984          10,399
    Current portion of deferred revenue            194,570         190,569
                                            --------------  --------------
       Total current liabilities                   261,577         265,177
Income taxes payable, less current portion           9,322          12,264
Senior secured credit facility                     160,000         190,000
Deferred revenue, less current portion              93,058          96,116
Deferred tax liability, less current portion        15,959          20,964
Other long term liabilities                          3,426           1,634
Stockholders' equity:
  Common stock                                         516             515
  Additional paid-in capital                       273,555         267,164
  Treasury stock                                  (144,797)       (139,792)
  Retained earnings                                 61,571          67,808
  Accumulated other comprehensive loss              (2,880)         (1,320)
                                            --------------  --------------
    Total stockholders' equity                     187,965         194,375
                                            --------------  --------------
Total liabilities and stockholders' equity  $      731,307  $      780,530
                                            ==============  ==============




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

                                  Three Months Ended March 31, 2008
                          ------------------------------------------------
                                  Acquisition   SFAS
                                    Related     123R    Favorable
                                    Adjust-   Adjust-      Tax
                            GAAP    ments(1)  ments(2)  Ruling(3) Non-GAAP
                          --------  --------  --------  --------  --------
Revenue                   $ 66,984  $ 19,555  $      -  $      -  $ 86,539

Cost of revenues:
  Cost of revenues           8,867      (563)     (361)        -     7,943
  Amortization of acquired
   technology                3,072    (2,943)        -         -       129
                          --------  --------  --------  --------  --------
    Total cost of revenues  11,939    (3,506)     (361)        -     8,072
                          --------  --------  --------  --------  --------
Gross margin                55,045    23,061       361         -    78,467
Operating expenses:
  Selling and marketing     42,821   (10,206)   (2,317)        -    30,298
  Research and development  13,460      (476)   (1,124)        -    11,860
  General and
   administrative           12,853    (1,979)   (2,366)        -     8,508
                          --------  --------  --------  --------  --------
    Total operating
     expenses               69,134   (12,661)   (5,807)        -    50,666
                          --------  --------  --------  --------  --------
(Loss) income from
 operations                (14,089)   35,722     6,168         -    27,801
Interest expense            (4,432)    1,040         -         -    (3,392)
Other expense, net            (109)        -         -         -      (109)
                          --------  --------  --------  --------  --------
(Loss) income before
 income taxes              (18,630)   36,762     6,168         -    24,300
(Benefit) provision for
 income taxes              (12,393)   15,906     1,978     2,682     8,173
                          --------  --------  --------  --------  --------
Net (loss) income         $ (6,237) $ 20,856  $  4,190  $ (2,682) $ 16,127
                          ========  ========  ========  ========  ========
Diluted net (loss) income
 per share                $  (0.14) $   0.46  $   0.09  $  (0.06) $   0.35
                          ========  ========  ========  ========  ========
Diluted common shares       45,395    45,768    45,768    45,395    45,768
                          ========  ========  ========  ========  ========

(1) Acquisition Related Adjustments - Acquisition related adjustments from
the acquisition of SurfControl include the non-cash write-down of deferred
revenue ($19,555K), non-cash amortization of intangible assets ($11,727K ),
restructuring costs relating to headcount reduction ($283K) and facility
closures ($1,014K), integration travel ($211K), retention bonuses ($537K),
professional fees ($1,801K) and non-cash amortization of deferred financing
fees ($1,040K). Acquisition related adjustments from the acquisition of
PortAuthority include non-cash amortization of intangible assets ($580K)
and retention bonuses ($14K).

(2) SFAS 123R Adjustments – Non-cash stock-based compensation expense.

(3) Favorable Tax Ruling – Non-cash impact of favorable tax ruling from the
state of California.




                              Websense, Inc.

              Reconciliation of Billings to Deferred Revenue
                       (Unaudited and in thousands)

Deferred revenue balance December 31, 2007                       $ 286,685

Deferred revenue adjustment from SurfControl acquisition                73

Foreign exchange translation adjustment                                314

Net billings first quarter 2008                                     67,540

Less revenue recognized first quarter 2008                         (66,984)

                                                                 ---------
Deferred revenue balance March 31, 2008                          $ 287,628
                                                                 =========



       Reconciliation of Billings to Deferred Revenue (Non-GAAP)
                     (Unaudited and in thousands)

Non-GAAP deferred revenue balance December 31, 2007              $ 358,789

Foreign exchange translation adjustment                                974

Net billings first quarter 2008                                     67,540

Less non-GAAP revenue recognized first quarter 2008                (86,539)

                                                                 ---------
Non-GAAP deferred revenue balance March 31, 2008                 $ 340,764
                                                                 =========

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