Websense Announces Financial Results for Q1'07
Quarterly results reflected continued strength in international markets and an increase in new business
Revenue in the first quarter was a record $49.7 million, an increase of 18 percent from the first quarter of 2006 and slightly surpassing the company's previously issued revenue guidance range of $48.5 to $49.5 million. First quarter 2007 revenue is net of marketing payments and rebates to channel partners of approximately $0.6 million.
Net income calculated using generally accepted accounting principles (GAAP) was $3.9 million, or 9 cents per diluted share, compared with net income of $7.9 million or 16 cents per diluted share in the first quarter of 2006. Non-GAAP net income, which excludes stock-based compensation expense and related tax effects, as well as certain cash and non-cash expenses related to the PortAuthority acquisition, was $9.6 million or 21 cents per diluted share, a decrease of 16 percent from comparable non-GAAP net income of $11.5 million in the first quarter of 2006. Non-GAAP operating margin was 25 percent, at the high end of the company's previously issued guidance of 23 to 25 percent.
Gross billings invoiced to customers in the first quarter were $43.6 million, an increase of 12 percent from the first quarter of 2006. Net billings, reflecting approximately $1.1 million in marketing payments and channel rebates, were $42.5 million. Billings represent the full amount of subscription contracts billed to customers during the quarter. The amount by which revenue recognized in the first quarter exceeded net billings booked by Websense plus deferred revenue acquired from PortAuthority resulted in a decrease in deferred revenue of approximately $6.9 million from the end of December, bringing total deferred revenue to $213.4 million at the end of March.
"This was a solid quarter for Websense as we started to see some return from the significant investments we are making to drive new business," said Gene Hodges, chief executive officer, Websense. "Specifically, business from direct marketing small and medium business (SMB) resellers was up sharply and recruitment of new SMB partners remained strong; our information leak prevention business exceeded our first quarter plan; and our international business continued to deliver billings growth of more than 25 percent. These accomplishments give me confidence in the ability of the Websense team to execute as we take additional steps to expand our market presence and product portfolio."
Further validating the strength of Websense's information leak prevention solution, Websense has been positioned in the Leader's Quadrant of Gartner's recently released "Magic Quadrant for Content Monitoring and Filtering/Data Loss Prevention." "We are investing heavily to strengthen and broaden our information leak prevention solution, while integrating it with our Web security offerings," said John McCormack, senior vice president of Product Development, Websense. "We are still in the early days of this market, and Websense has the right mix of talent and technology to deliver the comprehensive solutions the market will demand, and pay for, over time."
Net cash flow from operations was approximately $21.3 million for the quarter, compared with $32.7 in the first quarter of 2006. The company ended the first quarter of 2007 with $261.4 million in cash and investments, versus approximately $326.9 million at the end of the 2006. The decrease in cash and investments reflects the purchase of PortAuthority Technologies in January, partially offset by cash generated by operations.
Recent Business and Product Development Highlights
In the first quarter, Websense:
-- Completed the acquisition of PortAuthority Technologies and launched the Websense Content Protection Suite, the company's information leak prevention solution that protects organizations from data loss due to internal security threats, such as accidental or malicious disclosure of confidential information. The company also launched an extension of its industry-leading channel program tailored to security-focused resellers to provide training, support, opportunities and promotions for information leak prevention sales.
-- Won a 2007 Reader Trust Award in the 10th annual SC Magazine Award program for outstanding achievement in information technology security. SC Magazine also named Websense Web Security Suite(tm) the Best Web Filtering Solution at a ceremony held in San Francisco in conjunction with the recent RSA Conference.
-- Was awarded two patents for certain proprietary technologies underlying ThreatSeeker that provide Web site and application classification intelligence to Websense software. These technologies help protect organizations from threats to information security and employee productivity due to unmanaged use of the Web or unauthorized applications.
-- Was first to discover and protect customers from malicious code embedded in the Dolphin Stadium Web site the week before Super Bowl XLI.
-- Was certified as a Five-Star Partner and recognized as one of North America's top information-technology vendors in terms of its partnership programs by CMP Technology's VARBusiness magazine.
Second Quarter 2007 Outlook
Websense provides guidance on its anticipated financial performance for the coming quarter based on its assessment of the current business environment and historical seasonal trends in its business. In providing quarterly guidance, the company emphasizes that its forward-looking statements are based on current expectations and disclaims any obligation to update the statements as conditions change. Non-GAAP guidance excludes stock-based compensation expense as well as certain cash and non-cash expenses related to the PortAuthority acquisition. For the second quarter of 2007:
-- Billings are expected to be in the range of $53 to $56 million and revenue is expected to be in the range of $50 to $51 million. The ranges for both billings and subscription revenue are net of anticipated channel marketing payments and rebates.
-- Stock-based compensation expense, reported in compliance with FAS 123R, is expected to total approximately $5.3 million.
-- GAAP gross margin is expected to be approximately 90 to 91 percent of revenue. Non-GAAP gross margin is expected to be approximately 91 to 92 percent of revenue.
-- GAAP operating margin is expected to be 10 to 11 percent of revenue. Non-GAAP operating margin is expected to be between 24 and 25 percent of revenue.
-- Fully diluted shares outstanding are expected to be 45 to 46 million shares.
-- Based on the above revenue and expense structure, expected fully diluted shares outstanding and an effective GAAP tax rate of 40 percent, GAAP earnings are expected to be approximately 10 to 12 cents per diluted share. Non-GAAP earnings per diluted share, based on an effective non-GAAP tax rate of 36 percent are expected to be approximately 20 to 22 cents.
Non-GAAP Financial Measures
This press release provides financial measures for net income and earnings per diluted share that exclude stock-based compensation expense and related tax effects, as well as certain cash and non-cash expenses related to the PortAuthority acquisition, and therefore are not calculated in accordance with generally accepted accounting principles (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 and to compare current operating results with historical operating results prior to the adoption of FAS 123R and the acquisition of PortAuthority Technologies. A reconciliation of the GAAP and non-GAAP income statements 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 generally accepted accounting principles (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. A reconciliation of billings to deferred revenue for the first quarter of 2007 is set forth at the end of this press release.
Websense Deutschland GmbH
Websense, Inc. (NASDAQ: WBSN) protects more than 42 million employees from external and internal computer security threats. Using a combination of preemptive ThreatSeeker(tm) malicious content identification and categorization technology and information leak prevention technology, Websense helps make computing safe and productive. Distributed through its global network of channel partners, Websense software helps organizations block malicious code, prevent the loss of confidential information and manage Internet and wireless access. For more information, visit www.websense.com.