Websense Announces Financial Results for Q2'07
Revenue in the second quarter was a record $50.4 million, an increase of 15 percent from the second quarter of 2006 and within the company's previously issued revenue guidance range of $50 to $51 million. Second quarter 2007 revenue is net of marketing payments and rebates to channel partners.
Net income calculated using generally accepted accounting principles (GAAP) was $2.1 million, or five cents per diluted share, compared with net income of $8.1 million or 17 cents per diluted share in the second quarter of 2006. Non-GAAP net income, which excludes stock-based compensation expense, certain cash and non-cash expenses related to the PortAuthority acquisition and the offer to purchase SurfControl, and a litigation settlement and associated payroll taxes, was $9.9 million or 22 cents per diluted share, a decrease of 16 percent from comparable non-GAAP net income of $11.8 million in the second quarter of 2006. All of the excluded items are presented on a tax-effected basis. Non-GAAP operating margin was 25 percent, at the high end of the company's previously issued guidance of 24 to 25 percent.
Net billings in the second quarter were $54.5 million, an increase of 10 percent from the second quarter of 2006. Net billings represent the full amount of subscription contracts billed to customers during the quarter less marketing payments and rebates to channel partners. The amount by which net billings booked in the second quarter exceeded revenue recognized resulted in an increase in deferred revenue of approximately $4.1 million from the end of March, bringing total deferred revenue to $217.5 million at the end of June.
Net operating cash flow was approximately $2.5 million for the quarter, compared with $9.4 million in the second quarter of 2006. The decline in operating cash flow compared to a year ago reflects cash tax payments and cash payments and deposits associated with the offer to purchase SurfControl, as well as lower operating income and a smaller increase in deferred revenue. The company ended the second quarter of 2007 with $261.9 million in cash and investments, of which $216.1 million was restricted, versus $261.4 million at the end of the first quarter.
"We made significant progress executing on our high level growth and profitability initiatives during the quarter," said Gene Hodges, Websense chief executive officer. "Our international performance remained strong. Within our small and mid-size business (SMB) initiative, we have added more than 700 new value-added resellers worldwide and strengthened our relationships with regional and national resellers. We also continued to improve our business processes and back-end systems, and as a result, generated incremental new SMB business at lower cost. With our new Websense Express product, which shipped on schedule earlier this month, we believe our opportunity within the SMB space is even stronger."
Update on the Pending Acquisition of SurfControl, PLC
On April 26, Websense announced that its subsidiary, Websense SC Operations Limited, made a pre-conditional cash offer for SurfControl, a provider of on-demand and software-based Web and email security solutions. The proposal was cleared by U.S. regulatory authorities on June 4th and by the U.K. Office of Fair Trading on July 6th. The proposal is being effected by a scheme of arrangement under section 425 of the Companies Act. SurfControl announced that the Offering Circular was posted on July 20th, and the shareholder vote is scheduled for August 16. The expected effective date and closing is October 3, 2007.
Recent Business and Product Development Highlights
* A new version of Websense Content Protection Suite was introduced that will integrate the document fingerprinting capabilities of Websense Content Protection Suite with the database of malicious URLs in Websense Web Security Suite(tm). With this solution, Websense becomes the only security software company to allow customers to create policies based on both internal document and user information and external Web site classifications to prevent leaks of confidential data to malicious or contaminated Web sites.
* The Websense Express(tm) Web security and content filtering platform was launched to address the needs of organizations with fewer than 1,000 employees. Websense Express leverages Websense's award-winning URL database to deliver enterprise-class Web security, but with simplified features, installation and management appropriate for smaller organizations.
* A new self-service support portal was launched to supplement telephone and channel partner support offerings.
* Doug Wride, the company's chief financial officer, was promoted to president. In this new role, Mr. Wride will be responsible for the integration of SurfControl following the completion of the acquisition, in addition to his current duties as chief financial officer. The Websense Board of Directors recognizes the essential and demanding nature of both roles and has initiated a search to fill the chief financial officer position.
Please find attached the "Additional Quarterly Business Metrics".
Settlement of Litigation
Websense has agreed in principle to settle all claims made in the purported class action, Tauber v. Websense, disclosed in our public filings. Although the settlement remains subject to court approval, during the quarter we established a $3.2 million reserve for the settlement and associated payroll taxes.
Third 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 and the offer to purchase SurfControl. For the third quarter of 2007:
* Billings are expected to be in the range of $56 to $59 million and revenue is expected to be in the range of $51 to $51.5 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 $5.7 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 25 and 26 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 approximately 42 percent, GAAP earnings are expected to be approximately 9 to 10 cents per diluted share. Non-GAAP earnings per diluted share, based on an effective non-GAAP tax rate of 35 to 36 percent are expected to be approximately 22 to 23 cents.
* Cash flow from operations is expected to be $11 to 14 million.
Management will host a conference call and simultaneous webcast to discuss the results today, July 24, at 1:30 p.m. Pacific Time. To participate in the call, investors should dial (800) 289-0529 (domestic) or (913) 981-5523 (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 September 30, 2007, and a taped replay of the call will be available for one week following the call at (888) 203-1112 or (719) 457-0820, passcode 5660604.
Non-GAAP Financial Measures
This press release provides financial measures for net income and earnings per diluted share that exclude stock-based compensation expense, certain cash and non-cash expenses related to the PortAuthority acquisition and offer to purchase SurfControl, and a litigation settlement and associated payroll taxes, and therefore are not calculated in accordance with generally accepted accounting principles (GAAP). All of the excluded items are presented on a tax-effected basis. 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 historic operating results. A reconciliation of the GAAP and non-GAAP income statements for the second quarter and the year-to-date period 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 second 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.