Websense Announces Financial Results for Q3'07
Preliminary Guidance for Fourth Quarter and Fiscal Year 2008 Includes Recently Acquired SurfControl
Revenue in the third quarter was $50.4 million, an increase of 10 percent from the third quarter of 2006. Third quarter 2007 revenue is net of approximately $950,000 in marketing payments and rebates to channel partners.
Net income calculated using generally accepted accounting principles (GAAP) was $6.4 million, or 14 cents per diluted share, compared with net income of $8.3 million or 18 cents per diluted share in the third quarter of 2006. Non-GAAP net income was $10.9 million or 24 cents per diluted share, a decrease of three percent from comparable non-GAAP net income of $11.3 million in the third quarter of 2006. Third quarter non-GAAP net income and non-GAAP earnings per diluted share exclude acquisition-related costs from the acquisition of SurfControl, the net gain associated with foreign exchange option contracts purchased in connection with the SurfControl acquisition, amortization of intangible assets, and retention bonuses in connection with the PortAuthority acquisition, as well as stock based compensation expense and the related tax effects.
Net billings for Websense in the third quarter were $52.2 million, a decrease of two percent from the third quarter of 2006. Third quarter 2007 net billings represent the full amount of subscription contracts billed to customers during the quarter, less marketing payments and rebates to channel partners of approximately $1.7 million. Third quarter 2006 billings do not reflect the net effect of payments and rebates to channel partners. The amount by which net billings booked in the third quarter exceeded revenue recognized resulted in an increase in deferred revenue of approximately $1.7 million from the end of the second quarter, bringing total deferred revenue to $219.3 million at the end of the third quarter.
Websense completed the acquisition of SurfControl on October 3, 2007. Combined third quarter net billings for Websense and SurfControl were $79.1 million and within the anticipated range of billings for the combined company. Websense billings were below the previously guided range of $56 to $59 million, primarily due to increased competition from SurfControl in North America.
"We made significant progress executing on our high-level strategic initiatives during the quarter," said Gene Hodges, Websense chief executive officer. "We delivered bottom line results consistent with expectations; our international performance remained strong; we launched an integrated version of our information leak prevention platform; and we successfully completed major milestones in the acquisition of SurfControl."
"With the acquisition now closed, our focus for the fourth quarter and 2008 has shifted to customer retention and improved productivity in the combined operation," added Hodges. "By 2009, we expect our financial results to reflect a more efficient cost structure, as well as incremental top line growth from the expanded product portfolio."
Operating Cash Flow Increases Sequentially; Current Cash Balances Reflect Acquisition
Net operating cash flow was approximately $13.9 million for the quarter, compared with $2.5 million in the second quarter of 2007 and $19.5 million in the third quarter of 2006. The increase compared to the second quarter is the result of increased collections on accounts receivable as well as higher net income. The decline in operating cash flow compared to the third quarter of 2006 reflects lower net income and a smaller increase in deferred revenue. The company ended the third quarter of 2007 with $279.8 million in cash and investments, of which $219.2 million was restricted for use in the SurfControl acquisition, versus $261.9 million at the end of the June 2007.
On October 3, 2007, the company closed its acquisition of SurfControl. The net purchase price of approximately $416 million was partially funded with a $210 million five-year term loan on October 11, 2007. The remaining $206 million of the purchase price was funded with Websense restricted cash.
After closing the SurfControl acquisition, the company had consolidated cash balances of approximately $100 million.
Please find attached the "Additional Websense Quarterly Business Metrics".
Combined Company Outlook for Fourth Quarter 2007 and Fiscal Year 2008
Websense provides preliminary guidance on its anticipated financial performance for the coming quarter and the next fiscal year based on its assessment of the current business environment and historical seasonal trends in its business, as well as preliminary assessments of historical SurfControl results adjusted to conform to GAAP. Websense expects to complete the conversion of SurfControl historical results from International Financial Reporting Standards (IFRS) to GAAP by December 17, 2007 and plans to provide a non-GAAP pro forma income statement for the combined company for the nine months ended September 30, 2007 at that time.
In providing fourth quarter 2007 and 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. Beginning with fiscal year 2008, the company will no longer provide guidance for quarterly financial results, but will update its annual guidance on a quarterly basis.
Non-GAAP guidance for revenue includes revenue of SurfControl that would have been recognized under subscriptions that were included in deferred revenue as of the date of the acquisition that will not be recognized as revenue under GAAP due to the impact of the expected write-down of 85 to 90 percent of SurfControl's deferred revenue as required by purchase accounting in accordance with GAAP. Non-GAAP guidance excludes stock-based compensation expense as well as certain cash and non-cash expenses related to the acquisitions of PortAuthority and SurfControl, as detailed below.
Please find attached the Guidance.
Management will host a conference call and simultaneous webcast to discuss the results today, October 30, at 2:00 p.m. Pacific Time. To participate in the call, investors should dial (888) 806-6224 (domestic) or (913) 312-1378 (international) ten minutes prior to the scheduled start of the call. A simultaneous audio-only webcast of the call may be accessed on the internet at www.websense.com/investors.
For investors unable to participate in the live event, an archive of the webcast will be available on the company's Web site through December 31, 2007 and a taped replay of the call will be available for one week at (888) 203-1112 or (719) 457-0820, passcode 2915184.
Non-GAAP Financial Measures
This press release provides financial measures for operating margin, net income and earnings per diluted share that exclude restructuring costs from the acquisition of SurfControl, the net expense or gain associated with foreign exchange option contracts purchased in connection with the SurfControl acquisition, amortization of intangible assets, and charges for in-process research and development and retention bonuses in connection with the PortAuthority acquisition, as well as stock based compensation expense and related tax effects, and therefore are not calculated in accordance with 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, trends and prospects and to compare current operating results with historic operating results. A reconciliation of the GAAP and non-GAAP income statements for the third 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 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 third quarter of 2007 is set forth at the end of this press release.
This press release also provides guidance for future non-GAAP revenue, non-GAAP operating margin and non-GAAP earnings per diluted share that exclude the impact of the expected write-down of SurfControl's deferred revenue, restructuring costs relating to headcount reduction and facility closures, integration travel and consultancy fees, system integration and Sarbanes Oxley compliance, the net expense or gain associated with foreign exchange option contracts purchased in connection with the SurfControl acquisition, amortization of intangible assets and capitalized financing fees and charges for in-process research and development and retention bonuses in connection with the Port Authority and SurfControl acquisitions, as well as stock-based compensation expense. All of the excluded items are presented on a tax-effected basis, which results in a non-GAAP tax rate. Management believes that the guidance for these non-GAAP financial measures provides meaningful supplemental information regarding our performance that enhances management's and investors' ability to evaluate the company's future performance.
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.