Websense Announces Strong Third Quarter Results and Confirms 2009 Growth Expectations

2008 Non-GAAP Revenue and Non-GAAP Earnings Guidance Ranges Adjusted Upward to Reflect Strong Q3 Performance; Quarterly Billings Resume Year-Over-Year Growth and Total $82.7 Million; Core Product Billings Increase 7 Percent Year-Over-Year; Billings Growth

(PresseBox) ( SAN DIEGO, CA, )
Websense, Inc. (NASDAQ: WBSN) today announced financial results for the third quarter ended September 30, 2008. The company expects 2008 revenue, calculated in accordance with U.S. generally accepted accounting principles (GAAP), to be in the range of USD 292 to USD 294 million, compared with previously issued revenue guidance of USD 290 to USD 295 million. 2008 non-GAAP revenue is expected to be in the range of USD 344 to USD 346 million, compared with previously issued non-GAAP revenue guidance of USD 340 to USD 345 million. Non-GAAP earnings per share and billings are expected to be in the ranges of USD 1.33 to USD 1.36 per diluted share and USD 345 to USD 350 million, respectively, compared with previously issued guidance of USD 1.30 to USD 1.35 per diluted share and USD 345 to USD 355 million, respectively.

Revenue, calculated in accordance with GAAP, increased to USD 76.7 million in the third quarter of 2008, from USD 50.4 million in the third quarter of 2007. The increase was a result of the addition of new, renewed and upgraded subscriptions, including approximately USD 20.6 million from new or renewal SurfControl seat subscriptions and revenue recognized from the deferred revenue acquired from SurfControl in October 2007.

The company posted a GAAP net loss of USD 3.5 million, or 8 cents per diluted share, for the third quarter of 2008, compared to net income of USD 6.4 million, or 14 cents per diluted share, for the third quarter of 2007. GAAP operating results reflected the write-down of the majority of SurfControl's deferred revenue to fair value as of the acquisition close date of October 3, 2007, which had the effect of reducing revenue that would have otherwise been recognizable by USD 10.2 million in the third quarter of 2008. GAAP operating income also included certain operating expenses totaling USD 18.6 million that were excluded from the company's non-GAAP results. A detailed discussion of non-GAAP results is included below and a full reconciliation is available in the table "Reconciliation of GAAP to Non-GAAP Consolidated Statements of Operations" at the end of this news release.

Non-GAAP operating cash flow for the quarter was approximately USD 20.4 million, which excludes approximately USD 1 million in cash payments for acquisition-related costs. GAAP operating cash flow for the quarter was USD 19.4 million compared to approximately USD 13.9 million in the third quarter of 2007. For the first nine months of 2008, non-GAAP operating cash flow was approximately USD 57.5 million, which excludes approximately USD 11.3 million in cash payments for acquisition related costs and USD 2.9 million for a litigation settlement. GAAP operating cash flow for the first nine months of 2008 was USD 43.3 million compared to USD 37.6 million in the first nine months of 2007.

Non-GAAP Operating Results

Billings for the third quarter, which represent the full amount of subscription contracts billed to customers during the period, were USD 82.7 million, compared to third quarter 2007 billings of USD 52.2 million for Websense standalone and USD 79.1 million including SurfControl billings.

The average duration of third quarter contracts was 22.1 months, compared to 23.1 months for Websense in the third quarter of 2007. This change reflected an increase in the mix of one-year contracts to 55 percent of total billings, compared to 50 percent of total billings in the third quarter of 2007.

Third quarter non-GAAP revenue was USD 86.8 million and included approximately USD 10.2 million in subscription revenue from past billings to SurfControl customers that would have been recognized during this period had SurfControl remained an independent company reporting under GAAP. This subscription revenue was included in SurfControl's deferred revenue as of the acquisition date, but is not 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.

Third quarter non-GAAP operating income was USD 26.3 million, or 30.3 percent of non-GAAP revenue. Third quarter non-GAAP operating expenses of USD 60.5 million excluded cash and non-cash acquisition related expenses of approximately USD 12.8 million and stock based compensation expense of approximately USD 5.8 million. Third quarter non-GAAP net income was USD 15.6 million, or 34 cents per share, an increase of 43 percent from the USD 10.9 million, or 24 cents per diluted share, in non-GAAP net income posted in the third quarter of 2007.

In April 2007, when Websense announced plans to acquire SurfControl, the company expected the combination to be accretive to non-GAAP earnings by at least 20 percent. On a year to date basis, non-GAAP net income increased 61 percent, from USD 30.4 million in the first nine months of 2007 to USD 48.8 million in the first nine months of 2008. The costs excluded from non-GAAP earnings are fully detailed in the footnotes to the table "Reconciliation of GAAP to Non-GAAP Consolidated Statements of Operations" at the end of this news release.

"We posted another solid quarter in Q3 as we continue to exceed our original expectations for earnings and cash flow accretion due to the SurfControl acquisition. We have yet to see a significant negative impact on our business from the recent economic turbulence and billings for our core products increased 7 percent from combined billings of Websense and SurfControl last year, excluding SurfControl products that we discontinued," said Gene Hodges, Websense chief executive officer.

"We introduced several new products toward the end of the quarter, including our new Web Security Gateway with real time malware scanning and dynamic categorization of Web 2.0 content, and our data security endpoint solution. I believe the availability of these new products was a significant factor in the strength of our third quarter renewals and our growing pipeline of new business," Hodges added.

Balance Sheet and Cash Flow Metrics

The company's balance sheet remains strong, with cash and cash equivalents of USD 63.4 million, accounts receivable of USD 64.6 million and total GAAP deferred revenue of USD 307.3 million as of September 30, 2008. Significant changes to the balance sheet compared to the prior quarter included:

- An increase in deferred revenue by approximately USD 4.8 million. Non-GAAP deferred revenue decreased by approximately USD 5.8 million. The reconciliations of billings to deferred revenue and non-GAAP deferred revenue are included in tables at the end of this release.

- An increase in accounts receivable by approximately USD 3 million. Days sales outstanding increased to 67 days from 63 days in the prior quarter, but remained within the company's target range of 65 to 70 days.

The company repaid USD 15 million in long term debt during the third quarter and an additional USD 5 million in the first week of October, bringing total principal payments to date to USD 75 million and reducing long term debt to USD 135 million as of October 28, 2008, from USD 210 million at the close of the SurfControl acquisition one year ago. The company also repurchased a total of 252,388 shares in the third quarter for approximately USD 5 million under a 10b5-1 plan.

Please find attached the Quarterly Business Metrics.

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 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 Outlook
(as of 10/28/08)

Billings $ 345 - 350 million

GAAP revenue $ 292 - 294 million

Non-GAAP revenue $ 344 - 346 million

Non-GAAP operating margin 29 - 30%

Stock-based compensation expense approximately $ 25 million

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

Net cash interest expense $ 9 - 10 million

Non-GAAP earnings per diluted share $ 1.33 - 1.36

Assumed Non-GAAP tax rate approximately 35%

Average diluted shares outstanding 45 - 46 million

Additionally, the company has identified strategic growth opportunities within each of its primary product segments with the combined potential to drive billings growth of at least 10 percent in 2009.

Non-GAAP guidance for 2008 revenue includes approximately $52 million in subscription 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 during the applicable period as 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 guidance for 2008 earnings per diluted share excludes stock-based compensation expense, certain cash and non-cash expenses related to the acquisitions of PortAuthority and SurfControl and the impact of a favorable tax ruling in the first quarter of 2008 (as detailed in "Non-GAAP Financial Measures" below). Additionally, based on the current business outlook and collections trends, the company continues to expect its non-GAAP cash flow from operations for 2008 to exceed USD 75 million, excluding acquisition related and legal settlement costs, compared to USD 53.6 million in operating cash flow in 2007.

Non-GAAP Financial Measures

This press release provides financial measures for the third 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 third 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, third 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 related tax effects. Full year guidance also excludes the benefit of the reversal of a tax provision based upon a favorable tax ruling. Based on the foregoing, the company's presentation of non-GAAP revenue, operating margin, net income, earnings per diluted share and cash flow from operations 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 quarter is provided at the end of this press release.

This press release also includes financial measures for 2008 and 2009 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 third quarter of 2008 is set forth at the end of this press release.
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