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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
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.
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.
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.
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.
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