Quantcast
Last updated on April 17, 2014 at 8:19 EDT

Websense Reports Third Quarter 2012 Results

October 23, 2012

SAN DIEGO, Oct. 23, 2012 /PRNewswire/ — Websense, Inc. (NASDAQ: WBSN) today announced financial results for the third quarter of 2012.

“In the third quarter, we had double-digit growth in sales to new customers and we started to see a recovery in our international sales territories, with sales outside the U.S. growing by 14 percent,” said Gene Hodges, Websense(®) CEO. “While our customer retention rates remain solid, we were negatively impacted by fewer upgrades from our installed base in the U.S. Looking ahead, we see good opportunities to upgrade our customers and increase new customer sales. The need and awareness for content security is increasing, and security experts recognize we have the best solutions to protect against data theft and advanced attacks.”

Third Quarter 2012 GAAP Financial Highlights

  • Revenues of $90.4 million, compared with $92.1 million in the third quarter of 2011.
  • Software and service revenues of $82.3 million, compared with $81.8 million in the third quarter of 2011.
  • Appliance revenues of $8.1 million, which consisted of approximately $6.6 million in current-period appliance sales and approximately $1.5 million of deferred appliance revenue primarily from pre-2011 appliance sales, compared with $10.3 million of appliance revenues in the third quarter of 2011, which consisted of approximately $7.7 million in current-period appliance sales and the remainder from deferred appliance revenue primarily from pre-2011 appliance sales.
  • Operating income of $13.8 million, compared with $13.7 million in the third quarter of 2011.
  • Provision for income taxes of $4.6 million, compared with $5.4 million in the third quarter of 2011.
  • Net income of $8.5 million, or 23 cents per diluted share, compared with net income of $8.1 million, or 20 cents per diluted share, in the third quarter of 2011.
  • Weighted average diluted shares outstanding of 36.8 million, compared with 40.4 million in the third quarter of 2011.
  • Cash flow from operations of $5.6 million, compared with $16.7 million in the third quarter of 2011. Cash flow from operations includes one-time tax payments of $14.7 million relating to the company’s settlement with the U.S. Internal Revenue Service of certain audit adjustments for tax years 2005 through 2007. The company had expected these payments to total $15 to $16 million in the third quarter.
  • Quarter-end accounts receivable of $54.4 million, compared with $59.8 million at the end of the third quarter of 2011 and $61.8 million at the end of the second quarter of 2012.
  • Days billings outstanding of 60 days, compared with 64 days at the end of the third quarter of 2011 and 65 days billings outstanding at the end of the second quarter of 2012.
  • Deferred revenue of $370.7 million, an increase of $0.9 million compared with deferred revenue of $369.8 million at the end of the third quarter of 2011. Deferred revenue at the end of the third quarter of 2012 included $5.8 million from extended warranties and pre-2011 appliance sales, a decrease of $5.8 million from the year ago period. Deferred revenue from pre-2011 appliance sales will continue to decrease quarterly.

Third Quarter 2012 Non-GAAP(1) Financial Highlights

  • Billings of $81.5 million, a decrease of three percent compared with the third quarter of 2011. Currency exchange rates had a negative impact on billings of approximately $1.9 million in the third quarter of 2012 compared with the prevailing exchange rates in effect during the third quarter of 2011.
  • TRITON(TM) solution billings of $49.4 million, an increase of nine percent compared with the third quarter of 2011.
  • Non-GAAP operating income of $20.3 million, compared with non-GAAP operating income of $21.8 million in the third quarter of 2011. Non-GAAP operating margin in the third quarter of 2012, calculated as a percentage of revenues, was 22.4 percent, compared with 23.7 percent in the third quarter of 2011.
  • Billings-based operating margin of 14.8 percent, compared with billings-based operating margin of 17.9 percent in the third quarter of 2011. Billings-based operating margin is calculated like revenue-based non-GAAP operating margin, but is computed using billings as the top-line measure and excludes deferred appliance costs to match current period sales activities with current period costs.
  • A non-GAAP tax provision of $3.7 million, based on a long-term effective tax rate of 19 percent, compared with a non-GAAP tax provision of $3.8 million, based on an effective tax rate of 17.7 percent, in the third quarter of 2011.
  • Non-GAAP net income of $15.9 million, or 43 cents per diluted share, compared with $17.9 million, or 44 cents per diluted share, in the third quarter of 2011.

Summary Metrics

    Millions, except percentages,
     number of transactions, duration,
     and days billings outstanding                 Q3'11       Y/Y Chg
                                       Q3'12
    ---                                -----
    Total billings                           $81.5       $84.3          -3%
    --------------                           -----       -----         ---
    U.S. billings                            $39.3       $47.2         -17%
    -------------                            -----       -----         ---
    International billings                   $42.2       $37.1          14%
    ----------------------                   -----       -----         ---
    TRITON solution billings(2)              $49.4       $45.3           9%
    --------------------------               -----       -----         ---
    Appliance billings                        $6.9        $8.0         -14%
    ------------------                        ----        ----         ---
    Number of transactions >$100K              144         132           9%
    -----------------------------              ---         ---         ---
    Average contract duration (months)        24.1        23.1           4%
    ----------------------------------        ----        ----         ---
    Days billings outstanding (DSOs)            60          64 -4 days
    -------------------------------            ---         --- -------
    Cash and cash equivalents                $57.6       $75.6         -24%
    -------------------------                -----       -----         ---
    Balance on revolving credit
     facility                                $68.0       $73.0          -7%
    ---------------------------              -----       -----         ---
    Share repurchases ($)                     $2.9       $25.0         -88%
    --------------------                      ----       -----         ---

    1.            A detailed description of the company's
                  non-GAAP financial measures appears
                  under "Non-GAAP Financial Measures"
                  and a full reconciliation of GAAP to
                  non-GAAP results is included at the
                  end of this news release in the tables
                  "Reconciliation of GAAP to Non-GAAP
                  Financial Measures."
    2.            TRITON solutions include the TRITON
                  family of security gateways for web,
                  email, mobile, and data security
                  (including related appliances and
                  technical support subscriptions),
                  Websense Data Security Suite and
                  cloud-based security solutions. Non-
                  TRITON solutions include web filtering
                  products, including Websense Web
                  Filtering, Websense Web Security Suite
                  and related appliances, plus
                  SurfControl email security products.

Outlook for the Fourth Quarter and Fiscal Year 2012
Websense provides guidance on anticipated financial performance for the year based on an assessment of the current business environment, historical seasonal business trends, and prevailing exchange rates between the U.S. dollar and other major currencies. Annual guidance is updated each quarter with the release of quarterly results. In providing guidance, the company emphasizes that all forward-looking statements are based on current expectations, including average contract duration between 23 and 24 months and prevailing currency exchange rates of $1.29 for the Euro and $1.61 for the Pound Sterling. The company disclaims any obligation to update the statements as circumstances change.

    Millions, except percentages and
     per-share amounts               Q4'12 Outlook         Implied
                                                         2012 Outlook
    ---                                                  ------------
    Total billings                           $112 - 117      $359.5 - 364.5
    --------------                           ----------      --------------
    Appliance billings (% of total
     billings)                                   7 - 8%             7 - 8%
    ------------------------------                -----               -----
    Revenues                                   $90 - 92      $359.8 - 361.8
    --------                                   --------      --------------
    Non-GAAP gross profit margin               83 - 84%           84 - 85%
    ----------------------------                -------             -------
    Non-GAAP operating margin                  16 - 18%           19 - 20%
    -------------------------                   -------             -------
    Non-GAAP earnings per diluted
     share                                 $0.32 - 0.35        $1.50 - 1.53
    -----------------------------          ------------        ------------
    Non-GAAP effective tax rate                      19%                 19%
    ---------------------------                     ---                 ---
    Average diluted shares
     outstanding                      37.0 - 37.5        37.0 - 37.5
    ----------------------            -----------        -----------
    Cash flow from operations               $8.0 - 11.0        $45.8 - 48.8
    -------------------------               -----------        ------------
    Capital expenditures                     $3.0 - 3.5        $12.5 - 13.0
    --------------------                     ----------        ------------
    Cash taxes (net of refunds)              $3.0 - 4.0        $28.0 - 29.0
    --------------------------               ----------        ------------

Additionally, outlook ranges for 2012 reflect:

  • Billings-based non-GAAP operating margin of 20 to 22 percent.
  • Expected stock repurchases in the fourth quarter of approximately $5 million to more closely align with expected cash flow.
  • Non-cash items related to the recognition of revenue and costs associated with pre-2011 appliance billings:
    • Remaining deferred revenue of $3.9 million from pre-2011 appliance billings (as of September 30, 2012) that will continue to be recognized ratably according to the original subscription periods, including $1.2 million to be recognized in the fourth quarter of 2012 (compared with $2.1 million in the fourth quarter of 2011).
    • Remaining deferred costs of $1.9 million from pre-2011 appliance billings (as of September 30, 2012) that will continue to be recognized ratably according to the original subscription periods, including $0.5 million to be recognized in the fourth quarter of 2012 (compared with $1.0 million in the fourth quarter of 2011).
    • On January 1, 2011, Websense was required to adopt Accounting Standards Update (ASU) 2009-13 (Multiple Deliverable Revenue Arrangements) and ASU 2009-14 (Certain Revenue Arrangements that Include Software Elements), which require the immediate recognition of appliance revenues upon sale. Prior to January 1, 2011, the company recognized revenue and costs from appliance sales ratably according to the original subscription terms. The schedules below summarize the actual and expected recognition of remaining deferred appliance revenues and costs by quarter for 2011 and 2012:
                 2011 Summary of Amounts Related to pre-2011 Appliance Sales
                 -----------------------------------------------------------
    Millions                          Deferred balances        2011 Recognition Schedule (actual)  Remaining deferred balances
                                               as of 12/31/10                                            as of 12/31/11
                                          (actual)                                                    (actual)
    ---                                    -------                                                     -------
              Q1'11                    Q2'11                 Q3'11               Q4'11                               2011

               ---
    Revenue                         $20.0     $3.5     $3.2     $2.6     $2.1    $11.4                         $8.6
    -------                         -----     ----     ----     ----     ----    -----                         ----
    Costs                            $9.2     $1.6     $1.5     $1.1     $1.0     $5.2                         $4.0
    -----                            ----     ----     ----     ----     ----     ----                         ----

                      2012 Summary of Amounts Related to pre-2011 Appliance Sales
                      -----------------------------------------------------------
    Millions                      Deferred balances               2012 Recognition Schedule            Remaining deferred balances
                                       as of 12/31/11                                                   as of 12/31/12 (expected)
                                      (actual)
    ---                                -------
              Q1'12                Q2'12 (actual)              Q3'12                    Q4'12                                   2012
             (actual)                                        (actual)                (expected)                  (expected)
             -------                                          -------                 ---------                   ---------
    Revenue                          $8.6      $1.7      $1.6      $1.4         $1.2         $5.9                         $2.7
    -------                          ----      ----      ----      ----         ----         ----                         ----
    Costs                            $4.0      $0.8      $0.7      $0.6         $0.5         $2.6                         $1.4
    -----                            ----      ----      ----      ----         ----         ----                         ----

Conference Call Details
Management will host a conference call and simultaneous webcast to discuss the financial results and outlook today, October 23, at 2 p.m. Pacific Daylight Time. To participate in the conference call, investors should dial (866) 757-5630 (domestic) or 707-287-9356 (international) 10 minutes prior to the scheduled start of the call. A simultaneous audio-only webcast of the call may be accessed at www.websense.com/investors. An archive of the webcast will be available on the company’s website through December 31, 2012, and a recorded replay of the call will be available for one week at (855) 859-2056 and (404) 537-3406, pass code 33392987.

Non-GAAP Financial Measures
This news release provides financial measures for non-GAAP gross profit, operating expenses, operating margin, income from operations, provision for income taxes, net income, and diluted earnings per share that are not calculated in accordance with GAAP. Management believes that these non-GAAP financial measures provide meaningful supplemental information regarding 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. Reconciliations of the GAAP and non-GAAP financial measures for the third quarters of 2012 and 2011 are provided at the end of this news release.

This news release also includes financial measures for various categories of billings, billings operating margin and other billings-related measures that are not numerical measures that can be calculated in accordance with GAAP. Billings-based non-GAAP operating margin is calculated like revenue-based non-GAAP operating margin, but uses billings as the top-line measure and excludes deferred appliance costs to match current period sales activities with current period costs. Websense provides these measurements in reporting financial performance because these measurements provide a consistent basis for understanding the company’s sales activities in the current period. The company believes that these measurements are useful to investors because the GAAP measurements of revenues and deferred revenue in the current period include subscription contracts commenced in prior periods. The roll forward of deferred revenue (which includes billings and revenues) for the third quarter of 2012 is set forth at the end of this news release.

About Websense, Inc.
Websense, Inc. (NASDAQ: WBSN), a global leader in unified web security, email security, mobile security, and data loss prevention (DLP) solutions, delivers the best content security for modern threats at the lowest total cost of ownership to tens of thousands of enterprise, mid-market and small organizations around the world. Distributed through a global network of channel partners and delivered as software, appliance and Security-as-a-Service (SaaS), Websense content security solutions help organizations leverage web 2.0 and cloud communication, collaboration, and social media while protecting from advanced persistent threats, preventing the loss of confidential information and enforcing internet use and security policies. Websense is headquartered in San Diego, California with offices around the world. For more information, visit www.websense.com.

Follow Websense on Twitter: www.twitter.com/websense

Join the discussion on Facebook: www.facebook.com/websense

This news release contains forward-looking statements that involve risks, uncertainties, assumptions, and other factors which, if they do not materialize or prove correct, could cause Websense’s results to differ materially from historical results or those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including financial estimates; the statements of Gene Hodges; statements about our expected success selling products; statements about the effectiveness of our products; billings, revenues, and growth trends; statements regarding expected repurchases of our common stock; and statements containing the words “planned,” “expects,” “believes,” “strategy,” “opportunity,” “anticipates,” and similar words. The potential risks and uncertainties that contribute to the uncertain nature of these statements include, among others, risks associated with customer acceptance of the company’s products and services, product performance, launching new product offerings, products and fee structures in a changing market, the success of Websense’s brand development efforts, the volatile and competitive nature of the internet and security industries, changes in domestic and international market conditions (including in continental Europe), fluctuations in currency exchange rates and impacts of macro-economic conditions on our customers, ongoing compliance with the covenants in the company’s credit facility, changes in accounting interpretations, and the other risks and uncertainties described in Websense’s public filings with the Securities and Exchange Commission, available at www.websense.com/investors. Websense assumes no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made.

The following financial information should be read in conjunction with the audited financial statements and notes thereto, included in Websense Inc.’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission as well as the interim financial statements and notes thereto included in Websense’s Quarterly Reports on Form 10-Q. Certain reclassifications have been made for consistent presentation.

                                                                                          Websense, Inc.
                                                                               Consolidated Statements of Operations
                                                                      (Unaudited and in thousands, except per share amounts)

                                      Three Months Ended September 30,                      Nine Months Ended September 30,
                                      --------------------------------                      -------------------------------
                                                                    2012                                                  2011      2012      2011
                                                                    ----                                                  ----      ----      ----

    Revenues:
        Software and service                                     $82,285                                               $81,803  $245,992  $243,057
        Appliance                                                  8,078                                                10,308    23,769    28,393
                                                                   -----                                                ------    ------    ------
           Total revenues                                         90,363                                                92,111   269,761   271,450
    Cost of revenues:
        Software and service                                      11,643                                                10,234    33,918    30,993
        Appliance                                                  3,337                                                 4,665     9,929    13,661
                                                                   -----                                                 -----     -----    ------
           Total cost of revenues                                 14,980                                                14,899    43,847    44,654
                                                                  ------                                                ------    ------    ------
    Gross profit                                                  75,383                                                77,212   225,914   226,796
    Operating expenses:
        Selling and marketing                                     35,661                                                38,445   112,226   121,285
        Research and development                                  15,786                                                15,084    46,745    43,556
        General and administrative                                10,132                                                 9,969    30,960    30,922
           Total operating expenses                               61,579                                                63,498   189,931   195,763
                                                                  ------                                                ------   -------   -------
    Income from operations                                        13,804                                                13,714    35,983    31,033
    Interest expense                                                (644)                                                 (374)   (1,943)   (1,167)
    Other income (expense), net                                      (81)                                                  204      (221)    1,530
                                                                     ---                                                   ---      ----     -----
    Income before income taxes                                    13,079                                                13,544    33,819    31,396
    Provision for income taxes                                     4,628                                                 5,426    19,278    10,777
                                                                   -----                                                 -----    ------    ------
    Net income                                                    $8,451                                                $8,118   $14,541   $20,619
                                                                  ======                                                ======   =======   =======

    Basic net income per share                                     $0.23                                                 $0.21     $0.39     $0.51
                                                                   =====                                                 =====     =====     =====
    Diluted net income per share                                   $0.23                                                 $0.20     $0.39     $0.50
                                                                   =====                                                 =====     =====     =====
    Weighted average shares - basic                               36,457                                                39,575    37,010    40,081
                                                                  ======                                                ======    ======    ======
    Weighted average shares - diluted                             36,782                                                40,428    37,590    41,273
                                                                  ======                                                ======    ======    ======

    Financial Data:
    Total deferred revenue                                      $370,739                                              $369,750  $370,739  $369,750
                                                                ========                                              ========  ========  ========

                              Websense, Inc.
                        Consolidated Balance Sheets
                              (In thousands)

                            September 30, 2012         December 31, 2011
                            ------------------         -----------------
    Assets                      (Unaudited)
    Current
     assets:
        Cash and
         cash
         equivalents                          $57,602                  $76,201
        Accounts
         receivable,
         net                                   54,436                   80,147
        Income
         tax
         receivable/
         prepaid
         income
         tax                                    2,187                      738
        Current
         portion
         of
         deferred
         income
         taxes                                 30,234                   30,021
        Other
         current
         assets                                11,589                   13,793
                                               ------                   ------
           Total
            current
            assets                            156,048                  200,900
    Cash and
     cash
     equivalents
     -
     restricted                                   640                      628
    Property
     and
     equipment,
     net                                       18,617                   16,832
     Intangible
     assets,
     net                                       20,058                   26,412
    Goodwill                                  372,445                  372,445
    Deferred
     income
     taxes,
     less
     current
     portion                                    8,670                    8,599
    Deposits
     and
     other
     assets                                     7,348                    8,622
    Total
     assets                                  $583,826                 $634,438
                                             ========                 ========

     Liabilities
     and
     stockholders'
     equity
    Current
     liabilities:
        Accounts
         payable                               $6,404                   $9,026
        Accrued
         compensation
         and
         related
         benefits                              23,358                   22,770
        Other
         accrued
         expenses                              11,722                   16,534
        Current
         portion
         of
         income
         taxes
         payable                                1,533                    3,187
        Current
         portion
         of
         deferred
         tax
         liability                                 86                       86
        Current
         portion
         of
         deferred
         revenue                              231,576                  250,597
                                              -------                  -------
           Total
            current
            liabilities                       274,679                  302,200
    Other
     long
     term
     liabilities                                2,256                    2,600
    Income
     taxes
     payable,
     less
     current
     portion                                   10,308                   11,955
    Secured
     loan                                      68,000                   73,000
    Deferred
     tax
     liability,
     less
     current
     portion                                    2,512                    2,501
    Deferred
     revenue,
     less
     current
     portion                                  139,163                  142,437
                                              -------                  -------
        Total
         liabilities                          496,918                  534,693
     Stockholders'
     equity:
      Common
       stock                                      577                      568
       Additional
       paid-in
       capital                                434,089                  415,573
      Treasury
       stock,
       at cost                               (431,290)                (385,544)
      Retained
       earnings                                86,788                   72,247
       Accumulated
       other
       comprehensive
       loss                                    (3,256)                  (3,099)
        Total
         stockholders'
         equity                                86,908                   99,745
    Total
     liabilities
     and
     stockholders'
     equity                                  $583,826                 $634,438
                                             ========                 ========

                                                                                                                  Websense, Inc.
                                                                                                      Consolidated Statements of Cash Flows
                                                                                                           (Unaudited and in thousands)

                                                                                                                                                     Nine Months Ended September 30,
                                                                                                                                                     -------------------------------
                                                                                                                                                                                  2012                                                 2011
                                                                                                                                                                                  ----                                                 ----
    Operating activities:
    Net income                                                                                                                                                                 $14,541                                              $20,619
    Adjustments to reconcile net income to net cash provided by operating activities:
    Depreciation and amortization                                                                                                                                               15,133                                               19,716
    Share-based compensation                                                                                                                                                    14,675                                               14,433
    Deferred income taxes                                                                                                                                                            -                                                 (360)
    Unrealized loss (gain) on foreign exchange                                                                                                                                     412                                                  (47)
    Excess tax benefit from share-based compensation                                                                                                                              (532)                                              (2,267)
    Changes in operating assets and liabilities:
    Accounts receivable                                                                                                                                                         26,760                                               21,149
    Other assets                                                                                                                                                                 2,412                                                  470
    Accounts payable                                                                                                                                                            (3,437)                                               2,244
    Accrued compensation and related benefits                                                                                                                                      451                                                  533
    Other liabilities                                                                                                                                                           (3,761)                                              (3,385)
    Deferred revenue                                                                                                                                                           (22,297)                                             (24,575)
    Income taxes payable and receivable/prepaid                                                                                                                                 (6,559)                                               8,722
    Net cash provided by operating activities                                                                                                                                   37,798                                               57,252
                                                                                                                                                                                ------                                               ------

    Investing activities:
    Change in restricted cash and cash equivalents                                                                                                                                 (20)                                                  33
    Purchase of property and equipment                                                                                                                                          (9,576)                                              (7,176)
    Purchase of intangible assets                                                                                                                                                    -                                                 (500)
    Net cash used in investing activities                                                                                                                                       (9,596)                                              (7,643)
                                                                                                                                                                                ------                                               ------

    Financing activities:
    Proceeds from secured loan                                                                                                                                                       -                                               87,000
    Principal payments on secured loan                                                                                                                                          (5,000)                                             (81,000)
    Principal payments on capital lease obligation                                                                                                                                (587)                                                (569)
    Proceeds from exercise of stock options                                                                                                                                      2,257                                               14,461
    Proceeds from issuance of common stock for stock purchase plan                                                                                                               3,595                                                3,446
    Excess tax benefit from share-based compensation                                                                                                                               532                                                2,267
    Tax payments related to restricted stock unit issuances                                                                                                                     (2,830)                                              (2,824)
    Purchase of treasury stock                                                                                                                                                 (44,674)                                             (73,998)
    Net cash used in financing activities                                                                                                                                      (46,707)                                             (51,217)
                                                                                                                                                                               -------                                              -------

    Effect of exchange rate changes on cash and cash equivalents                                                                                                                   (94)                                                (232)
    Decrease in cash and cash equivalents                                                                                                                                      (18,599)                                              (1,840)
    Cash and cash equivalents at beginning of period                                                                                                                            76,201                                               77,390
    Cash and cash equivalents at end of period                                                                                                                                 $57,602                                              $75,550
                                                                                                                                                                               =======                                              =======

    Cash paid during the period for:
      Income taxes including interest and penalties, net of refunds                                                                                                            $25,385                                               $5,045
      Interest                                                                                                                                                                  $1,746                                                 $968

    Non-cash financing activities:
        Change in operating assets and liabilities for unsettled purchase
          of treasury stock and exercise of stock options
                                                                                                                                        $(1,583)                                  $994

                                       Websense, Inc.
                               Rollforward of Deferred Revenue
                                (Unaudited and in thousands)

              Deferred revenue balance at
              June 30, 2012                                          $379,606
              Net billings during third
              quarter 2012                                             81,498
              Less revenue recognized
              during third quarter 2012                               (90,363)
             Translation adjustment                                        (2)
              Deferred revenue balance at
              September 30, 2012                                     $370,739
                                                                     ========

                                                                             Websense, Inc.
                                                          Reconciliation of GAAP to Non-GAAP Financial Measures
                                                         (Unaudited and in thousands, except per share amounts)

                                                                     Three Months Ended                     Nine Months Ended
                                                                        September 30,                         September 30,
                                                                       ------------------                     -----------------
                                                                                      2012                                  2011      2012      2011
                                                                                      ----                                  ----      ----      ----

    GAAP Gross profit                                                              $75,383                               $77,212  $225,914  $226,796
       Amortization of acquired technology (2)                                         539                                   646     1,617     1,937
       Share-based compensation (1)                                                    238                                   276       883       829
                                                                                       ---                                   ---       ---       ---
         Gross profit adjustment                                                       777                                   922     2,500     2,766
    Non-GAAP Gross profit                                                          $76,160                               $78,134  $228,414  $229,562
                                                                                   =======                               =======  ========  ========

    GAAP Operating expenses                                                        $61,579                               $63,498  $189,931  $195,763
       Amortization of other intangible assets (2)                                  (1,512)                               (3,159)   (4,535)   (9,479)
       Share-based compensation (1)                                                 (4,192)                               (4,004)  (13,792)  (13,605)
                                                                                    ------                                ------   -------   -------
         Operating expense adjustment                                               (5,704)                               (7,163)  (18,327)  (23,084)
    Non-GAAP Operating expenses                                                    $55,875                               $56,335  $171,604  $172,679
                                                                                   =======                               =======  ========  ========

    GAAP Income from operations                                                    $13,804                               $13,714   $35,983   $31,033
         Gross profit adjustment                                                       777                                   922     2,500     2,766
         Operating expense adjustment                                                5,704                                 7,163    18,327    23,084
    Non-GAAP Income from operations                                                $20,285                               $21,799   $56,810   $56,883
                                                                                   =======                               =======   =======   =======

    GAAP Provision for income taxes                                                 $4,628                                $5,426   $19,278   $10,777
            Provision for income taxes adjustment (3, 5)                              (900)                               (1,592)   (8,861)     (153)
                                                                                      ----                                ------    ------      ----
    Non-GAAP Provision for income taxes                                             $3,728                                $3,834   $10,417   $10,624
                                                                                    ======                                ======   =======   =======

    GAAP Net income                                                                 $8,451                                $8,118   $14,541   $20,619
         Gross profit adjustment                                                       777                                   922     2,500     2,766
         Operating expense adjustment                                                5,704                                 7,163    18,327    23,084
         Amortization of deferred financing fees (4)                                    59                                    60       178       179
         Provision for income tax adjustment                                           900                                 1,592     8,861       153
    Non-GAAP Net income                                                            $15,891                               $17,855   $44,407   $46,801
                                                                                   =======                               =======   =======   =======

    GAAP Net income per diluted share                                                $0.23                                 $0.20     $0.39     $0.50
       Non-GAAP adjustments as described above                                        0.20                                  0.24      0.79      0.63
       per share, net of tax (1-5)
    Non-GAAP Net income per diluted share                                            $0.43                                 $0.44     $1.18     $1.13
                                                                                     =====                                 =====     =====     =====

(1) Share-based compensation. Consists of non-cash expenses for employee stock options, restricted stock units and our employee stock purchase plan determined in accordance with the fair value method of accounting for share-based compensation. When evaluating the performance of our business and developing short and long-term plans, we do not consider share-based compensation charges. Although share-based compensation is necessary to attract and retain quality employees, our consideration of share-based compensation places its primary emphasis on overall shareholder dilution rather than the accounting charges associated with such grants. Because of varying available valuation methodologies, subjective assumptions and the variety of award types, we believe that the exclusion of share-based compensation allows for more accurate comparison of our financial results to previous periods. In addition, we believe it is useful to investors to understand the specific impact of the application of the fair value method of accounting for share-based compensation on our operating results.

(2) Amortization of acquired technology and other intangible assets. When conducting internal development of intangible assets (including developed technology, customer relationships, trademarks, etc.), GAAP accounting rules require that we expense the costs as incurred. In the case of acquired businesses, however, we are required to allocate a portion of the purchase price to the accounting value assigned to intangible assets acquired and amortize this amount over the estimated useful lives of the acquired intangibles. The acquired company, in most cases, has itself previously expensed the costs incurred to develop the acquired intangible assets, and the purchase price allocated to these assets is not necessarily reflective of the cost we would incur in developing the intangible asset. We eliminate these amortization charges from our non-GAAP operating results to provide better comparability of pre- and post-acquisition operating results and comparability to results of businesses utilizing internally developed intangible assets.

(3) Non-GAAP effective tax rate. The company’s annual non-GAAP effective tax rate is calculated by dividing the company’s estimated annual non-GAAP tax expense by its estimated annual non-GAAP taxable income. The company’s estimated non-GAAP taxable income is determined by adjusting its estimated GAAP taxable income for its non-GAAP adjustments on a country-by-country basis. The company determines its annual estimated non-GAAP tax expense by adding together the estimated non-GAAP tax expense for each country based on each country’s applicable tax rate. The company determines its interim non-GAAP effective tax expense in accordance with the general principles of ASC 740, Accounting for Income Taxes. In 2012, the company’s effective tax rate is based on the company’s anticipated long term annual non-GAAP tax expense divided by the company’s long term annual non-GAAP taxable income on a country by country basis.

(4) Amortization of deferred financing fees. This is a non-cash charge that is disregarded by the company’s management when evaluating our ongoing performance and/or predicting our earnings trends, and is excluded by us when presenting our non-GAAP financial measures. Further, we believe it is useful to investors to understand the specific impact of this charge on our operating results.

(5) Tax related adjustments from other discrete items. This amount represents the non-recurring tax effect from the transfer of customer relationship intangible assets and the related deferred tax liabilities from a higher tax rate jurisdiction to a lower tax rate jurisdiction. The tax benefit is reflected in the first quarter of 2011 upon the completion of our global distribution restructuring and is not expected to recur.

                                                                                                                            Websense, Inc.
                                                                                                          Non-GAAP Billings Operating Margin Reconciliation
                                                                                                           (Unaudited and in thousands, except percentages)

                                                                                                                       Three Months Ended September 30,                             Nine Months Ended September 30,
    Billings:                                                                                                              2012                                2011                 2012                             2011
                                                                                                                           ----                                ----                 ----                             ----
                                       Software and service billings                                        $74,585                  91.5%                  $76,332        90.5%              $227,631               92.0%         $226,896        91.9%
                                       Appliance billings                                                     6,913                   8.5%                    7,983         9.5%                19,839                8.0%           19,981         8.1%
                                                                                                              -----
                                         Total billings                                                      81,498                 100.0%                   84,315       100.0%               247,470              100.0%          246,877       100.0%

    Non-GAAP Cost of billings:
                                       Software and service cost of billings                                 10,866                  14.6%                    9,312        12.2%                31,418               13.8%           28,227        12.4%
                                       Appliance cost of billings (1)                                         2,716                  39.3%                    3,553        44.5%                 7,842               39.5%            9,512        47.6%
                                                                                                              -----
                                         Non-GAAP Cost of billings                                           13,582                  16.7%                   12,865        15.3%                39,260               15.9%           37,739        15.3%

    Non-GAAP Gross margin:
                                       Software and service gross margin                                     63,719                  85.4%                   67,020        87.8%               196,213               86.2%          198,669        87.6%
                                       Appliance gross margin                                                 4,197                  60.7%                    4,430        55.5%                11,997               60.5%           10,469        52.4%
                                                                                                              -----
                                         Non-GAAP Gross margin                                               67,916                  83.3%                   71,450        84.7%               208,210               84.1%          209,138        84.7%

    Non-GAAP Operating expenses:
                                       Selling and marketing                                                 32,627                  40.0%                   33,953        40.3%               102,370               41.4%          107,494        43.5%
                                       Research and development                                              14,689                  18.0%                   14,123        16.7%                43,206               17.4%           40,669        16.5%
                                       General and administrative                                             8,559                  10.5%                    8,259         9.8%                26,028               10.5%           24,516         9.9%
                                                                                                              -----
                                         Non-GAAP Operating expenses                                         55,875                  68.5%                   56,335        66.8%               171,604               69.3%          172,679        69.9%

    Non-GAAP Billings operating margin                                                         $12,041                     14.8%               $15,115              17.9%        $36,606                      14.8%        $36,459          14.8%
                                                                                               =======                                         =======                           =======                                   =======

                                       (1) Excluding deferred appliance expenses associated with pre-2011 appliance sales.

The non-GAAP financial measures included in the tables above and in the tables on the preceding page are non-GAAP gross profit, non-GAAP operating expenses, non-GAAP income from operations, non-GAAP provision for income taxes, non-GAAP net income and non-GAAP net income per share, billings, non-GAAP cost of billings, non-GAAP gross margin and non-GAAP billings operating margin which adjust for the following items: acquisition related adjustments, share-based compensation expense, amortization of intangible assets, deferred expenses and certain other items. We believe the presentation of these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provides meaningful supplemental information regarding the company’s operating performance for the reasons discussed below. Our management uses these non-GAAP financial measures in assessing the company’s operating results, as well as when planning, forecasting and analyzing future periods. The annual operating plan approved by our Board of Directors is based upon non-GAAP financial measures and our management incentive plans also use non-GAAP financial measures as performance objectives. We believe that these non-GAAP financial measures also facilitate comparisons of the company’s performance to prior periods and to our peers and that investors benefit from an understanding of these non-financial measures.

    INVESTOR CONTACT:      MEDIA CONTACT:
    Avelina Kauffman       Patricia Hogan
    Websense, Inc.         Websense, Inc.
    (858) 320-9364         (858) 320-9393
    akauffman@websense.com phogan@websense.com

SOURCE Websense, Inc.


Source: PR Newswire