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Last updated on April 23, 2014 at 16:13 EDT

Websense Reports Fourth Quarter and Fiscal Year 2012 Results

January 29, 2013

SAN DIEGO, Jan. 29, 2013 /PRNewswire/ — Websense, Inc. (NASDAQ: WBSN) today announced financial results for the fourth quarter and fiscal year 2012 consistent with preliminary results for billings, non-GAAP revenue, non-GAAP earnings per diluted share, and cash flow from operations released on January 13, 2013.

“Our record fourth quarter billings demonstrate the success of our strategic initiatives and the Websense(®) TRITON(TM) platform,” said John McCormack, Websense CEO. “The strength in the quarter was driven by a 23 percent year-over-year increase in TRITON solution billings and double-digit year-over-year growth in new customer sales. These results confirm the traction we have established in the content security market as we evolve our web, email, mobile and data security solutions. Looking to the future, we are focused on continued growth, consistent execution, and extension of the TRITON platform ecosystem through strategic partnerships.”

Fourth Quarter 2012 GAAP Financial Highlights

  • Revenues of $91.7 million, compared with $92.7 million in the fourth quarter of 2011.
  • Software and services revenues of $82.3 million, consistent with the fourth quarter of 2011.
  • Appliance revenues of $9.4 million, which consisted of approximately $8.2 million in current-period appliance sales and approximately $1.2 million of deferred appliance revenue primarily from pre-2011 appliance sales, compared with $10.4 million of appliance revenues in the fourth quarter of 2011, which consisted of approximately $8.3 million in current-period appliance sales and $2.1 million of deferred appliance revenue primarily from pre-2011 appliance sales.
  • Operating income of $5.6 million, compared with $13.4 million in the fourth quarter of 2011, as we incurred increased operating expenses primarily due to increased sales commissions and selling expenses resulting from our billings growth and our investments to expand our sales force, as well as litigation expenses associated with the company’s successful defense of a patent lawsuit.
  • Provision for income taxes of $1.4 million, compared with $2.2 million in the fourth quarter of 2011.
  • Net income of $3.8 million, or 10 cents per diluted share, compared with net income of $10.4 million, or 27 cents per diluted share, in the fourth quarter of 2011.
  • Weighted average diluted shares outstanding of 36.8 million, compared with 38.9 million in the fourth quarter of 2011.
  • Cash flow from operations of $11.1 million, compared with $5.6 million in the third quarter of 2012 and $21.9 million in the fourth quarter 2011.
  • Quarter-end accounts receivable of $89.1 million, compared with $54.4 million at the end of the third quarter of 2012 and $80.1 million at the end of the fourth quarter of 2011.
  • Days billings outstanding of 66 days, compared with 60 days at the end of the third quarter of 2012 and 62 days at the end of the fourth quarter of 2011.
  • Deferred revenue of $401.1 million, an increase of $8.1 million compared with deferred revenue of $393.0 million at the end of the fourth quarter of 2011. Deferred revenue at the end of the fourth quarter of 2012 included $5.0 million from extended warranties and pre-2011 appliance sales, a decrease of $4.7 million from the year ago period. Deferred revenue from pre-2011 appliance sales will continue to decrease quarterly as it is depleted by ratable recognition over the original subscription periods.

Fourth Quarter 2012 Non-GAAP(1) Financial Highlights

  • Billings of $122.0 million, an increase of five percent compared with the fourth quarter of 2011. Changes in currency exchange rates, compared with exchange rates prevailing in the fourth quarter of 2011, did not materially impact fourth quarter 2012 billings performance.
  • TRITON solution billings of $83.7 million, an increase of 23 percent compared with the fourth quarter of 2011.
  • Non-GAAP operating income of $13.0 million, compared with non-GAAP operating income of $21.7 million in the fourth quarter of 2011. Non-GAAP operating margin in the fourth quarter of 2012, calculated as a percentage of revenues, was 14.2 percent, compared with 23.4 percent in the fourth quarter of 2011. We incurred increased operating expenses primarily due to increased sales commissions and selling expenses resulting from our billings growth and investments to expand our sales force, as well as litigation expenses associated with the company’s successful defense of a patent lawsuit.
  • Billings-based operating margin of 36.0 percent, compared with billings-based operating margin of 39.6 percent in the fourth 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 $2.4 million, based on an effective tax rate of 19 percent, compared with a non-GAAP tax provision of $3.9 million based on an effective tax rate of 18.5 percent, in the fourth quarter of 2011.
  • Non-GAAP net income of $10.3 million, or 28 cents per diluted share, compared with $17.1 million, or 44 cents per diluted share, in the fourth quarter of 2011.

Fiscal Year 2012 GAAP Financial Highlights

  • Revenues of $361.5 million, compared with $364.2 million in 2011.
  • Software and services revenues of $328.3 million, compared with $325.4 million in 2011.
  • Appliance revenues of $33.2 million, which consisted of approximately $27.3 million in current-period appliance sales and approximately $5.9 million of deferred appliance revenue primarily from pre-2011 appliance sales, compared with $38.8 million of appliance revenues in 2011, which consisted of approximately $27.4 million in current-period appliance sales and $11.4 million of deferred appliance revenue primarily from pre-2011 appliance sales.
  • Operating income of $41.5 million, compared with $44.4 million in 2011.
  • Provision for income taxes of $20.7 million, representing an effective tax rate of 53 percent, compared with a tax provision of $13.0 million and an effective tax rate of 29.6 percent in 2011. The 2012 effective tax rate was impacted by a one-time tax provision recorded in the first quarter of 2012 relating to the company’s settlement with the U.S. Internal Revenue Service of certain audit adjustments for tax years 2005 through 2007.
  • Net income of $18.3 million, or 49 cents per diluted share, compared with $31.0 million, or 76 cents per diluted share, in 2011.
  • Weighted average diluted shares outstanding of 37.5 million, compared with 40.7 million in 2011.
  • Cash flow from operations of $48.9 million, compared with $79.2 million in 2011. Cash flow from operations includes one-time tax payments of $14.7 million in the third quarter of 2012 relating to the company’s settlement with the U.S. Internal Revenue Service described above.

Fiscal Year 2012 Non-GAAP(1) Financial Highlights

  • Billings of $369.5 million, an increase of 2 percent compared with $362.9 million in 2011. Changes in currency exchange rates, compared with exchange rates prevailing in 2011, negatively impacted 2012 billings by approximately $4.7 million.
  • TRITON solution billings of $232.9 million, an increase of 21 percent compared with the 2011.
  • Non-GAAP operating income of $69.9 million, compared with non-GAAP operating income of $78.6 million in 2011. Non-GAAP operating margin in 2012, calculated as a percentage of revenues, was 19.3 percent, compared with 21.6 percent in 2011.
  • Billings-based operating margin of 21.8 percent, compared with billings-based operating margin of 22.7 percent in 2011.
  • A non-GAAP tax provision of $12.8 million, based on a long-term effective tax rate of 19 percent, compared with a non-GAAP tax provision of $14.5 million, based on an effective tax rate of 18.5 percent, in 2011.
  • Non-GAAP net income of $54.8 million, or $1.46 per diluted share, compared with $63.9 million, or $1.57 per diluted share, in 2011.
    Summary Metrics
    ---------------
    Millions, except percentages,
     number of transactions, duration,
     and days billings outstanding                 Q4'12                     Q4'11                   Y/Y Chg               2012       2011          Y/Y Chg
    ----------------------------------             -----                     -----                   -------               ----       ----          -------
    Total billings                                         $122.0                    $116.0                        5%    $369.5     $362.9                       2%
    --------------                                         ------                    ------                      ---     ------     ------                     ---
    U.S. billings                                           $54.4                     $51.9                        5%    $174.0     $173.3                       0%
    -------------                                           -----                     -----                      ---     ------     ------                     ---
    International billings                                  $67.6                     $64.1                        5%    $195.5     $189.6                       3%
    ----------------------                                  -----                     -----                      ---     ------     ------                     ---
    TRITON solution billings(2)                             $83.7                     $68.3                       23%    $232.9     $192.6                      21%
    --------------------------                              -----                     -----                      ---     ------     ------                     ---
    Appliance billings                                       $8.6                      $8.6                        0%     $28.5      $28.6                       0%
    ------------------                                       ----                      ----                      ---      -----      -----                     ---
    Number of transactions >$100K                             243                       205                       19%       648        563                      15%
    -----------------------------                             ---                       ---                      ---        ---        ---                     ---
    Average contract duration (months)                       25.8                      24.2                        7%                   -
    ---------------------------------                        ----                      ----                      ---                  ---
    Days billings outstanding (DSOs)                           66                        62          +4 days                            -
    -------------------------------                           ---                       ---          -------                          ---
    Cash and cash equivalents                               $64.6                     $76.2                      -15%                   -
    -------------------------                               -----                     -----                      ---                  ---
    Balance on revolving credit
     facility                                               $68.0                     $73.0                       -7%                   -
    ---------------------------                             -----                     -----                      ---                  ---
    Share repurchases ($)                                    $5.0                     $25.0                      -80%     $47.9     $100.0                     -52%
    --------------------                                     ----                     -----                      ---      -----     ------                     ---
    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 First Quarter and Fiscal Year 2013
Websense provides guidance on anticipated financial performance for the first quarter and 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 24 and 26 months and prevailing currency exchange rates of $1.32 for the Euro and $1.62 for the Pound Sterling. The company disclaims any obligation to update the statements as circumstances change.

    Millions, except
     percentages and
     per share
     amounts          Q1'13 Outlook               2013 Outlook
    ----------------  -------------               ------------
    Total billings                    $82 - 86                 $374 - 394
    --------------                    --------                 ----------
    Appliance
     billings (% of
     total billings)                    7 - 8%                    7 - 8%
    ----------------                     -----                      -----
    Revenues                          $84 - 87                 $351 - 361
    --------                          --------                 ----------
    Non-GAAP gross
     profit margin           Approximately 83%         Approximately 83%
    --------------            ----------------           ----------------
    Non-GAAP
     operating
     margin                            8 - 11%                  11 - 13%
    ----------                          ------                    -------
    Billings-based
     non-GAAP
     operating
     margin                            8 - 11%                  17 - 20%
    --------------                      ------                    -------
    Non-GAAP
     earnings per
     diluted share                $0.15 - 0.19               $0.78 - 0.93
    --------------                ------------               ------------
    Non-GAAP
     effective tax
     rate                                   19%                        19%
    --------------                         ---                        ---
    Average diluted
     shares
     outstanding     Approximately 37           Approximately 37
    ---------------  ----------------           ----------------
    Cash flow from
     operations                       $27 - 30                   $66 - 76
    --------------                    --------                   --------
    Capital
     expenditures    Approximately $4                            $15 - 17
    -------------    ----------------                            --------

Management further indicates:

  • Expected stock repurchases of approximately $5 million per quarter in 2013.
  • Non-cash items related to the recognition of revenue and costs associated with pre-2011 appliance billings:
    • Remaining deferred revenue of $2.7 million from pre-2011 appliance billings (as of December 31, 2012) that will continue to be recognized ratably according to the original subscription periods, including $0.8 million to be recognized in the first quarter of 2013 (compared with $1.7 million in the first quarter of 2012).
    • Remaining deferred costs of $1.4 million from pre-2011 appliance billings (as of December 31, 2012) that will continue to be recognized ratably according to the original subscription periods, including $0.4 million to be recognized in the first quarter of 2013 (compared with $0.8 million in the first quarter of 2012).
    • On January 1, 2011, Websense adopted Accounting Standards Update (ASU) 2009-13 (Multiple Deliverable Revenue Arrangements) and ASU 2009-14 (Certain Revenue Arrangements that Include Software Elements), which requires 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 related software subscription terms. The schedules below summarize the actual and expected recognition of remaining deferred appliance revenues and costs by quarter for 2012 and 2013:
                          2012 Summary of Amounts Related to pre-2011 Appliance Sales
                          -----------------------------------------------------------
    Millions                      Deferred balances               2012 Recognition Schedule (actual)           Remaining deferred balances
                                         as of 12/31/11                                                                     as of 12/31/12
                                       (actual)                                                                          (actual)
    ---                                -------                                                                            -------
              Q1'12                     Q2'12                       Q3'12                       Q4'12                                   2012
              -----                     -----                       -----                       -----                                   ----
    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
    -----                           ----         ----         ----         ----         ----         ----                         ----

                      2013 Summary of Amounts Related to pre-2011 Appliance Sales
                      -----------------------------------------------------------
    Millions                    Deferred balances                 2013 Recognition Schedule            Remaining deferred balances
                                      as of 12/31/12                                                    as of 12/31/13 (expected)
                                     (actual)
    ---                              -------
              Q1'13              Q2'13 (expected)              Q3'13                    Q4'13                                  2013
                      (expected)                             (expected)               (expected)                  (expected)
            ---------                 ---------                 ---------                ---------                  ----------
    Revenue                         $2.7         $0.8         $0.6         $0.5         $0.3         $2.2                         $0.5
    -------                         ----         ----         ----         ----         ----         ----                         ----
    Costs                           $1.4         $0.4         $0.3         $0.2         $0.1         $1.0                         $0.4
    -----                           ----         ----         ----         ----         ----         ----                         ----

Strategic Partnership with F5 Networks
During the fourth quarter of 2012, Websense entered into an agreement with F5 Networks (NASDAQ: FFIV), the global leader in Application Delivery Networking (ADN). The companies have agreed to integrate their technologies to deliver bi-directional context-based security leveraging user, device, and location, as well as application, data, and destination information. Further details will be announced at the RSA Security Conference starting on February 25.

Conference Call Details
Management will host a conference call and simultaneous webcast to discuss the financial results and outlook today, January 29, at 2 p.m. Pacific Standard 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 on the internet at www.websense.com/investors. An archive of the webcast will be available on the company’s website through March 31, 2013, and a recorded replay of the call will be available for one week at 855-859-2056 or 404-537-3406, pass code 83989045.

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 historical operating results. Reconciliations of the GAAP and non-GAAP financial measures for 2012, 2011 and the fourth quarters of both years 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 numerical measures that cannot 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 fourth 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), 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 appliance-based software or SaaS-based cloud services, Websense TRITON content security solutions help organizations leverage social media and cloud-based communication, while protecting from advanced persistent threats and modern malware, 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 John McCormack; statements about our expected success of our strategic initiatives and selling products; statements regarding market share gains and trends; 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, 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.

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

                                                                          Websense, Inc.
                                                              Consolidated Statements of Operations
                                                             (In thousands, except per share amounts)

                               Three Months Ended December
                                           31,                       Years Ended December 31,
                              ----------------------------           ------------------------
                                                       2012                                 2011                      2012      2011
                                                       ----                                 ----                      ----      ----
                                      (Unaudited)                          (Unaudited)                (Unaudited)
    Revenues:
        Software and service                        $82,284                              $82,316                  $328,276  $325,373
        Appliance                                     9,419                               10,417                    33,188    38,810
                                                      -----                               ------                    ------    ------
           Total revenues                            91,703                               92,733                   361,464   364,183
    Cost of revenues:
        Software and service                         11,642                               10,570                    45,560    41,563
        Appliance                                     3,717                                4,395                    13,646    18,056
                                                      -----                                -----                    ------    ------
           Total cost of
            revenues                                 15,359                               14,965                    59,206    59,619
                                                     ------                               ------                    ------    ------
    Gross profit                                     76,344                               77,768                   302,258   304,564
    Operating expenses:
        Selling and marketing                        43,028                               39,754                   155,254   161,039
        Research and
         development                                 16,560                               14,691                    63,305    58,247
        General and
         administrative                              11,201                                9,941                    42,161    40,863
           Total operating
            expenses                                 70,789                               64,386                   260,720   260,149
                                                     ------                               ------                   -------   -------
    Income from
     operations                                       5,555                               13,382                    41,538    44,415
    Interest expense                                   (643)                                (468)                   (2,586)   (1,635)
    Other income
     (expense), net                                     313                                 (291)                       92     1,239
                                                        ---                                 ----                       ---     -----
    Income before income
     taxes                                            5,225                               12,623                    39,044    44,019
    Provision for income
     taxes                                            1,417                                2,248                    20,695    13,025
                                                      -----                                -----                    ------    ------
    Net income                                       $3,808                              $10,375                   $18,349   $30,994
                                                     ======                              =======                   =======   =======

    Basic net income per
     share                                            $0.10                                $0.27                     $0.50     $0.78
                                                      =====                                =====                     =====     =====
    Diluted net income
     per share                                        $0.10                                $0.27                     $0.49     $0.76
                                                      =====                                =====                     =====     =====
    Weighted average
     shares -basic                                   36,602                               38,555                    36,908    39,711
                                                     ======                               ======                    ======    ======
    Weighted average
     shares -diluted                                 36,848                               38,894                    37,526    40,739
                                                     ======                               ======                    ======    ======

    Financial Data:
    Total deferred
     revenue                                       $401,057                             $393,034                  $401,057  $393,034
                                                   ========                             ========                  ========  ========

                               Websense, Inc.
                        Consolidated Balance Sheets
                               (In thousands)

                                December 31, 2012         December 31, 2011
                                -----------------         -----------------
    Assets                         (Unaudited)
    Current
     assets:
        Cash and
         cash
         equivalents                             $64,584                 $76,201
        Accounts
         receivable,
         net                                      89,071                  80,147
        Income tax
         receivable/
         prepaid
         income tax                                3,989                     738
        Current
         portion of
         deferred
         income
         taxes                                    28,933                  30,021
        Other
         current
         assets                                   13,249                  13,793
                                                  ------                  ------
           Total
            current
            assets                               199,826                 200,900
    Cash and
     cash
     equivalents
     -
     restricted                                      662                     628
    Property
     and
     equipment,
     net                                          18,901                  16,832
    Intangible
     assets,
     net                                          17,940                  26,412
    Goodwill                                     372,445                 372,445
    Deferred
     income
     taxes,
     less
     current
     portion                                       7,335                   8,599
    Deposits
     and other
     assets                                        7,352                   8,622
    Total
     assets                                     $624,461                $634,438
                                                ========                ========

    Liabilities
     and
     stockholders'
     equity
    Current
     liabilities:
        Accounts
         payable                                  $7,941                  $9,026
        Accrued
         compensation
         and
         related
         benefits                                 24,981                  22,770
        Other
         accrued
         expenses                                 12,413                  16,534
        Current
         portion of
         income
         taxes
         payable                                     694                   3,187
        Current
         portion of
         deferred
         tax
         liability                                    42                      86
        Current
         portion of
         deferred
         revenue                                 243,945                 250,597
                                                 -------                 -------
           Total
            current
            liabilities                          290,016                 302,200
    Other long
     term
     liabilities                                   2,044                   2,600
    Income
     taxes
     payable,
     less
     current
     portion                                      10,514                  11,955
    Secured
     loan                                         68,000                  73,000
    Deferred
     tax
     liability,
     less
     current
     portion                                       2,026                   2,501
    Deferred
     revenue,
     less
     current
     portion                                     157,112                 142,437
                                                 -------                 -------
        Total
         liabilities                             529,712                 534,693
     Stockholders'
     equity:
      Common
       stock                                         580                     568
      Additional
       paid-in
       capital                                   443,100                 415,573
      Treasury
       stock, at
       cost                                     (436,426)               (385,544)
      Retained
       earnings                                   90,596                  72,247
      Accumulated
       other
       comprehensive
       loss                                       (3,101)                 (3,099)
        Total
         stockholders'
         equity                                   94,749                  99,745
    Total
     liabilities
     and
     stockholders'
     equity                                     $624,461                $634,438
                                                ========                ========

                                            Websense, Inc.
                                 Consolidated Statements of Cash Flows
                                            (In thousands)

                                                                             Years Ended December 31,
                                                                             ------------------------
                                                                                      2012               2011
                                                                                      ----               ----
    Operating activities:                                                     (Unaudited)
    Net income                                                                     $18,349            $30,994
    Adjustments to reconcile net income to net cash provided by operating
     activities:
    Depreciation and amortization                                                   20,351             26,286
    Share-based compensation                                                        20,110             18,976
    Deferred income taxes                                                            2,036              5,423
    Unrealized loss (gain) on foreign
     exchange                                                                          279               (137)
    Excess tax benefit from share-based
     compensation                                                                     (555)            (2,596)
    Changes in operating assets and liabilities:
    Accounts receivable                                                             (7,836)               957
    Other assets                                                                       835              2,251
    Accounts payable                                                                (2,135)             1,667
    Accrued compensation and related benefits                                        1,877                449
    Other liabilities                                                               (3,635)            (4,161)
    Deferred revenue                                                                 8,021             (1,246)
    Income taxes payable and receivable/
     prepaid                                                                        (8,765)               328
    Net cash provided by operating activities                                       48,932             79,191
                                                                                    ------             ------

    Investing activities:
    Change in restricted cash and cash
     equivalents                                                                       (21)                31
    Purchase of property and equipment                                             (12,546)            (9,117)
    Purchase of intangible assets                                                        -               (765)
    Net cash used in investing activities                                          (12,567)            (9,851)
                                                                                   -------             ------

    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)
    Cash paid for deferred financing fees
     under secured loan                                                                (35)               (35)
    Proceeds from exercise of stock options                                          2,464             16,719
    Proceeds from issuance of common stock
     for stock purchase plan                                                         6,752              6,614
    Excess tax benefit from share-based
     compensation                                                                      555              2,596
    Tax payments related to restricted stock
     unit issuances                                                                 (2,967)            (2,979)
    Purchase of treasury stock                                                     (49,109)           (98,712)
    Net cash used in financing activities                                          (47,927)           (70,366)
                                                                                   -------            -------

    Effect of exchange rate changes on cash
     and cash equivalents                                                              (55)              (163)
    Decrease in cash and cash equivalents                                          (11,617)            (1,189)
    Cash and cash equivalents at beginning of
     period                                                                         76,201             77,390
    Cash and cash equivalents at end of
     period                                                                        $64,584            $76,201
                                                                                   =======            =======

    Cash paid during the period for:
        Income taxes including interest and
         penalties, net of refunds                                                 $28,279             $8,597
        Interest                                                                    $2,332             $1,421

    Non-cash financing activities:
        Change in operating assets and liabilities for unsettled purchase of
         treasury
             stock and exercise of stock options                                   $(1,018)            $1,097

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

                                                              $370,739
    Deferred revenue balance at
     September 30, 2012
                                                               122,021
    Net billings during fourth
     quarter 2012
                                                               (91,703)
    Less revenue recognized during
     fourth quarter 2012
                                                                     -
    Translation adjustment
                                                              $401,057
    Deferred revenue balance at
     December 31, 2012

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

                                                                                      Three Months Ended                      Years Ended
                                                                                         December 31,                        December 31,
                                                                                         ------------                        ------------
                                                                                                       2012                                 2011      2012      2011
                                                                                                       ----                                 ----      ----      ----

    GAAP gross profit                                                                               $76,344                              $77,768  $302,258  $304,564
       Amortization of acquired technology (2)                                                          538                                  646     2,155     2,583
       Share-based compensation (1)                                                                     341                                  267     1,224     1,097
                                                                                                        ---                                  ---     -----     -----
         Gross profit adjustment                                                                        879                                  913     3,379     3,680
    Non-GAAP gross profit                                                                           $77,223                              $78,681  $305,637  $308,244
                                                                                                    =======                              =======  ========  ========

    GAAP operating expenses                                                                         $70,789                              $64,386  $260,720  $260,149
       Amortization of other intangible assets (2)                                                   (1,512)                              (3,160)   (6,047)  (12,640)
       Share-based compensation (1)                                                                  (5,094)                              (4,275)  (18,886)  (17,878)
                                                                                                     ------                               ------   -------   -------
         Operating expense adjustment                                                                (6,606)                              (7,435)  (24,933)  (30,518)
    Non-GAAP operating expenses                                                                     $64,183                              $56,951  $235,787  $229,631
                                                                                                    =======                              =======  ========  ========

    GAAP income from operations                                                                      $5,555                              $13,382   $41,538   $44,415
         Gross profit adjustment                                                                        879                                  913     3,379     3,680
         Operating expense adjustment                                                                 6,606                                7,435    24,933    30,518
    Non-GAAP income from operations                                                                 $13,040                              $21,730   $69,850   $78,613
                                                                                                    =======                              =======   =======   =======

    GAAP provision for income taxes                                                                  $1,417                               $2,248   $20,695   $13,025
            Provision for income taxes adjustment (3, 5)                                              1,009                                1,642    (7,852)    1,489
                                                                                                      -----                                -----    ------     -----
    Non-GAAP provision for income taxes                                                              $2,426                               $3,890   $12,843   $14,514
                                                                                                     ======                               ======   =======   =======

    GAAP net income                                                                                  $3,808                              $10,375   $18,349   $30,994
         Gross profit adjustment                                                                        879                                  913     3,379     3,680
         Operating expense adjustment                                                                 6,606                                7,435    24,933    30,518
         Amortization of deferred financing fees (4)                                                     60                                   59       238       238
         Provision for income tax adjustment                                                         (1,009)                              (1,642)    7,852    (1,489)
    Non-GAAP net income                                                                             $10,344                              $17,140   $54,751   $63,941
                                                                                                    =======                              =======   =======   =======

    GAAP net income per diluted share                                                                 $0.10                                $0.27     $0.49     $0.76
    Non-GAAP adjustments as described above per share, net of tax (1-5)                                0.18                                 0.17      0.97      0.81
    Non-GAAP net income per diluted share                                                             $0.28                                $0.44     $1.46     $1.57
                                                                                                      =====                                =====     =====     =====

(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 non-GAAP 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 December 31,                             Years Ended December 31,
                                                                                                    -------------------------------                             ------------------------
                                                          Billings:                                     2012                            2011                 2012                             2011
                                                                                                        ----                            ----                 ----                             ----
                                       Software and service                             $113,373                   92.9%            $107,390        92.6%              $341,004               92.3%         $334,286        92.1%
                                       Appliance                                           8,648                    7.1%               8,622         7.4%                28,487                7.7%           28,603         7.9%
                                                                                           -----
                                         Total billings                                  122,021                  100.0%             116,012       100.0%               369,491              100.0%          362,889       100.0%

    Non-GAAP cost of billings:
                                       Software and service                               10,763                    9.5%               9,656         9.0%                42,181               12.4%           37,883        11.3%
                                       Appliance (1)                                       3,208                   37.1%               3,440        39.9%                11,050               38.8%           12,952        45.3%
                                                                                           -----
                                         Total non-GAAP cost of billings                  13,971                   11.4%              13,096        11.3%                53,231               14.4%           50,835        14.0%

    Non-GAAP gross margin:
                                       Software and service                              102,610                   90.5%              97,734        91.0%               298,823               87.6%          296,403        88.7%
                                       Appliance                                           5,440                   62.9%               5,182        60.1%                17,437               61.2%           15,651        54.7%
                                                                                           -----
                                         Total non-GAAP gross margin                     108,050                   88.6%             102,916        88.7%               316,260               85.6%          312,054        86.0%

    Non-GAAP operating expenses:
                                       Selling and marketing                              39,436                   32.3%              35,011        30.2%               141,806               38.4%          142,506        39.3%
                                       Research and development                           15,320                   12.6%              13,752        11.8%                58,526               15.8%           54,420        15.0%
                                       General and administrative                          9,427                    7.7%               8,188         7.1%                35,455                9.6%           32,704         9.0%
                                                                                           -----
                                         Total non-GAAP operating expenses                64,183                   52.6%              56,951        49.1%               235,787               63.8%          229,630        63.3%

    Non-GAAP billings operating margin                                     $43,867                      36.0%               $45,965          39.6%        $80,473                      21.8%        $82,424          22.7%
                                                                           =======                                          =======                       =======                                   =======
              (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 diluted 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.

SOURCE Websense, Inc.


Source: PR Newswire