SOURCE: Websense, Inc.
Websense Reports Growth in Billings and Cash Flow From Operations for Third Quarter 2009
Billings of $84.5 Million Reflect Strong Sales of Strategic Product Offerings, Including the V10000 Web Security Gateway Appliance, Data Loss Prevention and SaaS Web Security Solutions
SAN DIEGO, CA--(Marketwire - October 29, 2009) - Websense, Inc. (
Third Quarter 2009 GAAP Financial Highlights
-- Revenue, calculated in accordance with generally accepted accounting
principles (GAAP), increased 5 percent from the third quarter of 2008 to
$78.6 million.
-- Operating expenses of $64.2 million decreased 4 percent from the third
quarter of 2008 and included approximately $1.2 million in severance
expenses associated with third quarter cost reduction actions,
approximately $6.2 million in acquisition related amortization and
restructuring and integration expenses and approximately $5.8 million in
stock based compensation.
-- Operating income was $1.3 million, compared to an operating loss of
$4.3 million in the third quarter of 2008.
-- Net loss was $1.9 million, or 4 cents per share, compared to a net
loss of $4.8 million, or 11 cents per share, in the third quarter of 2008.
-- Cash flow from operations was $22.5 million, compared to $17.8 million
in the third quarter of 2008. Year to date, the company has generated
approximately $65.4 million in cash flow from operations.
Third Quarter 2009 Non-GAAP Financial Highlights
-- Billings, which represent the full amount of subscription contracts
billed to customers during the period, totaled $84.5 million, an increase
of 2 percent compared to $82.7 million in the third quarter of 2008. Using
the same currency exchange rates that prevailed in the third quarter of
2008, billings in the third quarter of 2009 would have been approximately
$87.4 million, an increase of 6 percent from the third quarter of 2008.
-- International billings were approximately $41.7 million, compared to
$39.1 million in the third quarter of 2008.
-- Non-GAAP revenue of $82.2 million included approximately $3.6 million
of revenue from SurfControl that would have been recognized during this
period had SurfControl remained an independent operating company reporting
under GAAP. This subscription revenue was included in SurfControl's
deferred revenue as of the date of the acquisition, but was not recognized
as revenue on a post-acquisition basis under GAAP due to a required write-
down of SurfControl's deferred revenue to fair value as of the acquisition
date. Non-GAAP revenue in the third quarter of 2008 was $85.5 million, and
included approximately $10.6 million of revenue from SurfControl that would
have been recognized during this period had SurfControl remained an
independent company.
-- Non-GAAP operating expenses were $51 million, a decrease of
approximately $636,000 from the second quarter of 2009 and a decrease of
approximately $653,000 from the third quarter of 2008.
-- Non-GAAP operating income was $21.6 million, representing 26.2 percent
of non-GAAP revenue. This compares to $25.0 million in the third quarter
of 2008, representing 29.2 percent of non-GAAP revenue.
-- Non-GAAP net income was $13.6 million, or 31 cents per diluted share,
compared to $14.7 million, or 32 cents per diluted share, in the third
quarter of 2008.
"Our Q3 performance confirms our belief that our new products can drive incremental growth in the coming quarters given continued improvement in the economic climate. The incremental business we received from selling our market leading Web security gateway, SaaS security and data loss prevention products continued to grow, with incremental Web security gateway sales up 37 percent sequentially. Recessionary impact from distressed customers on Websense business decreased during Q3, but still remained significant," said Websense Chief Executive Officer Gene Hodges. "This performance validates our strategy and demonstrates the resiliency of a subscription based business model in a tough economic climate."
"The strength of our cash flow performance and profitability outlook for the remainder of the year has prompted us to increase the amount allocated for share repurchases in the fourth quarter to up to $12 million, compared to $7.5 million per quarter in the first three quarters of the year," added Hodges. "We have generated more than $65 million in cash flow from operations so far this year, and we are confident we will exceed our expectation of operating cash flow of approximately $80 million for the year."
Quarterly Business Metrics Summary:
Dollars in thousands, except earnings per diluted share, product seats under subscription, average contract value, average contract duration and all percentage metrics.
Q3'09 Q3'08
--------------- ---------------
Billings $ 84,454 $ 82,683
--------------- ---------------
(as restated)**
--------------- ---------------
GAAP revenue 78,601 74,884**
--------------- ---------------
GAAP operating income (loss) 1,263 (4,325)**
--------------- ---------------
GAAP net loss (1,925) (4,813)**
--------------- ---------------
GAAP net loss per share $ (0.04) $ (0.11)**
--------------- ---------------
--------------- ---------------
Non-GAAP* revenue 82,193 85,475
--------------- ---------------
Non-GAAP* operating income 21,567 24,967
--------------- ---------------
Non-GAAP* net income 13,604 14,695
--------------- ---------------
Non-GAAP* earnings per diluted share $ 0.31 $ 0.32
--------------- ---------------
--------------- ---------------
Product seats under subscription
(millions) 42.9 43.3
--------------- ---------------
International billings (% of total) 49% 47%
--------------- ---------------
Average contract value $ 8,100 $ 7,900
--------------- ---------------
Billings from renewals (% of total) 75-80% 75-80%
--------------- ---------------
Average contract duration (months) 23.9 22.1
--------------- ---------------
*A detailed description of the company's non-GAAP financial data 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 table "Reconciliation of GAAP to Non-GAAP Financial Measures."
** The Company restated its results for the third quarter of 2008 to correct for errors in the method of recognizing royalty revenue related to contracts with original equipment manufacturer (OEM) customers and to correct a miscalculation of the 2008 tax provision, as described below.
Balance Sheet and Operating Cash Flow Metrics
Highlights of the balance sheet and cash flow performance compared to the third quarter of 2008 included:
-- Cash and cash equivalents worldwide of $76.3 million, compared with
$60.4 million at the end of the third quarter of 2008.
-- Total GAAP deferred revenue of $341.5 million, an increase of 8
percent compared to $315.0 million at the end of the third quarter of 2008.
-- Non-GAAP deferred revenue of $349.4 million, an increase of 1 percent
compared to non-GAAP deferred revenue of $344.9 million at the end of the
third quarter of 2008. Non-GAAP deferred revenue at the end of the third
quarter of 2009 included approximately $7.9 million of deferred revenue
from SurfControl that was included in SurfControl's deferred revenue as of
the date of the acquisition, but is not included in the company's GAAP
deferred revenue on a post-acquisition basis due to a required write-down
of SurfControl's deferred revenue to fair value as of the acquisition date.
Non-GAAP deferred revenue at the end of the third quarter of 2008 included
$29.4 million of deferred revenue from SurfControl that was included in
SurfControl's deferred revenue as of the date of acquisition, but was
written down as of the acquisition date.
-- Accounts receivable of $56.8 million, representing 63 days of sales
outstanding. This compares to 66 days outstanding at the end of the second
quarter of 2009 and 67 days outstanding at the end of the third quarter of
2008.
-- Cash flow from operations during the third quarter of 2009 of $22.5
million, compared to $17.8 million in the third quarter of 2008.
-- Capital expenditures of $2.9 million in the quarter, compared to $2.7
million in the second quarter of 2009 and $2.2 million in the third quarter
of 2008.
During the quarter, the company repurchased a total of approximately 473,000 shares for approximately $7.5 million under a 10b5-1 stock repurchase plan.
Restatement of Historical Results Completed
On October 29, 2009, Websense completed the restatement of its historical financial results and filed an amendment number one to Annual Report on Form 10-K/A to restate consolidated financial statements for the years ended December 31, 2007 and 2008 and amendment number one to Quarterly Reports on Form 10-Q/A for the quarters ended March 31, 2009 and June 30, 2009. The restatements relate to an error in the method of recognizing royalty revenue related to contracts with original equipment manufacturer (OEM) customers and an error in the income tax provision computation that overstated the company's estimate of taxable income for the purposes of the income tax provision. Additionally, the restated consolidated financial statements also include other adjustments that were identified but not previously recorded as they were determined not to be material, either individually or in the aggregate.
Outlook for Fiscal Year 2009
Websense updates its annual guidance on its anticipated financial performance for the fiscal year each quarter based on its assessment of the current business environment and historical seasonal trends in its business and prevailing exchange rates between the US dollar and other major currencies. In providing guidance, the company emphasizes that its forward-looking statements are based on current expectations and prevailing currency exchange rates on the date the guidance is provided and disclaims any obligation to update the statements as circumstances change.
Adjustment for
Restated
Financials and
Revised OEM
Revenue Revised 2009
2009 Outlook Recognition Outlook
(as of 7/28/09) Policy (as of 10/29/09)
-------------- --------------- --------------
$ 340 - 350 $ 340 - 350
Billings million -- million
-------------- --------------- --------------
$ 318 - 322 approximately $ 312 - 314
GAAP revenue million $ 6 million million
-------------- --------------- --------------
$ 334 - 338 approximately $ 329 - 331
Non-GAAP revenue million $ 6 million million
-------------- --------------- --------------
Stock-based compensation $ 26 - 28 $ 26 - 28
expense million -- million
-------------- --------------- --------------
Amortization of intangible approximately approximately
assets (non-cash) $ 39 million -- $ 39 million
-------------- --------------- --------------
$ 5 - 6 $ 5 - 6
Net cash interest expense million -- million
-------------- --------------- --------------
Non-GAAP earnings per approximately
diluted share $ 1.23 - 1.27 $ 0.08 $ 1.15 - 1.18
-------------- --------------- --------------
Estimated Non-GAAP tax rate 33 - 34% -- 33 - 34%
-------------- --------------- --------------
Average diluted shares 44 - 46 44 - 46
outstanding million -- million
-------------- --------------- --------------
Billings guidance for 2009 assumes an average contract duration in the range of 22 to 24 months. GAAP cash flow from operations for the year is expected to exceed $80 million, compared to $65.8 million in GAAP cash flow from operations in 2008.
Non-GAAP guidance for 2009 revenue and diluted earnings per share includes approximately $17.2 million in subscription revenue of SurfControl that would have been recognized under subscriptions that were included in deferred revenue as of the date of the acquisition that will not be recognized as revenue during the applicable period as revenue on a post acquisition basis under GAAP due to the impact of the write-down of the majority of SurfControl's deferred revenue to fair value as of the acquisition date.
Conference Call
Management will host a conference call and simultaneous webcast to discuss the final results today, October 29, at 6:00 a.m. Pacific time. To participate in the conference call, investors should dial 888-503-8171 (domestic) or 719-457-2626 (international) ten minutes prior to the scheduled start of the call. A simultaneous audio-only webcast of the call may be accessed on the Internet at www.websense.com/investors.
An archive of the webcast will be available on the company's Web site through December 31, 2009, and a taped replay of the call will be available for one week at 719-457-0820 or 888-203-1112, passcode 8405935.
Non-GAAP Financial Measures
This news release provides financial measures, including measures for revenue, operating expenses, income from operations, net income and earnings per diluted share, that include revenue from SurfControl that would have been recognized during the applicable periods under subscriptions that were included in deferred revenue as of the date of the acquisition but will not be recognized as revenue on a post-acquisition basis under GAAP due to the impact of the write-down of a majority of SurfControl's deferred revenue to fair value as of the acquisition date. In addition, non-GAAP operating results exclude certain cash and non-cash expenses relating to the company's acquisitions, including amortization of intangible assets and deferred financing fees, restructuring and integration related costs, as well as severance related costs for our reduction in force in the third quarter of 2009, stock based compensation expense and related tax effects. Based on the foregoing, the company's presentation of non-GAAP revenue, operating expenses, income from operations, net income and earnings per diluted share are not calculated in accordance with GAAP. Management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance that enhances management's and investors' ability to evaluate the company's operating results, trends and prospects and to compare current operating results with historic operating results. A reconciliation of the GAAP and non-GAAP financial measures and a more detailed explanation of each non-GAAP financial measure and its uses are provided at the end of this news release.
This news release also provides guidance for the fiscal year 2009, including guidance for revenue and earnings per diluted share, that include revenue from SurfControl that would have been recognized during the full year 2009 under subscriptions that were included in deferred revenue as of the date of the acquisition but will not be recognized as revenue on a post-acquisition basis under GAAP due to the impact of the write-down of a majority of SurfControl's deferred revenue to fair value as of the acquisition date.
This news release also includes financial measures and guidance for billings that are not numerical measures that can be calculated in accordance with GAAP. Websense provides this measurement in news releases reporting financial performance because this measurement provides a consistent basis for understanding the company's sales activities in the current period. The company believes the billings measurement is useful to investors because the GAAP measurements of revenue and deferred revenue in the current period include subscription contracts commenced in prior periods. The roll-forwards of deferred revenue for the third quarter of 2009 are set forth at the end of this news release.
About Websense, Inc.
Websense, Inc. (
Websense is a registered trademark of Websense, Inc. in the United States and certain international markets. Websense has numerous other registered and unregistered trademarks in the United States and internationally. All other trademarks are the property of their respective owners.
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, our guidance and financial outlook for the company's 2009 fiscal year, and statements about our technology and product leadership, growth trends and expense management, and statements containing the words "planned," "expects," "believes," "strategy," "opportunity," "anticipates" and similar words. The potential risks and uncertainties which contribute to the uncertain nature of these statements include, among others, risks associated with launching new product offerings, customer acceptance of the company's services, 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, risks relating to currency exchange rates and impacts of macro-economic conditions on our customers, risks relating to the required use of cash for debt servicing, the risks of ongoing compliance with the covenants in the senior secured credit facility, risks related to 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.
Websense, Inc.
Consolidated Statements of Operations
(Unaudited and in thousands, except per share amounts)
September Three Months Ended
30, 2009 September 30, 2008
---------- -----------------------------------
Previously As
Reported Adjustments Restated
Revenue $ 78,601 $ 76,663 $ (1,779) $ 74,884
Cost of revenues:
Cost of revenues 9,946 9,181 6 9,187
Amortization of
acquired technology 3,223 3,108 - 3,108
---------- ---------- ----------- ----------
Total cost of
revenues 13,169 12,289 6 12,295
---------- ---------- ----------- ----------
Gross margin 65,432 64,374 (1,785) 62,589
Operating expenses:
Selling and marketing 40,739 42,952 41 42,993
Research and
development 13,696 13,139 19 13,158
General and
administrative 9,734 10,753 10 10,763
---------- ---------- ----------- ----------
Total operating
expenses 64,169 66,844 70 66,914
---------- ---------- ----------- ----------
Income (loss) from
operations 1,263 (2,470) (1,855) (4,325)
Interest expense (1,700) (2,985) - (2,985)
Other income (expense),
net 184 (94) (34) (128)
---------- ---------- ----------- ----------
Loss before income taxes (253) (5,549) (1,889) (7,438)
Provision (benefit) for
income taxes 1,672 (2,052) (573) (2,625)
---------- ---------- ----------- ----------
Net loss $ (1,925) $ (3,497) $ (1,316) $ (4,813)
========== ========== =========== ==========
Basic net loss per share $ (0.04) $ (0.08) $ (0.11)
========== ========== ==========
Diluted net loss per share $ (0.04) $ (0.08) $ (0.11)
========== ========== ==========
Basic common shares 44,131 45,097 45,097
========== ========== ==========
Diluted common shares 44,131 45,097 45,097
========== ========== ==========
Financial Data:
Total deferred revenue $ 341,476 $ 307,339 $ 7,697 $ 315,036
========== ========== =========== ==========
Websense, Inc.
Consolidated Statements of Operations
(Unaudited and in thousands, except per share amounts)
September Nine Months Ended
30, 2009 September 30, 2008
---------- -----------------------------------
Previously Adjustments As
Reported Restated
Revenue $ 234,004 $ 216,605 $ (6,339) $ 210,266
Cost of revenues:
Cost of revenues 27,663 26,635 (38) 26,597
Amortization of
acquired technology 9,737 9,261 - 9,261
---------- ---------- ----------- ----------
Total cost of
revenues 37,400 35,896 (38) 35,858
---------- ---------- ----------- ----------
Gross margin 196,604 180,709 (6,301) 174,408
Operating expenses:
Selling and marketing 122,073 130,109 243 130,352
Research and
development 39,147 39,798 110 39,908
General and
administrative 30,894 35,441 47 35,488
---------- ---------- ----------- ----------
Total operating
expenses 192,114 205,348 400 205,748
---------- ---------- ----------- ----------
Income (loss) from
operations 4,490 (24,639) (6,701) (31,340)
Interest expense (5,659) (10,357) - (10,357)
Other income (expense),
net 612 908 (135) 773
---------- ---------- ----------- ----------
Loss before income taxes (557) (34,088) (6,836) (40,924)
Benefit for income taxes (880) (16,161) (3,638) (19,799)
---------- ---------- ----------- ----------
Net income (loss) $ 323 $ (17,927) $ (3,198) $ (21,125)
========== ========== =========== ==========
Basic net income (loss)
per share $ 0.01 $ (0.40) $ (0.47)
========== ========== ==========
Diluted net income (loss)
per share $ 0.01 $ (0.40) $ (0.47)
========== ========== ==========
Basic common shares 44,444 45,233 45,233
========== ========== ==========
Diluted common shares 44,812 45,233 45,233
========== ========== ==========
Financial Data:
Total deferred revenue $ 341,476 $ 307,339 $ 7,697 $ 315,036
========== ========== =========== ==========
Websense, Inc.
Consolidated Balance Sheets
(Unaudited and in thousands)
September
30, 2009 December 31, 2008
---------- -----------------------------------
Previously As
Reported Adjustments Restated
Assets
Current assets:
Cash and cash
equivalents $ 76,256 $ 64,310 $ (214) $ 64,096
Cash and cash
equivalents -
restricted 1,863 2,673 (173) 2,500
Accounts receivable,
net 56,804 82,032 67 82,099
Income tax receivable 11,276 3,723 7,204 10,927
Current portion of
deferred income taxes 33,571 33,125 1,073 34,198
Other current assets 11,037 9,029 - 9,029
---------- ---------- ----------- ----------
Total current
assets 190,807 194,892 7,957 202,849
Cash and cash equivalents
- restricted, less
current portion 168 - 215 215
Property and equipment,
net 15,631 14,312 - 14,312
Intangible assets, net 76,996 106,493 - 106,493
Goodwill 372,445 374,410 (1,786) 372,624
Deferred income taxes,
less current portion 29,211 21,092 3,145 24,237
Deposits and other assets 2,946 3,933 - 3,933
---------- ---------- ----------- ----------
Total assets $ 688,204 $ 715,132 $ 9,531 $ 724,663
========== ========== =========== ==========
Liabilities and
stockholders' equity
Current liabilities:
Accounts payable $ 2,666 $ 2,719 $ - $ 2,719
Accrued compensation
and related benefits 19,175 19,087 42 19,129
Other accrued expenses 25,359 28,440 (494) 27,946
Current portion of
income taxes payable 3,606 8,010 (875) 7,135
Current portion of
senior secured term
loan 13,063 4,112 - 4,112
Current portion of
deferred tax
liability 119 1,053 - 1,053
Current portion of
deferred revenue 218,566 220,607 3,337 223,944
---------- ---------- ----------- ----------
Total current
liabilities 282,554 284,028 2,010 286,038
Other long term
liabilities 10 2,617 (1) 2,616
Income taxes payable, less
current portion 12,920 10,098 - 10,098
Senior secured term loan,
less current portion 85,938 120,888 - 120,888
Deferred tax liability,
less current portion 7,083 10,523 - 10,523
Deferred revenue, less
current portion 122,910 112,157 5,683 117,840
---------- ---------- ----------- ----------
Total liabilities 511,415 540,311 7,692 548,003
Stockholders' equity:
Common stock 527 522 - 522
Additional paid-in
capital 321,672 299,657 393 300,050
Treasury stock, at cost (182,667) (159,842) - (159,842)
Retained earnings 39,435 37,937 1,176 39,113
Accumulated other
comprehensive loss (2,178) (3,453) 270 (3,183)
---------- ---------- ----------- ----------
Total stockholders'
equity 176,789 174,821 1,839 176,660
---------- ---------- ----------- ----------
Total liabilities and
stockholders' equity $ 688,204 $ 715,132 $ 9,531 $ 724,663
========== ========== =========== ==========
Websense, Inc.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
Nine Months Ended
---------------------------------------------
September
30, 2009 September 30, 2008
--------- ----------------------------------
Previously As
Reported Adjustments Restated
Operating activities:
Net income (loss) $ 323 $ (17,927) $ (3,198) $ (21,125)
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Depreciation and
amortization 38,457 47,156 - 47,156
Share-based compensation 18,412 18,009 346 18,355
Deferred income taxes (9,378) (34,108) (2,295) (36,403)
Unrealized loss (gain) on
foreign exchange 141 (211) 135 (76)
Tax shortfall from stock
option exercises 1,810 569 40 609
Changes in operating
assets and liabilities:
Accounts receivable 23,388 11,784 - 11,784
Other assets (2,654) 2,907 (1,600) 1,307
Accounts payable 139 (1,874) - (1,874)
Accrued compensation and
related benefits (256) (8,450) - (8,450)
Other liabilities (2,236) (3,283) 15 (3,268)
Deferred revenue (307) 21,380 6,339 27,719
Income taxes payable (2,465) 7,337 (1,342) 5,995
--------- ---------- ----------- ---------
Net cash provided by
operating activities 65,374 43,289 (1,560) 41,729
--------- ---------- ----------- ---------
Investing activities:
Change in restricted cash
and cash equivalents 747 - (1,240) (1,240)
Purchase of property and
equipment (9,013) (6,289) - (6,289)
Purchase of intangible
assets - (1,815) - (1,815)
Cash refunded from
PortAuthority acquisition - 147 - 147
Cash received from sale of
CyberPatrol assets - 1,400 - 1,400
Purchases of marketable
securities - (20,160) - (20,160)
Maturities of marketable
securities - 39,963 - 39,963
--------- ---------- ----------- ---------
Net cash (used in) provided
by investing activities (8,266) 13,246 (1,240) 12,006
--------- ---------- ----------- ---------
Financing activities:
Principal payments on
senior secured term loan (26,000) (50,000) - (50,000)
Proceeds from exercise of
stock options 2,237 3,790 - 3,790
Proceeds from issuance of
common stock for stock
purchase plan 2,787 2,903 - 2,903
Tax shortfall from stock
option exercises (1,810) (569) (40) (609)
Purchase of treasury stock (22,454) (14,998) - (14,998)
--------- ---------- ----------- ---------
Net cash used in financing
activities (45,240) (58,874) (40) (58,914)
--------- ---------- ----------- ---------
Effect of exchange rate
changes on cash and cash
equivalents 292 (680) 155 (525)
Increase (decrease) in cash
and cash equivalents 12,160 (3,019) (2,685) (5,704)
Cash and cash equivalents
at beginning of period 64,096 66,383 (293) 66,090
--------- ---------- ----------- ---------
Cash and cash equivalents
at end of period $ 76,256 $ 63,364 $ (2,978) $ 60,386
========= ========== =========== =========
Websense, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(Unaudited and in thousands, except per share amounts)
Three Months Ended
-----------------------------------------------
September
30, 2009 September 30, 2008
---------- -----------------------------------
Previously As
Reported Adjustments Restated
GAAP Revenue $ 78,601 $ 76,663 $ (1,779) $ 74,884
Deferred revenue
related to SurfControl
acquisition (1) 3,592 10,158 433 10,591
---------- ---------- ----------- ----------
Non-GAAP Revenue $ 82,193 $ 86,821 $ (1,346) $ 85,475
========== ========== =========== ==========
GAAP Gross margin $ 65,432 $ 64,374 $ (1,785) $ 62,589
Deferred revenue
related to SurfControl
acquisition (1) 3,592 10,158 433 10,591
Amortization of
acquired technology
(3) 3,036 2,943 - 2,943
Restructuring and
integration related
items (4) - 130 - 130
Severance charges from
Q3 2009 reduction in
force 115 - - -
Stock-based
compensation (2) 345 314 6 320
---------- ---------- ----------- ----------
Gross margin
adjustment 7,088 13,545 439 13,984
---------- ---------- ----------- ----------
Non-GAAP Gross margin $ 72,520 $ 77,919 $ (1,346) $ 76,573
========== ========== =========== ==========
GAAP Operating expenses $ 64,169 $ 66,844 $ 70 $ 66,914
Severance charges from
Q3 2009 reduction in
force (1,202) - - -
Amortization of other
intangible assets (3) (6,591) (9,364) - (9,364)
Restructuring and
integration related
items (4) 387 (358) - (358)
Stock-based
compensation (2) (5,810) (5,516) (70) (5,586)
---------- ---------- ----------- ----------
Operating expense
adjustment (13,216) (15,238) (70) (15,308)
---------- ---------- ----------- ----------
Non-GAAP Operating
expenses $ 50,953 $ 51,606 $ - $ 51,606
========== ========== =========== ==========
GAAP Income (loss) from
operations $ 1,263 $ (2,470) $ (1,855) $ (4,325)
Gross margin
adjustment 7,088 13,545 439 13,984
Operating expense
adjustment 13,216 15,238 70 15,308
---------- ---------- ----------- ----------
Non-GAAP Income from
operations $ 21,567 $ 26,313 $ (1,346) $ 24,967
========== ========== =========== ==========
GAAP Net loss $ (1,925) $ (3,497) $ (1,316) $ (4,813)
Gross margin
adjustment 7,088 13,545 439 13,984
Operating expense
adjustment 13,216 15,238 70 15,308
Amortization of
deferred financing
fees (5) 322 513 - 513
Impact of favorable
tax ruling (6) - - - -
Income tax effect on
the above items (7) (5,097) (10,197) (100) (10,297)
---------- ---------- ----------- ----------
Non-GAAP Net income $ 13,604 $ 15,602 $ (907) $ 14,695
========== ========== =========== ==========
GAAP Net loss per share $ (0.04) $ (0.08) $ (0.03) $ (0.11)
Non-GAAP adjustments as
described above per
share, net of tax
(1-7) 0.35 0.42 0.01 0.43
---------- ---------- ----------- ----------
Non-GAAP Net income per
share $ 0.31 $ 0.34 $ (0.02) $ 0.32
========== ========== =========== ==========
GAAP Diluted common shares 44,131 45,097 - 45,097
Effect of dilutive
securities (8) 467 517 - 517
---------- ---------- ----------- ----------
Non-GAAP Diluted common
shares 44,598 45,614 - 45,614
========== ========== =========== ==========
Websense, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(Unaudited and in thousands, except per share amounts)
Nine Months Ended
----------------------------------------------------------
September
30, 2009 September 30, 2008
--------- -----------------------------------------------
Previously Reported Adjustments As Restated
GAAP Revenue $ 234,004 $ 216,605 $ (6,339) $ 210,266
Deferred
revenue
related to
SurfControl
acquisition
(1) 14,390 44,936 1,232 46,168
--------- ------------------- ------------ ------------
Non-GAAP
Revenue $ 248,394 $ 261,541 $ (5,107) $ 256,434
========= =================== ============ ============
GAAP Gross
margin $ 196,604 $ 180,709 $ (6,301) $ 174,408
Deferred
revenue
related to
SurfControl
acquisition
(1) 14,390 44,936 1,232 46,168
Amortization
of acquired
technology
(3) 9,109 8,827 - 8,827
Restructuring
and
integration
related
items (4) 3 996 - 996
Severance
charges
from Q3
2009
reduction
in force 115 - - -
Stock-based
compensation
(2) 1,012 991 28 1,019
--------- ------------------- ------------ ------------
Gross
margin
adjustment 24,629 55,750 1,260 57,010
--------- ------------------- ------------ ------------
Non-GAAP Gross
margin $ 221,233 $ 236,459 $ (5,041) $ 231,418
========= =================== ============ ============
GAAP Operating
expenses $ 192,114 $ 205,348 $ 400 $ 205,748
Severance
charges
from Q3
2009
reduction
in force (1,202) - - -
Amortization
of other
intangible
assets (3) (19,771) (28,092) - (28,092)
Restructuring
and
integration
related
items (4) 166 (5,540) - (5,540)
Stock-based
compensation
(2) (17,400) (17,010) (320) (17,330)
--------- ------------------- ------------ ------------
Operating
expense
adjustment (38,207) (50,642) (320) (50,962)
--------- ------------------- ------------ ------------
Non-GAAP
Operating
expenses $ 153,907 $ 154,706 $ 80 $ 154,786
========= =================== ============ ============
GAAP Income
(loss) from
operations $ 4,490 $ (24,639) $ (6,701) $ (31,340)
Gross
margin
adjustment 24,629 55,750 1,260 57,010
Operating
expense
adjustment 38,207 50,642 320 50,962
--------- ------------------- ------------ ------------
Non-GAAP Income
from
operations $ 67,326 $ 81,753 $ (5,121) $ 76,632
========= =================== ============ ============
GAAP Net (loss)
income $ 323 $ (17,927) $ (3,198) $ (21,125)
Gross
margin
adjustment 24,629 55,750 1,260 57,010
Operating
expense
adjustment 38,207 50,642 320 50,962
Amortization
of
deferred
financing
fees (5) 911 1,878 - 1,878
Impact of
favorable
tax
ruling
(6) - (2,682) - (2,682)
Income tax
effect on
the above
items (7) (22,207) (38,861) (1,839) (40,700)
--------- ------------------- ------------ ------------
Non-GAAP Net
income $ 41,863 $ 48,800 $ (3,457) $ 45,343
========= =================== ============ ============
GAAP Net (loss)
income per
share $ 0.01 $ (0.40) $ (0.07) $ (0.47)
Non-GAAP
adjustments
as
described
above per
share, net
of tax
(1-7) 0.92 1.47 (0.01) 1.46
--------- ------------------- ------------ ------------
Non-GAAP Net
income per
share $ 0.93 $ 1.07 $ (0.08) $ 0.99
========= =================== ============ ============
GAAP Diluted
common shares 44,812 45,233 - 45,233
Effect of
dilutive
securities
(8) - 400 - 400
--------- ------------------- ------------ ------------
Non-GAAP
Diluted common
shares 44,812 45,633 - 45,633
========= =================== ============ ============
The non-GAAP financial measures included in the tables above are non-GAAP revenues, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP income from operations, non-GAAP net income and non-GAAP net income per share, which adjust for the following items: acquisition related adjustments, stock-based compensation expense, amortization of intangible assets 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.
(1) Deferred revenue related to SurfControl. We completed our acquisition of SurfControl in October 2007. At the time of the acquisition, SurfControl had recorded deferred revenue related to subscriptions commenced in the past for which revenue would be recognized in future periods (during the term of the subscription) as revenue recognition criteria are satisfied. The purchase accounting rules required us to write down a significant portion of this deferred revenue to its then current fair value. Consequently, in post acquisition periods, we do not recognize the full amount of this deferred revenue. When measuring the performance of our business, however, we add back non-GAAP revenue associated with the SurfControl deferred revenue that would have been recognized during the relevant accounting period that was excluded as a result of these purchase accounting adjustments, as we believe this provides information about the impact on operations of the acquired business in a manner consistent with the revenue recognition for our pre-existing services. We further believe that the inclusion of non-GAAP revenue enables investors to better understand the impact of the acquisition on the baseline revenue of the combined company and provides useful information to investors on revenue trends impacting the combined business.
(2) Stock-based compensation. Consists of non-cash expenses for employee stock options, restricted stock units and our employee stock purchase plan determined in accordance with SFAS 123(R). When evaluating the performance of our business and developing short and long-term plans, we do not consider stock-based compensation charges. Although stock-based compensation is necessary to attract and retain quality employees, our consideration of stock-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 stock-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 SFAS 123(R) on our operating results.
(3) Amortization of acquired technology and other intangible assets. When conducting internal development of intangible assets (including developed technology, customer relationships, trade-marks, etc.), 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.
(4) Restructuring and integration. We have engaged in various restructuring and integration activities in connection with our acquisitions that have resulted in costs associated with severance, benefits, excess facilities, integration travel, retention bonuses and professional fees. Each restructuring and integration has been a discrete event based on a unique set of business objectives or circumstances, and each has differed from the others in terms of its operational implementation, business impact and scope. We do not engage in these activities in the ordinary course of our business. We believe that it is important to understand these charges; however, we do not believe that these charges are indicative of future operating results and that investors benefit from an understanding of our operating results without giving effect to them, including in comparison to operating results for periods where no restructuring and integration costs were incurred.
(5) Amortization of deferred financing fees. This is a non-cash charge that can vary significantly in size and frequency depending on the optional prepayments we make on our senior secured term loan and, therefore, are disregarded by the Company's management when evaluating our ongoing performance and/or predicting our earnings trends, and 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.
(6) Impact of favorable tax ruling. During the first quarter of 2008, we received a favorable state tax ruling regarding unrecognized state income tax benefits. Because the impact is non-recurring, we excluded the impact when presenting non-GAAP financial measures.
(7) Income tax effect on the above items. This amount adjusts the provision (benefit) for income taxes to reflect the effect of the non-GAAP adjustments on non-GAAP net income.
(8) Effect of dilutive securities. The effect of dilutive securities was excluded from GAAP diluted common shares due to the reported net loss under GAAP, but are included for non-GAAP diluted common shares since we have non- GAAP net income.
Websense, Inc.
Rollforward of GAAP Deferred Revenue
(Unaudited and in thousands)
GAAP deferred revenue balance at June 30, 2009 $ 335,623
Net billings during third quarter 2009 84,454
Less GAAP revenue recognized during third quarter 2009 (78,601)
---------
GAAP deferred revenue balance at September 30, 2009 $ 341,476
=========
Websense, Inc.
Rollforward of Non-GAAP Deferred Revenue
(Unaudited and in thousands)
Non-GAAP deferred revenue balance at June 30, 2009 $ 347,113
Net billings during third quarter 2009 84,454
Less Non-GAAP revenue recognized during third quarter 2009 (82,193)
---------
Non-GAAP deferred revenue balance at September 30, 2009 $ 349,374
=========
Websense, Inc.
Reconciliation of GAAP to Non-GAAP Deferred Revenue
(Unaudited and in thousands)
GAAP deferred revenue balance at September 30, 2009 $ 341,476
Addback: Deferred revenue related to SurfControl acquisition 7,898
---------
Non-GAAP deferred revenue balance at September 30, 2009 $ 349,374
=========
Kate Patterson
Websense, Inc.
(858) 320-8072
kpatterson@websense.com
MEDIA CONTACT:
Sarah Needham
Websense, Inc.
(858) 320-9340
sneedham@websense.com