Websense Reports Record Revenues For Fourth Quarter And Fiscal Year 2011

PRESS RELEASE

SAN DIEGO, Jan. 31, 2012 /PRNewswire/ -- Websense, Inc. (NASDAQ: WBSN) today announced financial results for the fourth quarter and fiscal year 2011.

"Our fourth quarter results were driven by the success of our TRITON(TM) solutions, which accounted for 60 percent of end-user billings," said Gene Hodges, Websense CEO. "This was the third consecutive quarter TRITON solutions accounted for the majority of billings as our sales team demonstrated continued success upgrading our legacy URL filtering customers to our integrated web, email and data security offerings."

"As expected, strength in the enterprise segments of the U.S. and emerging markets was balanced by weakness in continental Europe, which we believe reflected the region's continued economic uncertainty," added Hodges. "Our performance in the second half of 2011 confirms that there is demand for our TRITON content security solutions, and we can continue to grow enterprise billings even in slow-growth macro-economic environments."

Fourth Quarter 2011 GAAP Financial Highlights

-- Revenues of $92.7 million, compared with $86.4 million in the fourth quarter of 2010. -- Software and services revenues of $82.3 million, compared with $82.2 in the fourth quarter of 2010. -- Appliance revenues of $10.4 million, consisting of approximately $8.3 million in current-period appliance sales and approximately $2.1 million of deferred appliance revenue from pre-2011 appliance sales, compared with $4.2 million of appliance revenues in the fourth quarter of 2010, the majority of which was recognized from deferred appliance revenue. -- Operating income of $13.4 million, compared with $7.7 million in the fourth quarter of 2010. -- Provision for income taxes of $2.2 million, representing an effective tax rate of 17.8 percent, compared with a tax benefit of $2.0 million in the fourth quarter of 2010. -- Net income of $10.4 million, or 27 cents per diluted share, compared with $8.9 million, or 21 cents per diluted share, in the fourth quarter of 2010. -- Weighted average diluted shares outstanding of 38.9 million, compared with 42.2 million in the fourth quarter of 2010. -- Cash flow from operations of $21.9 million, compared with $14.0 million in the fourth quarter 2010. -- Quarter end accounts receivable of $80.1 million, compared with $59.8 million at the end of the third quarter of 2011 and $82.2 million at the end of the fourth quarter of 2010. -- Days billings outstanding of 62 days, compared with 64 days billings outstanding at the end of the third quarter of 2011 and 67 days at the end of the fourth quarter of 2010. -- Deferred revenue of $393.0 million, a decrease of $1.3 million compared with deferred revenue of $394.3 million at the end of the fourth quarter of 2010. -- Deferred revenue from pre-2011 appliance sales of $8.6 million, a decrease of $11.4 million from the end of the fourth quarter of 2010. Deferred revenue from pre-2011 appliance sales will continue to decrease quarterly as it is depleted by ratable recognition over the original subscription periods.

On January 1, 2011, Websense was required to adopt Accounting Standards Update (ASU) 2009-13 (Multiple Deliverable Revenue Arrangements) and ASU 2009-14 (Certain Revenue Arrangements that Include Software Elements), which require the immediate recognition of appliance revenues upon sale. Consequently, fourth quarter 2011 appliance revenues of $10.4 million consisted primarily of $8.3 million of revenue recognized from fourth quarter 2011 appliance sales and $2.1 million of deferred appliance revenues from pre-2011 appliance sales. As discussed further below, the company will continue to recognize deferred revenue from pre-2011 appliance sales ratably over the original subscription terms.

Fourth quarter pre-tax income was correspondingly higher by approximately $3.0 million than estimated pre-tax income would have been if calculated using ratable recognition of appliance revenue and costs. The impact of accounting and policy changes on our 2011 results is described more fully in the "2011 Policy Changes" section of this release.

Fourth Quarter 2011 Non-GAAP(1) Financial Highlights

-- Billings of $116.0 million, an increase of four percent compared with the fourth quarter of 2010. Changes in currency exchange rates, compared with exchange rates prevailing in the fourth quarter of 2010, did not materially impact fourth quarter 2011 billings performance. -- End-user customer billings of $114.8 million, an increase of five percent compared with $109.4 million in the fourth quarter of 2010. End-user customer billings exclude billings to original equipment manufacturers (OEMs), which totaled $1.2 million in the fourth quarter of 2011 and $1.8 million in the fourth quarter of 2010. -- GAAP revenues of $92.7 million, an increase of seven percent compared with non-GAAP revenues of $86.6 million in the fourth quarter of 2010. (2) -- Non-GAAP operating income of $21.7 million, compared with non-GAAP operating income of $19.5 million in the fourth quarter of 2010. -- A non-GAAP tax provision of $3.9 million, for an effective tax rate of 18.5 percent, compared with a non-GAAP tax provision of $5.9 million, for an effective tax rate of 30.7 percent, in the fourth quarter of 2010. The quarter-over-quarter decline in the non-GAAP effective tax rate primarily resulted from the estimated impact of the company's international distribution restructuring on the long-term effective tax rate, as well as the estimated 2011 tax benefits associated with the company's equity compensation programs. -- Non-GAAP net income of $17.1 million, or 44 cents per diluted share, compared with $13.3 million, or 32 cents per diluted share, in the fourth quarter of 2010.

Fiscal Year 2011 GAAP Financial Highlights

-- Revenues of $364.2 million, an increase of nine percent compared with $332.8 million in 2010. -- Software and services revenues of $325.4 million, compared with $320.6 million in 2010. -- Appliance revenues of $38.8 million, consisting primarily of approximately $27.4 million in current-period appliance sales and approximately $11.4 million of deferred appliance revenue from pre-2011 appliance sales, compared with $12.2 million in appliance revenues in 2010, the majority of which was recognized from deferred appliance revenue. -- Operating income of $44.4 million, compared with $30.8 million in 2010. -- Provision for income taxes of $13.0 million, representing an effective tax rate of 29.6 percent, compared with a tax provision of $7.6 million and an effective tax rate of 29.0 percent in 2010. -- Net income of $31.0 million, or 76 cents per diluted share, compared with $18.7 million, or 43 cents per diluted share, in 2010. -- Weighted average diluted shares outstanding of 40.7 million, compared with 43.4 million in 2010. -- Cash flow from operations of $79.2 million, compared with $90.1 million in 2010.

Fiscal Year 2011 Non-GAAP(1) Financial Highlights

-- Billings of $362.9 million, an increase of five percent compared with $347.0 million in 2010. Changes in currency exchange rates, compared with exchange rates prevailing in 2010, increased 2011 billings by approximately $6.6 million. -- End-user customer billings of $359.4 million, an increase of seven percent compared with $336.2 million in 2010. End-user customer billings exclude billings to original equipment manufacturers (OEMs), which totaled $3.5 million in 2011 and $10.7 million in 2010. -- GAAP revenues of $364.2 million, compared with non-GAAP revenues of $337.0 million in 2010.(2) -- Non-GAAP operating income of $78.6 million, compared with non-GAAP operating income of $83.6 million in 2010. -- Provision for income taxes of $14.5 million, representing a non-GAAP effective tax rate of 18.5 percent, compared with a tax provision of $25.6 million and a non-GAAP effective tax rate of 32.0 percent in 2010. The year-over-year decline in the non-GAAP effective tax rate primarily resulted from the impact of the company's international distribution restructuring on the effective tax rate, as well as the 2011 tax benefits associated with the company's equity compensation programs. -- Non-GAAP net income of $63.9 million, or $1.57 per diluted share, compared with $54.5 million, or $1.26 per diluted share, in 2010.

Summary Metrics

Quarterly Annual --------- ------ Millions, except percentages, exchange rates, contract values, duration and days billings Y/Y outstanding Q4'10 Y/Y Chg 2010 Chg ------------------ ----- ------- ---- ---- Q4'11 2011 ----- ---- Billings metrics: ----------------- Total billings $116.0 $111.2 4% $362.9 $347.0 5% --------- ------ ------ --- ------ ------ --- Billings to end- user customers $114.8 $109.4 5% $359.4 $336.3 7% ---------- ------ ------ --- ------ ------ --- Renewal billings to end- user customers $82.0 $76.8 7% $256.3 $238.6 7% ---------- ----- ----- --- ------ ------ --- Incremental billings(3)to end- user customers $32.8 $32.6 1% $103.1 $97.7 6% ---------------- ----- ----- --- ------ ----- --- Billings to OEMs $1.2 $1.8 -33% $3.5 $10.7 -67% --------- ---- ---- --- ---- ----- --- U.S. billings to end- user customers $51.3 $51.5 0% $171.1 $163.5 5% ---------- ----- ----- --- ------ ------ --- International billings to end- user customers $63.5 $57.9 10% $188.3 $172.8 9% ------------- ----- ----- --- ------ ------ --- TRITON solution billings(4) $68.3 $50.8 34% $192.4 $135.4 42% ------------ ----- ----- --- ------ ------ --- Appliance billings $8.6 $7.0 23% $28.6 $20.5 40% --------- ---- ---- --- ----- ----- --- Number of transactions >$100K 205 184 11% 563 508 11% ------------- --- --- --- --- --- --- Average annualized contract value $12,800 $11,200 14% $10,900 $9,300 17% ----------- ------- ------- --- ------- ------ --- Average contract duration (months) 24.2 24.6 -2% 23.7 23.5 1% --------- ---- ---- --- ---- ---- --- Days billings outstanding (DSOs) 62 67 -5 days - ------------ --- --- ------- --- Exchange rates used in FX-neutral calculations: ----------------------------------------------- Euro $1.36 $1.33 2% - ---- ----- ----- --- --- Pound Sterling $1.57 $1.57 0% - --------- ----- ----- --- --- Balance sheet metrics: ----------------------- Cash and cash equivalents $76.2 $77.4 -2% - ------------ ----- ----- --- --- Balance on revolving credit facility $73.0 $67.0 9% - ---------- ----- ----- --- --- Share repurchases ($) $25.0 $25.0 0% $100.0 $85.0 18% ------------ ----- ----- --- ------ ----- --- Shares repurchased (shares) 1.4 1.2 17% 4.8 4.1 17% ------------ --- --- --- --- --- ---

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. The company discontinued reporting non-GAAP revenues in 2011 because the difference between GAAP and non-GAAP revenues was no longer significant. Non-GAAP revenues are provided for 2010 for purposes of historical comparison. Non-GAAP revenues of $86.6 million in the fourth quarter of 2010 included approximately $0.2 million of SurfControl revenue that would have been recognized during the fourth quarter of 2010 had SurfControl remained an independent operating company reporting under GAAP. Non-GAAP revenues of $337.0 million in 2010 included approximately $4.2 million of SurfControl revenue that would have been recognized during 2010 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 the required write-down of SurfControl's deferred revenue to fair value as of the acquisition date. 3. Incremental billings include upgrades to new products purchased by existing/renewing customers (i.e., data security, cloud-based security, and the incremental portion of TRITON gateway family migrations) and new customer billings, regardless of product. 4. TRITON solutions include the TRITON family of security gateways for web, email 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.

As described above, on January 1, 2011, Websense was required to adopt Accounting Standards Update 2009-13 (Multiple Deliverable Revenue Arrangements) and Accounting Standards Update 2009-14 (Certain Revenue Arrangements that Include Software Elements), which require immediate recognition of hardware revenues upon sale. Also effective January 1, 2011, the company restructured its international distribution operations, which is expected to reduce the complexity and compliance risks associated with the company's global distribution activities, and the company changed its policy for determining the estimated non-GAAP effective tax rate to include estimated tax benefits associated with stock-based compensation programs. The combination of the estimated tax impact associated with the international distribution restructuring and the change in the policy for determining the estimated non-GAAP effective tax rate reduced the company's estimated annual non-GAAP effective tax rate from approximately 32.0 percent in 2010 to 18.5 percent for