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Websense Reports Fourth Quarter And Fiscal Year 2012 Results

Record fourth quarter billings of $122.0 million, up 5 percent year-over-year
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-GAAP1 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-GAAP1 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: o 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). o 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). o 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.

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