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4/24/2012
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Websense Reports Record First Quarter Billings On Strong TRITON Performance

First quarter revenues of $89.5 million, up 1 percent year-over-year

SAN DIEGO, April 24, 2012 /PRNewswire/ -- Websense, Inc. (NASDAQ: WBSN) today announced financial results for the first quarter of 2012. The company also announced the promotion of Michael A. Newman to executive vice president and chief financial officer.

"This was the fourth consecutive quarter where Websense® TRITON(TM) solutions accounted for the majority of billings. It demonstrates continued success of our sales team in upgrading our filtering customers to our integrated web, email, mobile, and data security offerings," said Gene Hodges, Websense CEO. "Growth in business with new customers accelerated as we closed more enterprise transactions, consistent with the maturity and experience of our sales force. Awareness of the need for data-centric security is increasing, and security experts recognize we have the best solution to protect against modern data-stealing threats."

First Quarter 2012 GAAP Financial Highlights

-- Revenues of $89.5 million, compared with $88.6 million in the first quarter of 2011. -- Software and service revenues of $82.0 million, compared with $80.3 million in the first quarter of 2011. -- Appliance revenues of $7.5 million, which consisted of approximately $5.8 million in current-period appliance sales and approximately $1.7 million of deferred appliance revenue from pre-2011 appliance sales, compared with $8.3 million of appliance revenues in the first quarter of 2011, which consisted of approximately $4.8 million in current-period appliance sales and the remainder from deferred appliance revenue from pre-2011 appliance sales. -- Operating income of $10.7 million, compared with $7.8 million in the first quarter of 2011. -- Provision for income taxes of $11.7 million, which included $8.8 million related to an expected settlement of the U.S. Internal Revenue Service (IRS) tax audits for the 2005 through 2007 tax years. This matter is discussed in more detail later in this news release under "IRS Tax Settlement." -- A net loss of $1.8 million, or five cents per diluted share, compared with net income of $8.1 million, or 20 cents per diluted share, in the first quarter of 2011. The net loss of $1.8 million is the result of the $8.8 million increase in the tax provision related to the expected settlement with the IRS. -- Weighted average diluted shares outstanding of 37.6 million, compared with 41.4 million in the first quarter of 2011. -- Cash flow from operations of $22.4 million, compared with $31.4 million in the first quarter of 2011. The decrease in cash flow from operations was primarily due to lower cash collections and a $2.3 million increase in cash taxes in the first quarter of 2012 compared with the first quarter of 2011. -- Quarter-end accounts receivable of $61.9 million, compared with $55.4 million at the end of the first quarter of 2011 and $80.1 million at the end of the fourth quarter of 2011. -- Days billings outstanding of 69 days, compared with 65 days at the end of the first quarter of 2011 and 62 days billings outstanding at the end of the fourth quarter of 2011. -- Deferred revenue of $384.1 million, an increase of $1.8 million compared with deferred revenue of $382.3 million at the end of the first quarter of 2011. Deferred revenue at the end of the first quarter of 2012 included $6.9 million from pre-2011 appliance sales, a decrease of $9.6 million from the year ago period. Deferred revenue from pre-2011 appliance sales will continue to decrease quarterly. First Quarter 2012 Non-GAAP1 Financial Highlights

-- Billings of $80.6 million, an increase of five percent compared with the first quarter of 2011. Changes in currency exchange rates, compared with exchange rates prevailing in the first quarter of 2011, did not materially impact first quarter 2012 billings performance. -- Non-GAAP operating income of $17.8 million, compared with non-GAAP operating income of $17.1 million in the first quarter of 2011. Non-GAAP operating margin in the first quarter of 2012, calculated as a percentage of revenues, was 19.9 percent, compared with 19.3 percent in the first quarter of 2011. -- Billings-based operating margin of 11.9 percent, compared with billings-based operating margin of 8.8 percent in the first quarter of 2011. Billings-based operating margin is calculated like revenue-based non-GAAP operating margin, but is computed using billings as the top-line measure and excludes deferred appliance costs to match current period sales activities with current period costs. -- A non-GAAP tax provision of $3.2 million, based on a long-term effective tax rate of 19 percent, compared with a non-GAAP tax provision of $3.6 million, based on an effective tax rate of 20 percent, in the first quarter of 2011. -- Non-GAAP net income of $13.7 million, or 36 cents per diluted share, compared with $14.6 million, or 35 cents per diluted share, in the first quarter of 2011. Summary Metrics

Millions, except percentages, duration, number of transactions, and days billings outstanding Q1'11 Y/Y Chg Q1'12 --- ----- Total billings $80.6 $76.7 5% -------------- ----- ----- --- U.S. billings $37.5 $34.4 9% ------------- ----- ----- --- International billings $43.1 $42.3 2% ---------------------- ----- ----- --- TRITON solution billings(2) $49.0 $34.4 42% -------------------------- ----- ----- --- Appliance billings $6.0 $5.3 13% ------------------ ---- ---- --- Number of transactions >$100K 124 101 23% ----------------------------- --- --- --- Average contract duration (months) 25.5 23.6 8% ---------------------------------- ---- ---- --- Days billings outstanding (DSOs) 69 65 4 days ------------------------------- --- --- ------ Cash and cash equivalents $70.3 $79.3 -11% ------------------------- ----- ----- --- Balance on revolving credit facility $68.0 $63.0 8% --------------------------- ----- ----- --- Share repurchases ($) $20.0 $25.0 -20% -------------------- ----- ----- --- Shares repurchased 1.1 1.2 -8% ------------------ --- --- ---

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 1. Financial Measures." 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 2. SurfControl email security products.

Outlook for the Second Quarter and Fiscal Year 2012 Websense provides guidance on anticipated financial performance for the second quarter and the fiscal year based on an assessment of the current business environment, historical seasonal business trends, and prevailing exchange rates between the U.S. dollar and other major currencies. Annual guidance is updated each quarter with the release of quarterly results. In providing guidance, the company emphasizes that all forward-looking statements are based on current expectations, including average contract duration between 23 and 24 months and prevailing currency exchange rates of $1.33 for the Euro and $1.60 for the Pound Sterling. The company disclaims any obligation to update the statements as circumstances change.

Millions, except percentages and per-share amounts Q2'12 Outlook 2012 Outlook -------------------------------- ------------- ------------ Total billings $88 - 92 $373 - 393 -------------- -------- ---------- Appliance billings (% of total billings) 7 - 8% 7 - 8% ------------------------------ ----- ----- Revenues $89 - 91 $364 - 374 -------- -------- ---------- Non-GAAP gross profit margin 84 - 85% 84 - 85% ---------------------------- ------- ------- Non-GAAP operating margin 17 - 19% 19 - 21% ------------------------- ------- ------- Non-GAAP earnings per diluted share $0.34 - 0.37 $1.50 - 1.65 ----------------------------- ------------ ------------ Non-GAAP effective tax rate 19% 19% --------------------------- --- --- Average diluted shares outstanding 37.5 - 38 37 - 38 ---------------------- --------- ------- Cash flow from operations $8 - 10 $56 - 67 ------------------------- ------- -------- Capital expenditures ~$3.0 $12 - 14 -------------------- ----- --------

Additionally, outlook ranges for 2012 reflect:

-- Billings-based non-GAAP operating margin of 22 to 25 percent. 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. -- Expected cash tax payments of: o Approximately $5 million in the second quarter of 2012. o Approximately $21-22 million in the second half of 2012, including $15-16 million related to the expected settlement with the IRS for tax years 2005 through 2007. -- Non-cash items related to the recognition of revenue and costs associated with pre-2011 appliance billings: o Remaining deferred revenue of $6.9 million from pre-2011 appliance billings (as of March 31, 2012) that will continue to be recognized ratably according to the original subscription periods, including $1.6 million to be recognized in the second quarter of 2012 (compared to $3.2 million in the second quarter of 2011). o Remaining deferred costs of $3.2 million from pre-2011 appliance billings (as of March 31, 2012) that will continue to be recognized ratably according to the original subscription periods, including $0.7 million to be recognized in the second quarter of 2012 (compared to $1.5 million in the second quarter of 2011). o On January 1, 2011, Websense was required to adopt Accounting Standards Update (ASU) 2009-13 (Multiple Deliverable Revenue Arrangements) and ASU 2009-14 (Certain Revenue Arrangements that Include Software Elements), which require the immediate recognition of appliance revenues upon sale. Prior to January 1, 2011, the company recognized revenue and costs from appliance sales ratably according to the original subscription terms. The schedules below summarize the actual and expected recognition of remaining deferred appliance revenues and costs by quarter for 2011 and 2012:

2011 Summary of Amounts Related to pre-2011 Appliance Sales ----------------------------------------------------------- Millions Deferred balances 2011 Recognition Schedule (actual) Remaining deferred balances as of 12/31/10 as of 12/31/11 (actual) (actual) --- ------- ------- Q1'11 Q2'11 Q3'11 Q4'11 2011

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

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

IRS Tax Settlement The company announced an agreement in principle to settle an outstanding dispute with the IRS relating to an audit of the company's 2005 through 2007 tax years. During the first quarter of 2010, the company was informed by the IRS that it had completed its audit of the company's tax returns from 2005 through 2007, and the IRS proposed tax adjustments relating to the company's buy-in and cost-sharing arrangement with its Irish subsidiary, the company's research and development tax credits, and income tax deductions for certain equity compensation. The amount of additional tax proposed by the IRS totaled approximately $19.0 million.

As a result of settlement discussions during the first quarter of 2012, the company reached an agreement in principle with the IRS to settle the audit adjustments. Upon entering into a definitive settlement agreement, the company expects to pay approximately $10 million in federal tax, plus $5-6 million in state tax and accumulated interest. The company expects these additional tax amounts to be offset in part by approximately $4 million of future tax benefits. When finalized, the settlement completely resolves the issues in dispute, including issues related to buy-in payments associated with the company's cost-sharing arrangement with its Irish subsidiary.

Newman to Lead Finance and Administration The company announced the promotion of Michael A. Newman to executive vice president and chief financial officer. Since September 2011, Newman has been serving as interim chief financial officer in addition to his roles as general counsel and chief administrative officer. As chief financial officer, Newman's responsibilities will include finance, accounting, tax, investor relations, human resources, legal, and facilities. He also will continue to serve as the company's corporate secretary. The company has initiated a search to fill the general counsel role.

"Mike knows our business well and is eminently qualified to lead our finance and accounting organizations," said Gene Hodges, Websense CEO. "He played a central role in the development and execution of our transformation strategy. As general counsel and chief administrative officer, he participates in virtually every aspect of our business, from collaborating with sales leadership on sales process to working with engineers in expanding the company's patent portfolio. We have strong leaders in each of the functional areas Mike manages, and he has proven his ability to lead this team since assuming the interim CFO role last fall."

Newman joined the company in 2002 as general counsel and later broadened his areas of responsibility to include human resources, facilities, and administration.

Conference Call Details Management will host a conference call and simultaneous webcast to discuss the financial results and outlook today, April 24, at 2 p.m. Pacific Daylight Time. To participate in the conference call, investors should dial (866) 757-5630 (domestic) or 707-287-9356 (international) 10 minutes prior to the scheduled start of the call. A simultaneous audio-only webcast of the call may be accessed at www.websense.com/investors. An archive of the webcast will be available on the company's website through June 30, 2012, and a recorded replay of the call will be available for one week at (855) 859-2056 and (404) 537-3406, pass code 68383874.

Non-GAAP Financial Measures This news release provides financial measures for non-GAAP gross profit, operating expenses, operating margin, income from operations, provision for income taxes, net income, and diluted earnings per share that are not calculated in accordance with GAAP. Management believes that these non-GAAP financial measures provide meaningful supplemental information regarding performance that enhances management's and investors' ability to evaluate the company's operating results, trends, and prospects and to compare current operating results with historic operating results. Reconciliations of the GAAP and non-GAAP financial measures for the first quarters of 2012 and 2011 are provided at the end of this news release.

This news release also includes financial measures for various categories of billings, billings operating margin and other billings-related measures that are not numerical measures that can be calculated in accordance with GAAP. 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 first quarter of 2012 is set forth at the end of this news release.

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

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

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

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