"Our third-quarter results showed strong progress toward our goal of transforming Websense into a strategic security partner for enterprise customers worldwide," said Gene Hodges, Websense CEO. "Mid-market and enterprise customers are finding that our advanced Websense' TRITON(TM) solutions can address their needs for security effectiveness and compliance -- and our sales team, which we have transformed over the past 18 months, is rising to meet the opportunities created by the competitive strength of our products.
"We delivered a 33 percent increase in the number of transactions over $100,000, closing five seven-figure sales. Even in slow-growth economies like the U.S. and the UK, we grew our enterprise billings at rates exceeding 25 percent," added Hodges. "Our strength in the U.S. and emerging markets was balanced by weakness in continental Europe, which we believe reflected the region's economic uncertainty. Although we may face challenging macroeconomic trends in the future, particularly in Europe, our predominantly recurring subscription revenue model helps insulate us from economic volatility."
Third Quarter 2011 GAAP Financial Highlights
-- Revenues of $92.1 million, an increase of nine percent from the third quarter of 2010. -- Software and services revenues of $81.8 million, compared with $81.2 in the third quarter of 2010. -- Appliance revenues of $10.3 million, consisting of approximately $7.7 million in current-period appliance sales and approximately $2.6 million of deferred appliance revenue from pre-2011 appliance sales, compared with $3.6 million of appliance revenues in the third quarter of 2010, all of which was recognized from deferred appliance revenue. -- Operating income of $13.7 million, compared with $12.4 million in the third quarter of 2010. -- An effective tax rate of 40.1 percent, compared with 50.0 percent in the third quarter of 2010. -- Net income of $8.1 million, or 20 cents per diluted share, compared with $5.8 million, or 13 cents per diluted share, in the third quarter of 2010. -- Weighted average diluted shares outstanding of 40.4 million, compared with 42.9 million in the third quarter of 2010. -- Cash flow from operations of $16.7 million, compared with $27.2 million in the third quarter of 2010. The decrease in cash flow from operations compared with the third quarter of 2010 reflected higher operating expenses and increased cash tax payments in the third quarter of 2011. -- Quarter-end accounts receivable of $59.8 million, compared with $61.1 million at the end of the second quarter of 2011 and $53.5 million at the end of the third quarter of 2010. -- Days billings outstanding of 64 days, consistent with days billings outstanding at the end of the second quarter of 2011 and an increase of two days from the third quarter of 2010. -- Deferred revenue of $369.8 million, an increase of $0.3 million compared with deferred revenue at the end of the third quarter of 2010. -- Deferred revenue from pre-2011 appliance sales of $10.7 million, a decrease of $6.5 million from the year ago period. This amount will continue to decrease quarterly as deferred revenue from pre-2011 appliance sales 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, third quarter 2011 appliance revenues of $10.3 million consisted primarily of $7.7 million of revenue recognized from third quarter 2011 appliance sales and $2.6 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.
Third quarter pre-tax income was correspondingly higher by $3.2 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.
Third Quarter 2011 Non-GAAP(1) Financial Highlights
-- Billings of $84.3 million, an increase of nine percent compared with the third quarter of 2010. Changes in currency exchange rates, compared with exchange rates prevailing in the third quarter of 2010, benefited total billings in the quarter by approximately $2.0 million. -- End-user customer billings of $83.8 million, an increase of 15 percent compared with $73.0 million in the third quarter of 2010. End-user customer billings exclude billings to original equipment manufacturers (OEMs) of $0.5 million in the third quarter of 2011 and $4.4 million in the third quarter of 2010. -- GAAP revenues of $92.1 million, an increase of eight percent compared with non-GAAP revenues of $85.3 million in the third quarter of 2010.(2) -- Non-GAAP operating income of $21.8 million, compared with non-GAAP operating income of $24.3 million the third quarter of 2010. -- A non-GAAP effective tax rate of 17.7 percent, compared with 32.4 percent in the year ago period. The year-over-year 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 $17.9 million, or 44 cents per diluted share, compared with $15.9 million, or 37 cents per diluted share, in the third quarter of 2010.
Millions, except percentages, exchange rates, contract values, duration and days billings outstanding Q3'10 Y/Y Change Q3'11 Billings metrics: Total Billings $84.3 $77.4 9% Billings to end-user customers $83.8 $73.0 15% Renewal billings to end-user customers $60.0 $50.8 18% Incremental billings(3) to end-user customers $23.8 $22.2 8% Billings to OEMs $0.5 $4.4 -89% U.S. billings to end-user customers $46.8 $37.8 24% International billings to end-user customers $37.0 $35.2 5% TRITON solution billings(4) $45.2 $30.1 50% Appliance billings $8.0 $5.2 53% Average annualized contract value $10,700 $8,700 23% Average contract duration (months) 23.1 21.8 6% Days billings outstanding (DSOs) 64 62 2 days Exchange rates used in FX-neutral calculations: Euro $1.44 $1.27 13% Pound Sterling $1.63 $1.54 6% Balance sheet metrics: Cash and cash equivalents $75.6 $85.7 -12% Balance on revolving credit facility $73.0 $67.0 9% Share repurchases ($) $25.0 $20.0 25% --------------------- ----- ----- --- Shares repurchased (shares) 1.2 1.0 13% --------------------------- --- --- ---
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 is no longer significant. Non-GAAP revenues are provided for 2010 for purposes of historical comparison. Non-GAAP revenues of $85.3 million in the third quarter of 2010 included approximately $0.6 million of SurfControl revenue that would have been recognized during the third quarter of 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 percent in 2010 to an estimated 18.5 percent for 2011.
Third quarter non-GAAP net income was correspondingly impacted by the required changes in revenue recognition policy and the company's new estimated non-GAAP effective tax rate. Compared with the third quarter of 2010, the policy change in appliance revenue recognition and the decrease in the estimated non-GAAP effective tax rate increased non-GAAP earnings per diluted share by approximately 13 cents. The impact of accounting and policy changes on our 2011 results is described more fully in the "2011 Policy Changes" section of this release.
Outlook for Fiscal Year 2011
Websense provides guidance on anticipated financial performance for 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 23 and 24 months and prevailing currency exchange rates of $1.36 for the Euro and $1.58 for the Pound Sterling. The company disclaims any obligation to update the statements as circumstances change.
Millions, except percentages and per Previous 2011 Updated 2011 Implied Q4'11 share amounts Outlook Outlook Outlook (1) (as of (as of (7/26/11) 10/25/11) 10/25/11) Total Billings $357 - $374 $357.5 - $368.5 $110.5 - $121.5 Billings to end-user customers $354 - $371 $354.5 - $365.5 $109.5 - $120.5 Billings to OEMs ~$3 ~$3 ~$1 Appliance billings (% of total billings) 6 - 7% 7 - 8% -- Revenues $358 - $368 $364 - $368 $92 - $96 Non-GAAP gross margin ~84.5% ~84.5% ~84.5% Non-GAAP operating expenses +9-10% y/y +9-10% y/y -- Non-GAAP earnings per diluted share $1.50 - $1.60 $1.55 - $1.58 $0.42 - $0.45 Non-GAAP effective tax rate ~19% ~18.5% ~18.5% Average diluted shares outstanding 40 - 41 40 - 41 39 - 40 Cash flow from operations $80 - $90 $77 - $83 $20 - $26 -------------- --------- --------- --------- Capital expenditures ~$10 ~$10 ~$3 -------------------- ---- ---- ---
1. Outlook for the fourth quarter of 2011 is derived arithmetically by comparing the Updated 2011 Outlook with year-to-date results for the period ended September 30, 2011.
Management further indicates:
-- Deferred revenue of $10.7 million from pre-2011 appliance billings (as of September 30, 2011) will continue to be recognized ratably according to the original subscription period, including $2.1 million to be recognized in the fourth quarter of 2011. -- The outlook for fourth quarter revenue includes the immediate recognition of fourth quarter appliance sales, which are expected to be seasonally strong, consistent with the historical seasonal pattern in fourth quarter billings. -- Guidance for 2012 will be provided following the release of fourth quarter results on January 31, 2012 based on an assessment of the business environment and macroeconomic outlook at that time.