PRESS RELEASE

SAN DIEGO, Oct. 23, 2012 /PRNewswire/ -- Websense, Inc. (NASDAQ: WBSN) today announced financial results for the third quarter of 2012.

"In the third quarter, we had double-digit growth in sales to new customers and we started to see a recovery in our international sales territories, with sales outside the U.S. growing by 14 percent," said Gene Hodges, Websense® CEO. "While our customer retention rates remain solid, we were negatively impacted by fewer upgrades from our installed base in the U.S. Looking ahead, we see good opportunities to upgrade our customers and increase new customer sales. The need and awareness for content security is increasing, and security experts recognize we have the best solutions to protect against data theft and advanced attacks."

Third Quarter 2012 GAAP Financial Highlights

-- Revenues of $90.4 million, compared with $92.1 million in the third quarter of 2011. -- Software and service revenues of $82.3 million, compared with $81.8 million in the third quarter of 2011. -- Appliance revenues of $8.1 million, which consisted of approximately $6.6 million in current-period appliance sales and approximately $1.5 million of deferred appliance revenue primarily from pre-2011 appliance sales, compared with $10.3 million of appliance revenues in the third quarter of 2011, which consisted of approximately $7.7 million in current-period appliance sales and the remainder from deferred appliance revenue primarily from pre-2011 appliance sales. -- Operating income of $13.8 million, compared with $13.7 million in the third quarter of 2011. -- Provision for income taxes of $4.6 million, compared with $5.4 million in the third quarter of 2011. -- Net income of $8.5 million, or 23 cents per diluted share, compared with net income of $8.1 million, or 20 cents per diluted share, in the third quarter of 2011. -- Weighted average diluted shares outstanding of 36.8 million, compared with 40.4 million in the third quarter of 2011. -- Cash flow from operations of $5.6 million, compared with $16.7 million in the third quarter of 2011. Cash flow from operations includes one-time tax payments of $14.7 million relating to the company's settlement with the U.S. Internal Revenue Service of certain audit adjustments for tax years 2005 through 2007. The company had expected these payments to total $15 to $16 million in the third quarter. -- Quarter-end accounts receivable of $54.4 million, compared with $59.8 million at the end of the third quarter of 2011 and $61.8 million at the end of the second quarter of 2012. -- Days billings outstanding of 60 days, compared with 64 days at the end of the third quarter of 2011 and 65 days billings outstanding at the end of the second quarter of 2012. -- Deferred revenue of $370.7 million, an increase of $0.9 million compared with deferred revenue of $369.8 million at the end of the third quarter of 2011. Deferred revenue at the end of the third quarter of 2012 included $5.8 million from extended warranties and pre-2011 appliance sales, a decrease of $5.8 million from the year ago period. Deferred revenue from pre-2011 appliance sales will continue to decrease quarterly. Third Quarter 2012 Non-GAAP1 Financial Highlights

-- Billings of $81.5 million, a decrease of three percent compared with the third quarter of 2011. Currency exchange rates had a negative impact on billings of approximately $1.9 million in the third quarter of 2012 compared with the prevailing exchange rates in effect during the third quarter of 2011. -- TRITON(TM) solution billings of $49.4 million, an increase of nine percent compared with the third quarter of 2011. -- Non-GAAP operating income of $20.3 million, compared with non-GAAP operating income of $21.8 million in the third quarter of 2011. Non-GAAP operating margin in the third quarter of 2012, calculated as a percentage of revenues, was 22.4 percent, compared with 23.7 percent in the third quarter of 2011. -- Billings-based operating margin of 14.8 percent, compared with billings-based operating margin of 17.9 percent in the third 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 $3.7 million, based on a long-term effective tax rate of 19 percent, compared with a non-GAAP tax provision of $3.8 million, based on an effective tax rate of 17.7 percent, in the third quarter of 2011. -- Non-GAAP net income of $15.9 million, or 43 cents per diluted share, compared with $17.9 million, or 44 cents per diluted share, in the third quarter of 2011. Summary Metrics

Millions, except percentages, number of transactions, duration, and days billings outstanding Q3'11 Y/Y Chg Q3'12 --- ----- Total billings $81.5 $84.3 -3% -------------- ----- ----- --- U.S. billings $39.3 $47.2 -17% ------------- ----- ----- --- International billings $42.2 $37.1 14% ---------------------- ----- ----- --- TRITON solution billings(2) $49.4 $45.3 9% -------------------------- ----- ----- --- Appliance billings $6.9 $8.0 -14% ------------------ ---- ---- --- Number of transactions >$100K 144 132 9% ----------------------------- --- --- --- Average contract duration (months) 24.1 23.1 4% ---------------------------------- ---- ---- --- Days billings outstanding (DSOs) 60 64 -4 days ------------------------------- --- --- ------- Cash and cash equivalents $57.6 $75.6 -24% ------------------------- ----- ----- --- Balance on revolving credit facility $68.0 $73.0 -7% --------------------------- ----- ----- --- Share repurchases ($) $2.9 $25.0 -88% -------------------- ---- ----- ---

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 Fourth Quarter and Fiscal Year 2012 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 $1.29 for the Euro and $1.61 for the Pound Sterling. The company disclaims any obligation to update the statements as circumstances change.

Millions, except percentages and per-share amounts Q4'12 Outlook Implied 2012 Outlook --- ------------ Total billings $112 - 117 $359.5 - 364.5 -------------- ---------- -------------- Appliance billings (% of total billings) 7 - 8% 7 - 8% ------------------------------ ----- ----- Revenues $90 - 92 $359.8 - 361.8 -------- -------- -------------- Non-GAAP gross profit margin 83 - 84% 84 - 85% ---------------------------- ------- ------- Non-GAAP operating margin 16 - 18% 19 - 20% ------------------------- ------- ------- Non-GAAP earnings per diluted share $0.32 - 0.35 $1.50 - 1.53 ----------------------------- ------------ ------------ Non-GAAP effective tax rate 19% 19% --------------------------- --- --- Average diluted shares outstanding 37.0 - 37.5 37.0 - 37.5 ---------------------- ----------- ----------- Cash flow from operations $8.0 - 11.0 $45.8 - 48.8 ------------------------- ----------- ------------ Capital expenditures $3.0 - 3.5 $12.5 - 13.0 -------------------- ---------- ------------ Cash taxes (net of refunds) $3.0 - 4.0 $28.0 - 29.0 -------------------------- ---------- ------------

Additionally, outlook ranges for 2012 reflect:

-- Billings-based non-GAAP operating margin of 20 to 22 percent. -- Expected stock repurchases in the fourth quarter of approximately $5 million to more closely align with expected cash flow. -- Non-cash items related to the recognition of revenue and costs associated with pre-2011 appliance billings: -- Remaining deferred revenue of $3.9 million from pre-2011 appliance billings (as of September 30, 2012) that will continue to be recognized ratably according to the original subscription periods, including $1.2 million to be recognized in the fourth quarter of 2012 (compared with $2.1 million in the fourth quarter of 2011). -- Remaining deferred costs of $1.9 million from pre-2011 appliance billings (as of September 30, 2012) that will continue to be recognized ratably according to the original subscription periods, including $0.5 million to be recognized in the fourth quarter of 2012 (compared with $1.0 million in the fourth quarter of 2011). -- 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 (actual) Q3'12 Q4'12 2012 (actual) (actual) (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 ----- ---- ---- ---- ---- ---- ---- ----

Conference Call Details Management will host a conference call and simultaneous webcast to discuss the financial results and outlook today, October 23, 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 December 31, 2012, and a recorded replay of the call will be available for one week at (855) 859-2056 and (404) 537-3406, pass code 33392987.

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 third 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. 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 third 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.

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