Websense Announces Record Billings and Revenue for Q4'06
31 January 2007
Websense, Inc. (Nasdaq: WBSN) today announced financial results for the fourth quarter ended December 31, 2006.
Revenue in the fourth quarter was a record $47.3 million, but slightly below the company's previously issued revenue guidance range of $47.5 to $48 million. Revenue in the quarter reflected a change in the company's revenue recognition policy from monthly to daily revenue recognition, as well as distributor marketing payments and channel rebates, which had the combined net effect of reducing revenue by approximately $1 million.
Net income calculated using generally accepted accounting principles (GAAP) was $7.8 million, or 17 cents per diluted share. Fourth quarter non-GAAP net income, which excludes stock-based compensation expense and the related tax effects, was $11.4 million or 25 cents per diluted share, an increase of three percent from net income of $11.1 million in the fourth quarter of 2005.
Gross billings invoiced to customers in the fourth quarter were $69.0 million, an increase of two percent from the fourth quarter of 2005. Net billings, reflecting approximately $578,000 in distributor marketing payments and channel rebates, were $68.4 million. Billings represents the full amount of subscription contracts billed to customers during the quarter. The difference between net billings booked and revenue recognized in the fourth quarter resulted in an increase in deferred revenue of approximately $21.1 million from the end of September, bringing total deferred revenue to $220.3 million at the end of December.
"Our fourth quarter billings performance reflected normal quarterly seasonality, partially offset by a contraction in our average subscription length compared to the fourth quarter of 2005," said Gene Hodges, Websense chief executive officer. "Other business metrics, including strong growth internationally, continued increases in seats under subscription and gains in the average annual contract value, demonstrate that our business remains healthy and the Web security and Web filtering markets continue to offer opportunity for growth."
"2006 was a year of transition for Websense as we took steps to support our continued growth and expand our presence in the broader content security market. In the fourth quarter, we began distributing our software through Ingram Micro in North America, which will allow us to substantially expand the number of resellers and extend our reach into the sub-1000 seat market segment for Web security and Web filtering. Although there are significant start-up costs associated with establishing this relationship and marketing to Ingram's large base of resellers, we expect this partnership to generate increased new business and become additive to revenue and earnings by mid-2007," added Hodges.
"Additionally, in December we announced the acquisition of PortAuthority Technologies, Inc., a technology leader in information leak prevention. We identified information leak prevention as a significant opportunity for Websense in 2006 and formed a joint development and original equipment manufacturer relationship with PortAuthority. We believe that by acquiring PortAuthority and retaining its engineering talent, we will be able to accelerate our time to market and offer a more comprehensive solution, creating a more significant platform for long-term growth."
The company ended the fourth quarter of 2006 with $326.9 million in cash and investments, an increase of approximately $26.5 million from the end of the third quarter, and zero debt. Net operating cash flow was approximately $22.1 million for the quarter and approximately $83.7 million for the full year. On January 9, 2007, Websense made a cash payment of approximately $88 million to complete the acquisition of PortAuthority Technologies, Inc. and assumed indebtedness of approximately $4 million. The cash used in the acquisition, including any cash used to retire indebtedness, will be reflected in the cash balances reported at the end of the first quarter of 2007.
For the full year, gross billings were $211.1 million, an increase of 8 percent from 2005. Net billings, after subtracting distributor marketing payments and channel rebates, were $210.5 million. Revenue was $178.8 million, net of the approximately $2.2 million combined effect of distributor marketing payments, channel rebates and daily versus monthly revenue recognition. Net income calculated using generally accepted accounting principles (GAAP) was $32.1 million, or 68 cents per diluted share for the year. Non-GAAP net income, which excludes stock-based compensation expense and the related tax effects, was $46.0 million or 98 cents per diluted share, an increase of 19 percent from 2005.
Change in Revenue Recognition Policy and Adoption of SAB 108
In January 2007, as part of its annual audit and Sarbanes Oxley certification process, the company reviewed its revenue recognition policy with its independent registered public accounting firm, Ernst & Young LLP, and concluded that its policy of recognizing revenue on a monthly straight-line basis over the term of the subscription agreement is not consistent with the interpretations of generally accepted accounting principles (GAAP). As a result, Websense has recalculated revenue as recognized on a daily straight-line basis, commencing on the day rather than the month the subscription begins. While this recalculation, when applied retroactively to prior years, does not result in material adjustments to the company's income statements, cash balances or operating cash flows in any single year, the cumulative impact on deferred revenue would have been material if not corrected in the company's financial statements for 2006.
To adjust its historical financial statements for the change in revenue recognition, the company has adopted SEC Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (SAB 108) and applied the special cumulative effect transition provision to its 2006 financial statements. The cumulative net result is an increase in deferred revenue and a reduction in retained earnings, before tax impact, as of January 1, 2006 by $8.7 million.
For 2006, the impact of daily revenue recognition on subscriptions commencing during the period, combined with recognition of additional revenue related to the cumulative adjustment from prior periods, was to reduce revenue recognized by $1.7 million and net income by $1.1 million, and increase deferred revenue by $10.4 million when compared to what these amounts would have been under the monthly revenue recognition policy.
The adjustments to previously reported quarterly income statements for the first nine months of 2006 are outlined below in the reconciliation of GAAP to non-GAAP financial statements. The company's balance sheets and income statements prior to 2006 will not be restated by the company, pursuant to the provisions of SAB 108.
"We have always been committed to providing accurate, timely and transparent financial reports to our stockholders," said Doug Wride, Websense chief financial officer. "By changing to a daily revenue recognition method now, we can ensure that our results are compliant with interpretations of GAAP and that future comparisons to our 2006 financial statements are made on a consistent basis."
Recent Business and Product Development Highlights
In addition to reporting record revenue and billings performance and announcing the acquisition of PortAuthority, highlights from the fourth quarter included:
* Launch of Websense ThreatSeeker(TM) technology, the company's
patent-pending threat identification and categorization technology that
delivers preemptive protection from Web-based security threats.
* Announcement of plans for a new research and development center in
Beijing, China, to support the development of Websense(R) software and
establish a direct presence in the Chinese enterprise market.
* Recognition of Websense software with a "Best Buy" rating in SC
Magazine's Best of 2006 product feature. The Best Buy rating is SC
Magazine's top award and goes to products that the magazine rates as
outstanding across a range of criteria. The magazine also named
Websense a finalist in two categories of the 2007 SC Magazine Awards
program for outstanding achievement in information technology security.
Additional Quarterly Business Metrics
Q4'06 Q3'06 Q4'05
Seats under subscription 25 million 24.5 million 23.9 million
Billings of security-related
products 49% 49% 28%
New business revenue
(% of total) 34% 33% 33%
International revenue
(% of total) 38% 37% 34%
Average annual contract value $9,900 $9,200 $9,000
Attach rate for add-on products 63% 63% 60%
Average contract duration
(months) 22.7 22.7 23.2
Renewal rate (based on # of
customers) 75-80% 75-80% 75-80%
First Quarter 2007 Outlook
Websense provides guidance on its anticipated financial performance for the coming quarter based on its assessment of the current business environment and historical seasonal trends in its business. In providing quarterly guidance, the company emphasizes that its forward-looking statements are based on current expectations and disclaims any obligation to update the statements as conditions change. For the first quarter of 2007:
* Billings are expected to be in the range of $40 to $43 million and
revenue is expected to be in the range of $48.5 to $49.5 million. The
ranges for both billings and subscription revenue are net of
anticipated channel marketing payments and rebates. For the first
quarter, payments of this nature are expected to be between $700,000
and $1 million.
* Stock-based compensation expense, reported in compliance with FAS 123R,
is expected to total approximately $5.1 million.
* Both GAAP and non-GAAP gross margin, which excludes stock-based
compensation expense, are expected to be approximately 91 to 92 percent
of revenue.
* GAAP operating margin is expected to be 9 to 10 percent of revenue.
Non-GAAP operating margin, which excludes stock-based compensation
expense, is expected to be between 23 and 25 percent of revenue. The
company's guidance for gross margin and operating margin reflect the
impact of the acquired information leak prevention business.
* Fully diluted shares outstanding are expected to be 45 to 46 million
shares, depending upon the amount and timing of shares repurchased, if
any.
* Based on the above revenue and expense structure, expected fully
diluted shares outstanding and the 2006 effective GAAP tax rate of
37 percent, combined with a preliminary assessment of purchase price
allocations, GAAP earnings are expected to be approximately 9 to
11 cents per diluted share. Non-GAAP earnings per diluted share, based
on the 2006 effective non-GAAP tax rate of 35 percent, excluding
stock-based compensation expense and related tax effects, amortization
of intangibles related to the PortAuthority acquisition and one-time
charges related to in-process research and development, are expected to
be approximately 19 to 21 cents.
Conference Call
Websense is hosting a conference call and simultaneous webcast today at 4:30 p.m. EST (1:30 pm PST), to discuss these results. To participate in the call, investors should dial (800) 811-8845 (domestic) or (913) 981-4905 (international) 10 minutes prior to the scheduled start of the call. The webcast may be accessed via the internet at http://www.websense.com/investors. An audio archive of the webcast will be available on the company's website through March 31, 2007, and a taped replay of the call will be available for one week at (888) 203-1112 or (719) 457-0820, passcode 4336310.
Non-GAAP Financial Measures
This press release provides financial measures for net income and earnings per diluted share that exclude stock-based compensation expense and the related tax effects, and therefore are not calculated in accordance with generally accepted accounting principles (GAAP). Management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance that enhances management's and investors' ability to evaluate the company's operating results and to compare current operating results with historical operating results prior to the adoption of FAS 123R. A reconciliation of the GAAP and non-GAAP income statements for the fourth quarter and full year 2006 are provided at the end of this press release.
This press release provides financial measures for deferred revenue, revenue, net income and earnings per diluted share that exclude the effects of the company's adoption of SAB 108 to adjust deferred revenue and retained earnings on the company's balance sheet as of January 1, 2006, and to recalculate revenue during each of the quarters of 2006 under the company's new daily revenue recognition policy and reflect the revenue, net income and earnings per diluted share under the company's prior policy of recognizing revenue on a monthly straightline basis over the term of the subscription agreement. These non-GAAP financial measures are included to provide meaningful comparison to performance during prior quarters that were reported using the monthly revenue recognition policy and the impact of the change in accounting policy on the results for these periods and in order to provide information on the impact of these changes on future performance. A reconciliation of the GAAP and non-GAAP deferred revenue and income statement items for the fourth quarter and full year 2006 are provided at the end of this press release.
This press release also includes financial measures for billings that are not numerical measures that can be calculated in accordance with generally accepted accounting principles (GAAP). Websense provides this measurement in press releases reporting financial performance because this measurement provides a consistent basis for understanding the company's sales activities in the current period. The company believes the billings measurement is useful to investors because the GAAP measurements of revenue and deferred revenue in the current period include subscription contracts commenced in prior periods. A reconciliation of billings and deferred revenue for 2006 is set forth at the end of this press release.
About Websense, Inc.
Websense, Inc. (Nasdaq: WBSN), a global leader in Web security and Web filtering software, is trusted to protect 25 million employees worldwide. Websense proactively discovers and immediately protects customers against Web-based threats such as spyware, phishing attacks, viruses and crimeware with maximum protection and minimal effort. With diverse partnerships and integrations, Websense enhances our customers' network and security environments. For more information, visit http://www.websense.com.
Websense and Websense Enterprise are registered trademarks of Websense, Inc. in the United States and certain international markets. Websense has numerous other unregistered trademarks in the United States and internationally. All other trademarks are the property of their respective owners.
This press release contains forward-looking statements that involve risks, uncertainties, assumptions and other factors which, if they do not materialize or prove correct, could cause Websense's results to differ materially from historical results or those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including the quotations of Gene Hodges and Doug Wride, the First Quarter 2007 Outlook, statements (including implications) relating to the success and future performance of the security content business, and statements containing the words "planned," "expects," "believes," "strategy," "opportunity," "anticipates" and similar words. These statements may include, among others, plans, strategies and objectives of management for future operations; any statements regarding proposed new products, services or developments; statements regarding planned investments in our channel strategy and the expected benefits of the investment; any statements regarding future economic conditions or financial or operating performance; statements of belief and any statements of assumptions underlying any of the foregoing. The potential risks and uncertainties which contribute to the uncertain nature of these statements include, among others, risks associated with integrating acquired businesses and launching new product offerings, risks of changing distribution models and the potential for short-term disruptive effects on new customer sales; customer acceptance of the company's services, products and fee structures in a changing market; the success of Websense's brand development efforts; the volatile and competitive nature of the Internet industry; changes in domestic and international market conditions, including risks of having research and development centers in Israel and China, and the entry into and development of international markets for the company's products; risks relating to intellectual property ownership; risks related to changes in accounting interpretations and the other risks and uncertainties described in Websense's public filings with the Securities and Exchange Commission, available at (< http://www.sec.gov >). Websense assumes no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made.
INVESTOR CONTACT: MEDIA CONTACT:
Kate Patterson Cas Purdy
Websense, Inc. Websense, Inc.
(858) 320-8072 (858) 320-9493
kpatterson@websense.com cpurdy@websense.com
Websense, Inc.
Consolidated Income Statements
(Unaudited and in thousands, except per share amounts)
Three Months Twelve Months
Ended Ended
December 31, December 31, December 31, December 31,
2006 2005 2006 2005
Revenue $47,325 $40,128 $178,814 $148,636
Cost of revenue 4,319 2,812 15,274 10,642
Gross margin 43,006 37,316 163,540 137,994
Operating expenses:
Selling and
marketing 21,890 15,318 80,135 55,288
Research and
development 5,731 4,155 22,663 16,277
General and
administrative 5,311 2,775 21,279 11,729
Total operating
expenses 32,932 22,248 124,077 83,294
Income from
operations 10,074 15,068 39,463 54,700
Other income, net 3,047 1,721 11,287 5,411
Income before
income taxes 13,121 16,789 50,750 60,111
Provision for
income taxes 5,344 5,678 18,657 21,343
Net income $7,777 $11,111 $32,093 $38,768
Basic net income
per share $0.17 $0.23 $0.69 $0.82
Diluted net
income per share $0.17 $0.23 $0.68 $0.79
Basic common
shares 44,688 47,624 46,494 47,491
Diluted common
shares 45,272 49,195 47,116 49,196
Financial Data:
Total deferred
revenue $220,343 $179,925 $220,343 $179,925
Websense, Inc.
Consolidated Balance Sheets
(Unaudited and in thousands)
December 31, December 31,
2006 2005
Assets
Current assets:
Cash and cash equivalents $83,523 $61,629
Marketable securities 243,382 258,760
Accounts receivable, net 52,740 50,570
Prepaid income taxes -- 1,962
Current portion of deferred income taxes 18,179 15,772
Other current assets 3,943 3,467
Total current assets 401,767 392,160
Property and equipment, net 5,793 4,923
Deferred income taxes, less current portion 13,806 6,043
Deposits and other assets 2,891 549
Total assets $424,257 $403,675
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $2,712 $2,073
Accrued payroll and related benefits 9,164 8,476
Other accrued expenses 7,084 5,085
Income taxes payable 4,229 2,305
Current portion of deferred revenue 148,539 119,118
Total current liabilities 171,728 137,057
Deferred revenue, less current portion 71,804 60,807
Stockholders' equity:
Common stock 509 500
Additional paid-in capital 237,302 197,826
Treasury stock (139,744) (48,340)
Retained earnings 82,748 56,449
Accumulated other comprehensive loss (90) (624)
Total stockholders' equity 180,725 205,811
Total liabilities and stockholders' equity $424,257 $403,675
Websense Inc.
Reconciliation of GAAP to non-GAAP Measures As Corrected
Reconciliation of Billings to Deferred Revenue
(Unaudited and in thousands)
Impact of
As Daily
previously Revenue As
reported Recognition corrected
Deferred revenue balance December 31,
2005 $179,925 $-- $179,925
Cumulative adjustment on January 1,
2006 -- (8,712) 8,712
Billings first quarter 2006 39,034 -- 39,034
Revenue recognized first quarter 2006 (42,434) (374) (42,060)
Deferred revenue balance March 31,
2006 $176,525 $(9,086) $185,611
Billings second quarter 2006 49,777 -- 49,777
Revenue recognized second quarter
2006 (44,149) (462) (43,687)
Deferred revenue balance June 30,
2006 $182,153 $(9,548) $191,701
Billings third quarter 2006 53,314 -- 53,314
Revenue recognized third quarter 2006 (46,068) (326) (45,742)
Deferred revenue balance September 30,
2006 $189,399 $(9,874) $199,273
Non-GAAP Impact
(Revenue of Daily
recognized Revenue
monthly) Recognition Q4 2006
Deferred revenue balance September 30,
2006 $189,399 $(9,874) $199,273
Billings fourth quarter 2006
Invoiced to customers 68,973 -- 68,973
Payments and rebates to customers (578) -- (578)
Net billings 68,395 -- 68,395
Revenue recognized fourth quarter
2006
Gross revenue (48,326) (546) (47,780)
Payments and rebates to customers 455 -- 455
Net revenue (47,871) $(546) (47,325)
Deferred revenue balance December 31,
2006 $209,923 $(10,420) $220,343
Websense Inc.
Reconciliation of GAAP to non-GAAP Measures As Corrected (continued)
Summary of Revenue Recognition and Adjustments to Quarterly Income
Reconciliation of Consolidated Income Statements GAAP to Non-GAAP
Three Months Ended
March 31, 2006
Impact of
Previously Daily
Reported Revenue Corrected SFAS 123R
GAAP Recognition GAAP Adjustment Non-GAAP
Revenue $42,434 $374 $42,060 $-- $42,060
Cost of revenue 3,378 -- 3,378 326 3,052
Gross margin 39,056 374 38,682 326 39,008
Operating expenses:
Selling and
marketing 18,014 -- 18,014 1,951 16,063
Research and
development 5,443 -- 5,443 841 4,602
General and
administrative 5,208 -- 5,208 1,622 3,586
Total operating
expenses 28,665 -- 28,665 4,414 24,251
Income from
operations 10,391 374 10,017 4,740 14,757
Other income, net 2,635 -- 2,635 -- 2,635
Income before income
taxes 13,026 374 12,652 4,740 17,392
Provision for income
taxes 4,827 119 4,708 1,160 5,868
Net income $8,199 $255 $7,944 $3,580 $11,524
Diluted net income
per share $0.17 $0.01 $0.16 $0.07 $0.23
Diluted common shares 49,047 49,047 49,047 49,047 49,047
Websense Inc.
Reconciliation of GAAP to non-GAAP Measures As Corrected (continued)
Summary of Revenue Recognition and Adjustments to Quarterly Income
Reconciliation of Consolidated Income Statements GAAP to Non-GAAP
Three Months Ended
June 30, 2006
Impact of
Previously Daily
Reported Revenue Corrected SFAS 123R
GAAP Recognition GAAP Adjustment Non-GAAP
Revenue $44,149 $462 $43,687 $-- $43,687
Cost of revenue 3,704 -- 3,704 368 3,336
Gross margin 40,445 462 39,983 368 40,351
Operating expenses:
Selling and
marketing 18,922 -- 18,922 2,054 16,868
Research and
development 5,535 -- 5,535 890 4,645
General and
administrative 5,225 -- 5,225 1,658 3,567
Total operating
expenses 29,682 -- 29,682 4,602 25,080
Income from
operations 10,763 462 10,301 4,970 15,271
Other income, net 2,821 -- 2,821 -- 2,821
Income before income
taxes 13,584 462 13,122 4,970 18,092
Provision for income
taxes 5,216 161 5,055 1,286 6,341
Net income $8,368 $301 $8,067 $3,684 $11,751
Diluted net income
per share $0.17 $0.00 $0.17 $0.07 $0.24
Diluted common
shares 48,368 48,368 48,368 48,368 48,368
Websense Inc.
Reconciliation of GAAP to non-GAAP Measures As Corrected (continued)
Summary of Revenue Recognition and Adjustments to Quarterly Income
Reconciliation of Consolidated Income Statements GAAP to Non-GAAP
Three Months Ended
September 30, 2006
Impact of
Previously Daily
Reported Revenue Corrected SFAS 123R
GAAP Recognition GAAP Adjustment Non-GAAP
Revenue $46,068 $326 $45,742 $-- $45,742
Cost of revenue 3,873 -- 3,873 394 3,479
Gross margin 42,195 326 41,869 394 42,263
Operating expenses:
Selling and
marketing 21,309 -- 21,309 2,203 19,106
Research and
development 5,954 -- 5,954 928 5,026
General and
administrative 5,535 -- 5,535 1,797 3,738
Total operating
expenses 32,798 -- 32,798 4,928 27,870
Income from
operations 9,397 326 9,071 5,322 14,393
Other income, net 2,784 -- 2,784 -- 2,784
Income before income
taxes 12,181 326 11,855 5,322 17,177
Provision for income
taxes 3,647 97 3,550 2,368 5,918
Net income $8,534 $229 $8,305 $2,954 $11,259
Diluted net income
per share $0.18 $0.00 $0.18 $0.06 $0.24
Diluted common
shares 46,401 46,401 46,401 46,401 46,401
Websense Inc.
Reconciliation of GAAP to non-GAAP Measures (continued)
Summary of Revenue Recognition and SAB 108 Adjustments to Quarterly Income
Reconciliation of Consolidated Income Statements GAAP to Non-GAAP
Three Months Ended
December 31, 2006
Non-GAAP Impact
(Revenue of Daily
Recognized Revenue SFAS 123R
Monthly) Recognition GAAP Adjustment Non-GAAP
Revenue $47,871 $546 $47,325 $-- $47,325
Cost of revenue 4,319 -- 4,319 388 3,931
Gross margin 43,552 546 43,006 388 43,394
Operating expenses:
Selling and
marketing 21,890 -- 21,890 2,056 19,834
Research and
development 5,731 -- 5,731 914 4,817
General and
administrative 5,311 -- 5,311 1,968 3,343
Total operating
expenses 32,932 -- 32,932 4,938 27,994
Income from
operations 10,620 546 10,074 5,326 15,400
Other income, net 3,047 -- 3,047 -- 3,047
Income before
income taxes 13,667 546 13,121 5,326 18,447
Provision for
income taxes 5,544 200 5,344 1,665 7,009
Net income $8,123 $346 $7,777 $3,661 $11,438
Diluted net income
per share $0.18 $0.01 $0.17 $0.08 $0.25
Diluted common
shares 45,272 45,272 45,272 45,272 45,272
Websense Inc.
Reconciliation of GAAP to non-GAAP Measures As Corrected (continued)
Summary of Revenue Recognition and Adjustments to Annual Income
Reconciliation of Consolidated Income Statements GAAP to Non-GAAP
Twelve Months Ended
December 31, 2006
9 Months
Corrected Q4'06 12 Months SFAS 123R
GAAP GAAP GAAP Adjustment Non-GAAP
Revenue $131,489 $47,325 $178,814 $-- $178,814
Cost of revenue 10,955 4,319 15,274 1,476 13,798
Gross margin 120,534 43,006 163,540 1,476 165,016
Operating expenses:
Selling and marketing 58,245 21,890 80,135 8,264 71,871
Research and
development 16,932 5,731 22,663 3,573 19,090
General and
administrative 15,968 5,311 21,279 7,045 14,234
Total operating
expenses 91,145 32,932 124,077 18,882 105,195
Income from operations 29,389 10,074 39,463 20,358 59,821
Other income, net 8,240 3,047 11,287 -- 11,287
Income before income
taxes 37,629 13,121 50,750 20,358 71,108
Provision for income
taxes 13,313 5,344 18,657 6,479 25,136
Net income $24,316 $7,777 $32,093 $13,879 $45,972
Diluted net income
per share $0.51 $0.17 $0.68 $0.30 $0.98
Diluted common shares 47,926 45,272 47,116 47,116 47,116
Source: prnewswire
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