Websense Reports Third Quarter 2012 Results

                 Websense Reports Third Quarter 2012 Results

PR Newswire

SAN DIEGO, Oct. 23, 2012

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

  oRevenues of $90.4 million, compared with $92.1 million in the third
    quarter of 2011.
  oSoftware and service revenues of $82.3 million, compared with $81.8
    million in the third quarter of 2011.
  oAppliance 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.
  oOperating income of $13.8 million, compared with $13.7 million in the
    third quarter of 2011.
  oProvision for income taxes of $4.6 million, compared with $5.4 million in
    the third quarter of 2011.
  oNet 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.
  oWeighted average diluted shares outstanding of 36.8 million, compared with
    40.4 million in the third quarter of 2011.
  oCash 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.
  oQuarter-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.
  oDays 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.
  oDeferred 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-GAAP^1 Financial Highlights

  oBillings 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.
  oTRITON™ solution billings of $49.4 million, an increase of nine percent
    compared with the third quarter of 2011.
  oNon-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.
  oBillings-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.
  oA 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.
  oNon-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%

   A detailed description of the company's non-GAAP financial measures appears
1. 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."
   TRITON solutions include the TRITON family of security gateways for web,
   email, mobile, and data security (including related appliances and
2. 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                      Implied
amounts                                           Q4'12 Outlook
                                                                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:

  oBillings-based non-GAAP operating margin of 20 to 22 percent.
  oExpected stock repurchases in the fourth quarter of approximately $5
    million to more closely align with expected cash flow.
  oNon-cash items related to the recognition of revenue and costs associated
    with pre-2011 appliance billings:

       oRemaining 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).
       oRemaining 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).
       oOn 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
         Deferred       2011 Recognition Schedule (actual) Remaining deferred
         balances                                          balances
Millions                Q1'11  Q2'11  Q3'11  Q4'11  2011
         as of 12/31/10                                    as of 12/31/11
                                                
         (actual)                                          (actual)
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
         Deferred                                                  Remaining
         balances 2012 Recognition Schedule                        deferred
                                                                   balances
Millions as of    Q1'12             Q3'12    Q4'12      2012
         12/31/11          Q2'12                                   as of
                  (actual) (actual) (actual) (expected) (expected) 12/31/12
         (actual)                                                  (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.

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

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

This news 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 financial estimates; the statements of Gene Hodges;
statements about our expected success selling products; statements about the
effectiveness of our products; billings, revenues, and growth trends;
statements regarding expected repurchases of our common stock; and statements
containing the words "planned," "expects," "believes," "strategy,"
"opportunity," "anticipates," and similar words. The potential risks and
uncertainties that contribute to the uncertain nature of these statements
include, among others, risks associated with customer acceptance of the
company's products and services, product performance, launching new product
offerings, products and fee structures in a changing market, the success of
Websense's brand development efforts, the volatile and competitive nature of
the internet and security industries, changes in domestic and international
market conditions (including in continental Europe), fluctuations in currency
exchange rates and impacts of macro-economic conditions on our customers,
ongoing compliance with the covenants in the company's credit facility,
changes in accounting interpretations, and the other risks and uncertainties
described in Websense's public filings with the Securities and Exchange
Commission, available at www.websense.com/investors. Websense assumes no
obligation to update any forward-looking statement to reflect events or
circumstances arising after the date on which it was made.

The following financial information should be read in conjunction with the
audited financial statements and notes thereto, included in Websense Inc.'s
most recent Annual Report on Form 10-K filed with the Securities and Exchange
Commission as well as the interim financial statements and notes thereto
included in Websense's Quarterly Reports on Form 10-Q. Certain
reclassifications have been made for consistent presentation.

Websense, Inc.
Consolidated Statements of Operations
(Unaudited and in thousands, except per share amounts)
                          Three Months Ended September  Nine Months Ended
                          30,                           September 30,
                          2012            2011          2012        2011
Revenues:
 Software and service  $  82,285      $  81,803    $ 245,992   $ 243,057
 Appliance             8,078           10,308        23,769      28,393
 Total revenues     90,363          92,111        269,761     271,450
Cost of revenues:
 Software and service  11,643          10,234        33,918      30,993
 Appliance             3,337           4,665         9,929       13,661
 Total cost of      14,980          14,899        43,847      44,654
revenues
Gross profit              75,383          77,212        225,914     226,796
Operating expenses:
 Selling and marketing 35,661          38,445        112,226     121,285
 Research and          15,786          15,084        46,745      43,556
development
 General and           10,132          9,969         30,960      30,922
administrative
 Total operating    61,579          63,498        189,931     195,763
expenses
Income from operations    13,804          13,714        35,983      31,033
Interest expense          (644)           (374)         (1,943)     (1,167)
Other income (expense),   (81)            204           (221)       1,530
net
Income before income      13,079          13,544        33,819      31,396
taxes
Provision for income      4,628           5,426         19,278      10,777
taxes
Net income                $   8,451     $   8,118   $  14,541  $  20,619
Basic net income per      $    0.23    $    0.21  $        $   
share                                                   0.39        0.51
Diluted net income per    $    0.23    $    0.20  $        $   
share                                                   0.39        0.50
Weighted average shares - 36,457          39,575        37,010      40,081
basic
Weighted average shares - 36,782          40,428        37,590      41,273
diluted
Financial Data:
Total deferred revenue    $ 370,739       $ 369,750     $ 370,739   $ 369,750



 

Websense, Inc.
Consolidated Balance Sheets
(In thousands)
                                    September 30, 2012     December 31, 2011
Assets                              (Unaudited)
Current assets:
 Cash and cash equivalents       $            $         
                                    57,602                 76,201
 Accounts receivable, net        54,436                 80,147
 Income tax receivable/prepaid   2,187                  738
income tax
 Current portion of deferred     30,234                 30,021
income taxes
 Other current assets            11,589                 13,793
 Total current assets         156,048                200,900
Cash and cash equivalents -         640                    628
restricted
Property and equipment, net         18,617                 16,832
Intangible assets, net              20,058                 26,412
Goodwill                            372,445                372,445
Deferred income taxes, less current 8,670                  8,599
portion
Deposits and other assets           7,348                  8,622
Total assets                        $              $        
                                    583,826               634,438
Liabilities and stockholders'
equity
Current liabilities:
 Accounts payable                $            $         
                                     6,404                 9,026
 Accrued compensation and        23,358                 22,770
related benefits
 Other accrued expenses          11,722                 16,534
 Current portion of income taxes 1,533                  3,187
payable
 Current portion of deferred tax 86                     86
liability
 Current portion of deferred     231,576                250,597
revenue
 Total current liabilities    274,679                302,200
Other long term liabilities         2,256                  2,600
Income taxes payable, less current  10,308                 11,955
portion
Secured loan                        68,000                 73,000
Deferred tax liability, less        2,512                  2,501
current portion
Deferred revenue, less current      139,163                142,437
portion
 Total liabilities               496,918                534,693
Stockholders' equity:
 Common stock                      577                    568
 Additional paid-in capital        434,089                415,573
 Treasury stock, at cost           (431,290)              (385,544)
 Retained earnings                 86,788                 72,247
 Accumulated other comprehensive   (3,256)                (3,099)
loss
 Total stockholders' equity      86,908                 99,745
Total liabilities and stockholders' $              $        
equity                              583,826               634,438



 

Websense, Inc.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
                                               Nine Months Ended September 30,
                                               2012             2011
Operating activities:
Net income                                     $  14,541       $  20,619
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization                 15,133           19,716
Share-based compensation                      14,675           14,433
Deferred income taxes                         -                (360)
Unrealized loss (gain) on foreign exchange    412              (47)
Excess tax benefit from share-based            (532)            (2,267)
compensation
Changes in operating assets and liabilities:
Accounts receivable                           26,760           21,149
Other assets                                  2,412            470
Accounts payable                              (3,437)          2,244
Accrued compensation and related benefits     451              533
Other liabilities                             (3,761)          (3,385)
Deferred revenue                              (22,297)         (24,575)
Income taxes payable and receivable/prepaid    (6,559)          8,722
Net cash provided by operating activities     37,798           57,252
Investing activities:
Change in restricted cash and cash             (20)             33
equivalents
Purchase of property and equipment            (9,576)          (7,176)
Purchase of intangible assets                  -                (500)
Net cash used in investing activities         (9,596)          (7,643)
Financing activities:
Proceeds from secured loan                     -                87,000
Principal payments on secured loan            (5,000)          (81,000)
Principal payments on capital lease obligation (587)            (569)
Proceeds from exercise of stock options       2,257            14,461
Proceeds from issuance of common stock for     3,595            3,446
stock purchase plan
Excess tax benefit from share-based            532              2,267
compensation
Tax payments related to restricted stock unit  (2,830)          (2,824)
issuances
Purchase of treasury stock                    (44,674)         (73,998)
Net cash used in financing activities         (46,707)         (51,217)
Effect of exchange rate changes on cash and    (94)             (232)
cash equivalents
Decrease in cash and cash equivalents         (18,599)         (1,840)
Cash and cash equivalents at beginning of      76,201           77,390
period
Cash and cash equivalents at end of period     $  57,602       $  75,550
Cash paid during the period for:
Income taxes including interest and          $  25,385       $   5,045
penalties, net of refunds
Interest                                     $   1,746      $    968
Non-cash financing activities:
 Change in operating assets and liabilities
for unsettled purchase

 of treasury stock and exercise of stock  $  (1,583)      $    994
options



 

Websense, Inc.
Rollforward of Deferred Revenue
(Unaudited and in thousands)
 Deferred revenue balance at June 30, 2012          $ 379,606
 Net billings during third quarter 2012             81,498
 Less revenue recognized during third quarter 2012  (90,363)
 Translation adjustment                             (2)
 Deferred revenue balance at September 30, 2012     $ 370,739



 

Websense, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(Unaudited and in thousands, except per share amounts)
                           Three Months Ended      Nine Months Ended September
                           September 30,           30,
                           2012        2011        2012            2011
GAAP Gross profit          $ 75,383    $ 77,212    $ 225,914       $ 226,796
 Amortization of         539         646         1,617           1,937
acquired technology (2)
 Share-based             238         276         883             829
compensation (1)
 Gross profit          777         922         2,500           2,766
adjustment
Non-GAAP Gross profit      $ 76,160    $ 78,134    $ 228,414       $ 229,562
GAAP Operating expenses    $ 61,579    $ 63,498    $ 189,931       $ 195,763
 Amortization of other   (1,512)     (3,159)     (4,535)         (9,479)
intangible assets (2)
 Share-based             (4,192)     (4,004)     (13,792)        (13,605)
compensation (1)
 Operating expense     (5,704)     (7,163)     (18,327)        (23,084)
adjustment
Non-GAAP Operating         $ 55,875    $ 56,335    $ 171,604       $ 172,679
expenses
GAAP Income from           $ 13,804    $ 13,714    $  35,983      $  31,033
operations
 Gross profit          777         922         2,500           2,766
adjustment
 Operating expense     5,704       7,163       18,327          23,084
adjustment
Non-GAAP Income from       $ 20,285    $ 21,799    $  56,810      $  56,883
operations
GAAP Provision for income  $  4,628   $  5,426   $  19,278      $  10,777
taxes
 Provision for
income taxes adjustment    (900)       (1,592)     (8,861)         (153)
(3, 5)
Non-GAAP Provision for     $  3,728   $  3,834   $  10,417      $  10,624
income taxes
GAAP Net income            $  8,451   $  8,118   $  14,541      $  20,619
 Gross profit          777         922         2,500           2,766
adjustment
 Operating expense     5,704       7,163       18,327          23,084
adjustment
 Amortization of
deferred financing fees    59          60          178             179
(4)
 Provision for income  900         1,592       8,861           153
tax adjustment
Non-GAAP Net income        $ 15,891    $ 17,855    $  44,407      $  46,801
GAAP Net income per        $   0.23  $   0.20  $    0.39    $   
diluted share                                                      0.50
 Non-GAAP adjustments as
described above
                           0.20        0.24        0.79            0.63
 per share, net of tax
(1-5)
Non-GAAP Net income per    $   0.43  $   0.44  $    1.18    $   
diluted share                                                      1.13

(1) Share-based compensation. Consists of non-cash expenses for employee stock
options, restricted stock units and our employee stock purchase plan
determined in accordance with the fair value method of accounting for
share-based compensation. When evaluating the performance of our business and
developing short and long-term plans, we do not consider share-based
compensation charges. Although share-based compensation is necessary to
attract and retain quality employees, our consideration of share-based
compensation places its primary emphasis on overall shareholder dilution
rather than the accounting charges associated with such grants. Because of
varying available valuation methodologies, subjective assumptions and the
variety of award types, we believe that the exclusion of share-based
compensation allows for more accurate comparison of our financial results to
previous periods. In addition, we believe it is useful to investors to
understand the specific impact of the application of the fair value method of
accounting for share-based compensation on our operating results.

(2) Amortization of acquired technology and other intangible assets. When
conducting internal development of intangible assets (including developed
technology, customer relationships, trademarks, etc.), GAAP accounting rules
require that we expense the costs as incurred. In the case of acquired
businesses, however, we are required to allocate a portion of the purchase
price to the accounting value assigned to intangible assets acquired and
amortize this amount over the estimated useful lives of the acquired
intangibles. The acquired company, in most cases, has itself previously
expensed the costs incurred to develop the acquired intangible assets, and the
purchase price allocated to these assets is not necessarily reflective of the
cost we would incur in developing the intangible asset. We eliminate these
amortization charges from our non-GAAP operating results to provide better
comparability of pre- and post-acquisition operating results and comparability
to results of businesses utilizing internally developed intangible assets.

(3) Non-GAAP effective tax rate. The company's annual non-GAAP effective tax
rate is calculated by dividing the company's estimated annual non-GAAP tax
expense by its estimated annual non-GAAP taxable income. The company's
estimated non-GAAP taxable income is determined by adjusting its estimated
GAAP taxable income for its non-GAAP adjustments on a country-by-country
basis. The company determines its annual estimated non-GAAP tax expense by
adding together the estimated non-GAAP tax expense for each country based on
each country's applicable tax rate. The company determines its interim
non-GAAP effective tax expense in accordance with the general principles of
ASC 740, Accounting for Income Taxes. In 2012, the company's effective tax
rate is based on the company's anticipated long term annual non-GAAP tax
expense divided by the company's long term annual non-GAAP taxable income on a
country by country basis.

(4) Amortization of deferred financing fees. This is a non-cash charge that is
disregarded by the company's management when evaluating our ongoing
performance and/or predicting our earnings trends, and is excluded by us when
presenting our non-GAAP financial measures. Further, we believe it is useful
to investors to understand the specific impact of this charge on our operating
results.

(5) Tax related adjustments from other discrete items. This amount represents
the non-recurring tax effect from the transfer of customer relationship
intangible assets and the related deferred tax liabilities from a higher tax
rate jurisdiction to a lower tax rate jurisdiction. The tax benefit is
reflected in the first quarter of 2011 upon the completion of our global
distribution restructuring and is not expected to recur.

Websense, Inc.
Non-GAAP Billings Operating Margin Reconciliation
(Unaudited and in thousands, except percentages)
                Three Months Ended September    Nine Months Ended September 30,
                30,
Billings:       2012            2011            2012             2011
 Software and   $               $               $                $
 service        74,585  91.5%   76,332  90.5%   227,631  92.0%   226,896  91.9%
 billings
 Appliance      6,913   8.5%    7,983   9.5%    19,839   8.0%    19,981   8.1%
 billings
  Total        81,498  100.0%  84,315  100.0%  247,470  100.0%  246,877  100.0%
 billings
Non-GAAP Cost
of billings:
 Software and
 service cost   10,866  14.6%   9,312   12.2%   31,418   13.8%   28,227   12.4%
 of billings
 Appliance cost
 of billings    2,716   39.3%   3,553   44.5%   7,842    39.5%   9,512    47.6%
 (1)
  Non-GAAP
 Cost of        13,582  16.7%   12,865  15.3%   39,260   15.9%   37,739   15.3%
 billings
Non-GAAP Gross
margin:
 Software and
 service gross  63,719  85.4%   67,020  87.8%   196,213  86.2%   198,669  87.6%
 margin
 Appliance      4,197   60.7%   4,430   55.5%   11,997   60.5%   10,469   52.4%
 gross margin
  Non-GAAP     67,916  83.3%   71,450  84.7%   208,210  84.1%   209,138  84.7%
 Gross margin
Non-GAAP
Operating
expenses:
 Selling and    32,627  40.0%   33,953  40.3%   102,370  41.4%   107,494  43.5%
 marketing
 Research and   14,689  18.0%   14,123  16.7%   43,206   17.4%   40,669   16.5%
 development
 General and    8,559   10.5%   8,259   9.8%    26,028   10.5%   24,516   9.9%
 administrative
  Non-GAAP
 Operating      55,875  68.5%   56,335  66.8%   171,604  69.3%   172,679  69.9%
 expenses
Non-GAAP
Billings        $       14.8%   $       17.9%   $       14.8%   $       14.8%
operating       12,041          15,115          36,606           36,459
margin
 (1) Excluding deferred appliance expenses associated with pre-2011 appliance
 sales.



The non-GAAP financial measures included in the tables above and in the tables
on the preceding page are non-GAAP gross profit, non-GAAP operating expenses,
non-GAAP income from operations, non-GAAP provision for income taxes, non-GAAP
net income and non-GAAP net income per share, billings, non-GAAP cost of
billings, non-GAAP gross margin and non-GAAP billings operating margin which
adjust for the following items: acquisition related adjustments, share-based
compensation expense, amortization of intangible assets, deferred expenses and
certain other items. We believe the presentation of these non-GAAP financial
measures, when taken together with the corresponding GAAP financial measures,
provides meaningful supplemental information regarding the company's operating
performance for the reasons discussed below. Our management uses these
non-GAAP financial measures in assessing the company's operating results, as
well as when planning, forecasting and analyzing future periods. The annual
operating plan approved by our Board of Directors is based upon non-GAAP
financial measures and our management incentive plans also use non-GAAP
financial measures as performance objectives. We believe that these non-GAAP
financial measures also facilitate comparisons of the company's performance to
prior periods and to our peers and that investors benefit from an
understanding of these non-financial measures.

INVESTOR CONTACT:      MEDIA CONTACT:
Avelina Kauffman       Patricia Hogan
Websense, Inc.         Websense, Inc.
(858) 320-9364         (858) 320-9393
akauffman@websense.com phogan@websense.com 

SOURCE Websense, Inc.

Website: http://www.websense.com