Websense Reports Fourth Quarter and Fiscal Year 2012 Results - Record fourth quarter billings of $122.0 million, up five percent year-over-year - Fourth quarter TRITON billings of $83.7 million, up 23 percent year-over-year - Announces strategic partnership with F5 Networks to offer Websense leading content security technology PR Newswire SAN DIEGO, Jan. 29, 2013 SAN DIEGO, Jan. 29, 2013 /PRNewswire/ -- Websense, Inc. (NASDAQ: WBSN) today announced financial results for the fourth quarter and fiscal year 2012 consistent with preliminary results for billings, non-GAAP revenue, non-GAAP earnings per diluted share, and cash flow from operations released on January 13, 2013. "Our record fourth quarter billings demonstrate the success of our strategic initiatives and the Websense^® TRITON™ platform," said John McCormack, Websense CEO."The strength in the quarter was driven by a 23 percent year-over-year increase in TRITON solution billings and double-digit year-over-year growth in new customer sales. These results confirm the traction we have established in the content security market as we evolve our web, email, mobile and data security solutions.Looking to the future, we are focused on continued growth, consistent execution, and extension of the TRITON platform ecosystem through strategic partnerships." Fourth Quarter 2012 GAAP Financial Highlights oRevenues of $91.7 million, compared with $92.7 million in the fourth quarter of 2011. oSoftware and services revenues of $82.3 million, consistent with the fourth quarter of 2011. oAppliance revenues of $9.4 million, which consisted of approximately $8.2 million in current-period appliance sales and approximately $1.2 million of deferred appliance revenue primarily from pre-2011 appliance sales, compared with $10.4 million of appliance revenues in the fourth quarter of 2011, which consisted of approximately $8.3 million in current-period appliance sales and $2.1 million of deferred appliance revenue primarily from pre-2011 appliance sales. oOperating income of $5.6 million, compared with $13.4 million in the fourth quarter of 2011, as we incurred increased operating expenses primarily due to increased sales commissions and selling expenses resulting from our billings growth and our investments to expand our sales force, as well as litigation expenses associated with the company's successful defense of a patent lawsuit. oProvision for income taxes of $1.4 million, compared with $2.2 million in the fourth quarter of 2011. oNet income of $3.8 million, or 10 cents per diluted share, compared with net income of $10.4 million, or 27 cents per diluted share, in the fourth quarter of 2011. oWeighted average diluted shares outstanding of 36.8 million, compared with 38.9 million in the fourth quarter of 2011. oCash flow from operations of $11.1 million, compared with $5.6 million in the third quarter of 2012 and $21.9 million in the fourth quarter 2011. oQuarter-end accounts receivable of $89.1 million, compared with $54.4 million at the end of the third quarter of 2012 and $80.1 million at the end of the fourth quarter of 2011. oDays billings outstanding of 66 days, compared with 60 days at the end of the third quarter of 2012 and 62 days at the end of the fourth quarter of 2011. oDeferred revenue of $401.1 million, an increase of $8.1 million compared with deferred revenue of $393.0 million at the end of the fourth quarter of 2011. Deferred revenue at the end of the fourth quarter of 2012 included $5.0 million from extended warranties and pre-2011 appliance sales, a decrease of $4.7 million from the year ago period. Deferred revenue from pre-2011 appliance sales will continue to decrease quarterly as it is depleted by ratable recognition over the original subscription periods. Fourth Quarter 2012 Non-GAAP^1 Financial Highlights oBillings of $122.0 million, an increase of five percent compared with the fourth quarter of 2011. Changes in currency exchange rates, compared with exchange rates prevailing in the fourth quarter of 2011, did not materially impact fourth quarter 2012 billings performance. oTRITON solution billings of $83.7 million, an increase of 23 percent compared with the fourth quarter of 2011. oNon-GAAP operating income of $13.0 million, compared with non-GAAP operating income of $21.7 million in the fourth quarter of 2011. Non-GAAP operating margin in the fourth quarter of 2012, calculated as a percentage of revenues, was 14.2 percent, compared with 23.4 percent in the fourth quarter of 2011. We incurred increased operating expenses primarily due to increased sales commissions and selling expenses resulting from our billings growth and investments to expand our sales force, as well as litigation expenses associated with the company's successful defense of a patent lawsuit. oBillings-based operating margin of 36.0 percent, compared with billings-based operating margin of 39.6 percent in the fourth 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 $2.4 million, based on an effective tax rate of 19 percent, compared with a non-GAAP tax provision of $3.9 million based on an effective tax rate of 18.5 percent, in the fourth quarter of 2011. oNon-GAAP net income of $10.3 million, or 28 cents per diluted share, compared with $17.1 million, or 44 cents per diluted share, in the fourth quarter of 2011. Fiscal Year 2012 GAAP Financial Highlights oRevenues of $361.5 million, compared with $364.2 million in 2011. oSoftware and services revenues of $328.3 million, compared with $325.4 million in 2011. oAppliance revenues of $33.2 million, which consisted of approximately $27.3 million in current-period appliance sales and approximately $5.9 million of deferred appliance revenue primarily from pre-2011 appliance sales, compared with $38.8 million of appliance revenues in 2011, which consisted of approximately $27.4 million in current-period appliance sales and $11.4 million of deferred appliance revenue primarily from pre-2011 appliance sales. oOperating income of $41.5 million, compared with $44.4 million in 2011. oProvision for income taxes of $20.7 million, representing an effective tax rate of 53 percent, compared with a tax provision of $13.0 million and an effective tax rate of 29.6 percent in 2011. The 2012 effective tax rate was impacted by a one-time tax provision recorded in the first quarter of 2012 relating to the company's settlement with the U.S. Internal Revenue Service of certain audit adjustments for tax years 2005 through 2007. oNet income of $18.3 million, or 49 cents per diluted share, compared with $31.0 million, or 76 cents per diluted share, in 2011. oWeighted average diluted shares outstanding of 37.5 million, compared with 40.7 million in 2011. oCash flow from operations of $48.9 million, compared with $79.2 million in 2011. Cash flow from operations includes one-time tax payments of $14.7 million in the third quarter of 2012 relating to the company's settlement with the U.S. Internal Revenue Service described above. Fiscal Year 2012 Non-GAAP^1 Financial Highlights oBillings of $369.5 million, an increase of 2 percent compared with $362.9 million in 2011. Changes in currency exchange rates, compared with exchange rates prevailing in 2011, negatively impacted 2012 billings by approximately $4.7 million. oTRITON solution billings of $232.9 million, an increase of 21 percent compared with the 2011. oNon-GAAP operating income of $69.9 million, compared with non-GAAP operating income of $78.6 million in 2011. Non-GAAP operating margin in 2012, calculated as a percentage of revenues, was 19.3 percent, compared with 21.6 percent in 2011. oBillings-based operating margin of 21.8 percent, compared with billings-based operating margin of 22.7 percent in 2011. oA non-GAAP tax provision of $12.8 million, based on a long-term effective tax rate of 19 percent, compared with a non-GAAP tax provision of $14.5 million, based on an effective tax rate of 18.5 percent, in 2011. oNon-GAAP net income of $54.8 million, or $1.46 per diluted share, compared with $63.9 million, or $1.57 per diluted share, in 2011. Summary Metrics Millions, except percentages, number of transactions, duration, Q4'12 Q4'11 Y/Y Chg 2012 2011 Y/Y Chg and days billings outstanding Total billings $122.0 $116.0 5% $369.5 $362.9 2% U.S. billings $54.4 $51.9 5% $174.0 $173.3 0% International billings $67.6 $64.1 5% $195.5 $189.6 3% TRITON solution billings^2 $83.7 $68.3 23% $232.9 $192.6 21% Appliance billings $8.6 $8.6 0% $28.5 $28.6 0% Number of transactions >$100K 243 205 19% 648 563 15% Average contract duration (months) 25.8 24.2 7% — Days billings outstanding (DSOs) 66 62 +4 days — Cash and cash equivalents $64.6 $76.2 -15% — Balance on revolving credit $68.0 $73.0 -7% — facility Share repurchases ($) $5.0 $25.0 -80% $47.9 $100.0 -52% 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 First Quarter and Fiscal Year 2013 Websense provides guidance on anticipated financial performance for the first quarter and 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 24 and 26 months and prevailing currency exchange rates of $1.32 for the Euro and $1.62 for the Pound Sterling. The company disclaims any obligation to update the statements as circumstances change. Millions, except percentages and per share Q1'13 Outlook 2013 Outlook amounts Total billings $82 – 86 $374 – 394 Appliance billings (% of total billings) 7 – 8% 7 – 8% Revenues $84 – 87 $351 – 361 Non-GAAP gross profit margin Approximately 83% Approximately 83% Non-GAAP operating margin 8 – 11% 11 – 13% Billings-based non-GAAP operating margin 8 – 11% 17 – 20% Non-GAAP earnings per diluted share $0.15 – 0.19 $0.78 – 0.93 Non-GAAP effective tax rate 19% 19% Average diluted shares outstanding Approximately 37 Approximately 37 Cash flow from operations $27 – 30 $66 – 76 Capital expenditures Approximately $4 $15 – 17 Management further indicates: oExpected stock repurchases of approximately $5 million per quarter in 2013. oNon-cash items related to the recognition of revenue and costs associated with pre-2011 appliance billings: oRemaining deferred revenue of $2.7 million from pre-2011 appliance billings (as of December 31, 2012) that will continue to be recognized ratably according to the original subscription periods, including $0.8million to be recognized in the first quarter of 2013 (compared with $1.7 million in the first quarter of 2012). oRemaining deferred costs of $1.4 million from pre-2011 appliance billings (as of December 31, 2012) that will continue to be recognized ratably according to the original subscription periods, including $0.4 million to be recognized in the first quarter of 2013 (compared with $0.8 million in the first quarter of 2012). oOn January 1, 2011, Websense adopted Accounting Standards Update (ASU) 2009-13 (Multiple Deliverable Revenue Arrangements) and ASU 2009-14 (Certain Revenue Arrangements that Include Software Elements), which requires 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 related software subscription terms. The schedules below summarize the actual and expected recognition of remaining deferred appliance revenues and costs by quarter for 2012 and 2013: 2012 Summary of Amounts Related to pre-2011 Appliance Sales Deferred Remaining balances deferred 2012 Recognition Schedule (actual) balances Millions as of 12/31/11 as of 12/31/12 (actual) Q1'12 Q2'12 Q3'12 Q4'12 2012 (actual) 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 2013 Summary of Amounts Related to pre-2011 Appliance Sales Deferred Remaining balances 2013 Recognition Schedule deferred balances Millions as of Q1'13 Q3'13 Q4'13 2013 12/31/12 Q2'13 as of (expected) (expected) (expected) (expected) (expected) 12/31/13 (actual) (expected) Revenue $2.7 $0.8 $0.6 $0.5 $0.3 $2.2 $0.5 Costs $1.4 $0.4 $0.3 $0.2 $0.1 $1.0 $0.4 Strategic Partnership with F5 Networks During the fourth quarter of 2012, Websense entered into an agreement with F5 Networks (NASDAQ: FFIV), the global leader in Application Delivery Networking (ADN).The companies have agreed to integrate their technologies to deliver bi-directional context-based security leveraging user, device, and location, as well as application, data, and destination information. Further details will be announced at the RSA Security Conference starting on February 25. Conference Call Details Management will host a conference call and simultaneous webcast to discuss the financial results and outlook today, January 29, at 2 p.m. Pacific Standard 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 on the internet at www.websense.com/investors. An archive of the webcast will be available on the company's website through March 31, 2013, and a recorded replay of the call will be available for one week at 855-859-2056 or 404-537-3406, pass code 83989045. 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 historical operating results. Reconciliations of the GAAP and non-GAAP financial measures for 2012, 2011 and the fourth quarters of both years 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 numerical measures that cannot 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 fourth 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), 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 appliance-based software or SaaS-based cloud services, Websense TRITON content security solutions help organizations leverage social media and cloud-based communication, while protecting from advanced persistent threats and modern malware, 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 John McCormack; statements about our expected success of our strategic initiatives and selling products; statements regarding market share gains and trends; 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, 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. INVESTOR CONTACT: MEDIA CONTACT: Avelina Kauffman Patricia Hogan Websense, Inc. Websense, Inc. (858) 320-9364 (858) 320-9393 email@example.com firstname.lastname@example.org Websense, Inc. Consolidated Statements of Operations (In thousands, except per share amounts) Three Months Ended December Years Ended December 31, 31, 2012 2011 2012 2011 (Unaudited) (Unaudited) (Unaudited) Revenues: Software and $ 82,284 $ 82,316 $ 328,276 $ 325,373 service Appliance 9,419 10,417 33,188 38,810 Total 91,703 92,733 361,464 364,183 revenues Cost of revenues: Software and 11,642 10,570 45,560 41,563 service Appliance 3,717 4,395 13,646 18,056 Total cost of 15,359 14,965 59,206 59,619 revenues Gross profit 76,344 77,768 302,258 304,564 Operating expenses: Selling and 43,028 39,754 155,254 161,039 marketing Research and 16,560 14,691 63,305 58,247 development General and 11,201 9,941 42,161 40,863 administrative Total 70,789 64,386 260,720 260,149 operating expenses Income from 5,555 13,382 41,538 44,415 operations Interest expense (643) (468) (2,586) (1,635) Other income 313 (291) 92 1,239 (expense), net Income before income 5,225 12,623 39,044 44,019 taxes Provision for income 1,417 2,248 20,695 13,025 taxes Net income $ $ 10,375 $ 18,349 $ 3,808 30,994 Basic net income per $ $ $ $ share 0.10 0.27 0.50 0.78 Diluted net income $ $ $ $ per share 0.10 0.27 0.49 0.76 Weighted average 36,602 38,555 36,908 39,711 shares - basic Weighted average 36,848 38,894 37,526 40,739 shares - diluted Financial Data: Total deferred $ 401,057 $ 393,034 $ 401,057 $ 393,034 revenue Websense, Inc. Consolidated Balance Sheets (In thousands) December 31, 2012 December 31, 2011 Assets (Unaudited) Current assets: Cash and cash equivalents $ $ 64,584 76,201 Accounts receivable, net 89,071 80,147 Income tax receivable/prepaid 3,989 738 income tax Current portion of deferred 28,933 30,021 income taxes Other current assets 13,249 13,793 Total current assets 199,826 200,900 Cash and cash equivalents - 662 628 restricted Property and equipment, net 18,901 16,832 Intangible assets, net 17,940 26,412 Goodwill 372,445 372,445 Deferred income taxes, less current 7,335 8,599 portion Deposits and other assets 7,352 8,622 Total assets $ $ 624,461 634,438 Liabilities and stockholders' equity Current liabilities: Accounts payable $ $ 7,941 9,026 Accrued compensation and 24,981 22,770 related benefits Other accrued expenses 12,413 16,534 Current portion of income taxes 694 3,187 payable Current portion of deferred tax 42 86 liability Current portion of deferred 243,945 250,597 revenue Total current liabilities 290,016 302,200 Other long term liabilities 2,044 2,600 Income taxes payable, less current 10,514 11,955 portion Secured loan 68,000 73,000 Deferred tax liability, less 2,026 2,501 current portion Deferred revenue, less current 157,112 142,437 portion Total liabilities 529,712 534,693 Stockholders' equity: Common stock 580 568 Additional paid-in capital 443,100 415,573 Treasury stock, at cost (436,426) (385,544) Retained earnings 90,596 72,247 Accumulated other comprehensive (3,101) (3,099) loss Total stockholders' equity 94,749 99,745 Total liabilities and stockholders' $ $ equity 624,461 634,438 Websense, Inc. Consolidated Statements of Cash Flows (In thousands) Years Ended December 31, 2012 2011 Operating activities: (Unaudited) Net income $ 18,349 $ 30,994 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 20,351 26,286 Share-based compensation 20,110 18,976 Deferred income taxes 2,036 5,423 Unrealized loss (gain) on foreign exchange 279 (137) Excess tax benefit from share-based compensation (555) (2,596) Changes in operating assets and liabilities: Accounts receivable (7,836) 957 Other assets 835 2,251 Accounts payable (2,135) 1,667 Accrued compensation and related benefits 1,877 449 Other liabilities (3,635) (4,161) Deferred revenue 8,021 (1,246) Income taxes payable and receivable/prepaid (8,765) 328 Net cash provided by operating activities 48,932 79,191 Investing activities: Change in restricted cash and cash equivalents (21) 31 Purchase of property and equipment (12,546) (9,117) Purchase of intangible assets - (765) Net cash used in investing activities (12,567) (9,851) 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) Cash paid for deferred financing fees under (35) (35) secured loan Proceeds from exercise of stock options 2,464 16,719 Proceeds from issuance of common stock for stock 6,752 6,614 purchase plan Excess tax benefit from share-based compensation 555 2,596 Tax payments related to restricted stock unit (2,967) (2,979) issuances Purchase of treasury stock (49,109) (98,712) Net cash used in financing activities (47,927) (70,366) Effect of exchange rate changes on cash and cash (55) (163) equivalents Decrease in cash and cash equivalents (11,617) (1,189) Cash and cash equivalents at beginning of period 76,201 77,390 Cash and cash equivalents at end of period $ 64,584 $ 76,201 Cash paid during the period for: Income taxes including interest and $ 28,279 $ 8,597 penalties, net of refunds Interest $ 2,332 $ 1,421 Non-cash financing activities: Change in operating assets and liabilities for unsettled purchase of treasury stock and exercise of stock options $ (1,018) $ 1,097 Websense, Inc. Rollforward of Deferred Revenue (Unaudited and in thousands) Deferred revenue balance at September 30, 2012 $ 370,739 Net billings during fourth quarter 2012 122,021 Less revenue recognized during fourth quarter (91,703) 2012 Translation adjustment - Deferred revenue balance at December 31, 2012 $ 401,057 Websense, Inc. Reconciliation of GAAP to Non-GAAP Financial Measures (Unaudited and in thousands, except per share amounts) Three Months Ended Years Ended December 31, December 31, 2012 2011 2012 2011 GAAP gross profit $ 76,344 $ 77,768 $ 302,258 $ 304,564 Amortization of acquired 538 646 2,155 2,583 technology (2) Share-based compensation 341 267 1,224 1,097 (1) Gross profit 879 913 3,379 3,680 adjustment Non-GAAP gross profit $ 77,223 $ 78,681 $ 305,637 $ 308,244 GAAP operating expenses $ 70,789 $ 64,386 $ 260,720 $ 260,149 Amortization of other (1,512) (3,160) (6,047) (12,640) intangible assets (2) Share-based compensation (5,094) (4,275) (18,886) (17,878) (1) Operating expense (6,606) (7,435) (24,933) (30,518) adjustment Non-GAAP operating expenses $ 64,183 $ 56,951 $ 235,787 $ 229,631 GAAP income from operations $ 5,555 $ 13,382 $ 41,538 $ 44,415 Gross profit 879 913 3,379 3,680 adjustment Operating expense 6,606 7,435 24,933 30,518 adjustment Non-GAAP income from $ 13,040 $ 21,730 $ 69,850 $ 78,613 operations GAAP provision for income $ 1,417 $ 2,248 $ 20,695 $ 13,025 taxes Provision for income taxes adjustment (3, 1,009 1,642 (7,852) 1,489 5) Non-GAAP provision for $ 2,426 $ 3,890 $ 12,843 $ 14,514 income taxes GAAP net income $ 3,808 $ 10,375 $ 18,349 $ 30,994 Gross profit 879 913 3,379 3,680 adjustment Operating expense 6,606 7,435 24,933 30,518 adjustment Amortization of 60 59 238 238 deferred financing fees (4) Provision for income (1,009) (1,642) 7,852 (1,489) tax adjustment Non-GAAP net income $ 10,344 $ 17,140 $ 54,751 $ 63,941 GAAP net income per diluted $ 0.10 $ 0.27 $ 0.49 $ 0.76 share Non-GAAP adjustments as described above per share, 0.18 0.17 0.97 0.81 net of tax (1-5) Non-GAAP net income per $ 0.28 $ 0.44 $ 1.46 $ 1.57 diluted share (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 non-GAAP 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 December 31, Years Ended December 31, Billings: 2012 2011 2012 2011 Software and $ 92.9% $ 92.6% $ 92.3% $ 92.1% service 113,373 107,390 341,004 334,286 Appliance 8,648 7.1% 8,622 7.4% 28,487 7.7% 28,603 7.9% Total 122,021 100.0% 116,012 100.0% 369,491 100.0% 362,889 100.0% billings Non-GAAP cost of billings: Software and 10,763 9.5% 9,656 9.0% 42,181 12.4% 37,883 11.3% service Appliance (1) 3,208 37.1% 3,440 39.9% 11,050 38.8% 12,952 45.3% Total non-GAAP cost 13,971 11.4% 13,096 11.3% 53,231 14.4% 50,835 14.0% of billings Non-GAAP gross margin: Software and 102,610 90.5% 97,734 91.0% 298,823 87.6% 296,403 88.7% service Appliance 5,440 62.9% 5,182 60.1% 17,437 61.2% 15,651 54.7% Total non-GAAP gross 108,050 88.6% 102,916 88.7% 316,260 85.6% 312,054 86.0% margin Non-GAAP operating expenses: Selling and 39,436 32.3% 35,011 30.2% 141,806 38.4% 142,506 39.3% marketing Research and 15,320 12.6% 13,752 11.8% 58,526 15.8% 54,420 15.0% development General and 9,427 7.7% 8,188 7.1% 35,455 9.6% 32,704 9.0% administrative Total non-GAAP 64,183 52.6% 56,951 49.1% 235,787 63.8% 229,630 63.3% operating expenses Non-GAAP billings $ 36.0% $ 39.6% $ 21.8% $ 22.7% operating margin 43,867 45,965 80,473 82,424 (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 diluted 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. SOURCE Websense, Inc. Website: http://www.websense.com
Websense Reports Fourth Quarter and Fiscal Year 2012 Results
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