Websense Reports Fourth Quarter and Fiscal Year 2012 Results

         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
akauffman@websense.com phogan@websense.com





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
 
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