Websense Confirms Record Revenue for First Quarter 2008

Strong Cash Flow Enabled Early Principal Payments of 30 Million Dollar on Long-Term Debt and Resumption of Share Repurchases

(20.05.08) - Websense, Inc. (NASDAQ: WBSN) announced financial results for the first quarter ended March 31, 2008, and reiterated its previously issued outlook for 2008.

First quarter revenue, calculated in accordance with U.S. generally accepted accounting principles (GAAP) was $67 million. The company posted a GAAP net loss of $6.2 million, or 14 cents per diluted share in the first quarter. GAAP operating results reflected the write-down of the majority of SurfControl's deferred revenue to fair value as of the acquisition date of October 3, 2007, and included certain operating expenses excluded from the non-GAAP results as described below. Operating cash flow for the quarter was approximately $19 million, after paying approximately $11 million in cash payments for acquisition-related costs and a legal settlement.

Non-GAAP Operating Results

Billings for the first quarter, which represent the full amount of subscription contracts billed to customers during the period, were $67.5 million. The average duration of first quarter contracts was 20.6 months, reflecting an increase in the mix of one-year contracts to 61 percent compared to 48 percent in one-year contracts in the first quarter of 2007.

First quarter non-GAAP revenue was a record $86.5 million, and included approximately $20 million in subscription revenue from past billings to SurfControl customers that would have been recognized during this period had SurfControl remained an independent company operating under GAAP. This subscription revenue was included in SurfControl's deferred revenue as of the acquisition date, but will not be recognized as subscription revenue on a post-acquisition basis under GAAP due to the impact of the write-down of the majority of SurfControl's deferred revenue to fair value as of the acquisition date.

Non-GAAP operating income was a record $27.8 million, or 32.1 percent of non-GAAP revenue. First quarter non-GAAP operating expenses of $58.7 million exclude amortization of intangible assets, restructuring costs relating to headcount reduction and facility closures, integration travel, retention bonuses, professional fees for restructuring activities and stock-based compensation expense. In addition, the non-GAAP expenses exclude non-cash amortization of deferred financing fees and the non-recurring impact of a favorable tax ruling from the state of California.

First quarter non-GAAP net income was a record $16.1 million, or 35 cents per share. The excluded costs and reversal of a tax provision are detailed in the footnotes of the Reconciliation of GAAP to Non-GAAP Consolidated Statements of Operations.

"We have achieved our major cost cutting objectives in the integration of SurfControl," said Gene Hodges, Websense chief executive officer. "We are now focused on executing on the potential growth opportunities made possible through our expanded customer base, broader product offering, and increased global presence."

"Strong cash flow, driven by collections on record fourth quarter billings, allowed us to prepay $30 million against the principal balance of our long-term debt and repurchase $5 million of our common stock during the quarter," stated Dudley Mendenhall, Websense chief financial officer. "As anticipated, the acquisition of SurfControl became accretive to our cash flows almost immediately for recurring operations. The combined business generates substantial cash flows, reflecting our market leadership position and the strength of our subscription-based business model."

Balance Sheet Metrics

The company's balance sheet remains strong, with cash and marketable securities of $71.7 million and total GAAP deferred revenue of $287.6 million. During the quarter, the company repaid $30 million in long-term debt, bringing total early principal payments to date to $50 million and reducing long-term debt to $160 million from $210 million at the close of the SurfControl acquisition. The company also resumed share repurchases under a 10b5-1 plan, repurchasing a total of 264,400 shares for approximately $5 million, of which $2.2 million was paid after quarter end. Significant changes to the balance sheet compared to the prior quarter included:

· A decrease in accounts receivable by $29.3 million, which reflected strong collections performance on fourth quarter billings. Strong cash collections during the quarter resulted in a decline in days sales outstanding to 63 days from 66 days.

· An increase of $0.9 million in GAAP deferred revenue, to a total of $287.6 million. The increase primarily reflected the difference between billings booked and GAAP revenue recognized during the quarter and foreign exchange translation adjustments.

(Websense: ra)