Websense Reports Second Quarter 2010 Results

SAN DIEGO, CA--(Marketwire - July 27, 2010) - Websense, Inc. (NASDAQ: WBSN) today announced
financial results for the second quarter of 2010.

Second Quarter 2010 GAAP Financial Highlights

-- Revenue, calculated in accordance with generally accepted accounting
principles (GAAP), increased to $81.9 million, or 5.2 percent, from
$77.8 million in the second quarter of 2009.
-- Operating income was $7.1 million, an increase of 408 percent compared
with $1.4 million in the second quarter of 2009.
-- Net income was $3.1 million, or seven cents per diluted share,
compared with $3.3 million, or seven cents per diluted share, in the
second quarter of 2009.
-- Deferred revenue increased $41.2 million, or 12.3 percent, from the
second quarter of 2009 to $376.8 million.
-- Cash flow from operations during the second quarter of 2010 was $14.4
million, an increase of 158 percent compared with $5.6 million in the
second quarter of 2009.

Second Quarter 2010 Non-GAAP* Financial Highlights

-- Net billings, which represent the amount of subscription contracts
billed to customers net of rebates during the period, totaled $83.7
million, an increase of 1.8 percent compared with $82.2 million in the
second quarter of 2009. Currency exchange rates had a negative impact
on billings of approximately $1.1 million in the second quarter of 2010
compared with the prevailing currency exchange rates in effect during
the second quarter of 2009.
-- International billings were approximately $42.6 million, an increase of
6.1 percent compared with $40.1 million in the second quarter of 2009.
-- Billings to end-user customers, which exclude billings to original
equipment manufacturers (OEMs), were $82.0 million, an increase of 4
percent compared to $78.9 million in billings in the second quarter of
2009. Using the prevailing currency exchange rates in effect during the
second quarter of 2009, billings to end-user customers would have been
$83.0 million for the second quarter of 2010, an increase of 5.3
percent from the second quarter of 2009.
-- Billings to OEMs declined 49.5 percent to $1.7 million, compared to
$3.4 million in the second quarter of 2009 as certain non-strategic
OEM relationships were not renewed.
-- Non-GAAP revenue was $83.2 million and included approximately $1.4
million of revenue from SurfControl that would have been recognized
during this period had SurfControl remained an independent operating
company reporting under GAAP. This subscription revenue was included in
SurfControl's deferred revenue as of the date of the acquisition, but
was not recognized as revenue on a post-acquisition basis under GAAP
due to a required write-down of SurfControl's deferred revenue to fair
value as of the acquisition date. Non-GAAP revenue in the second
quarter of 2009 was $82.8 million, and included approximately $5
million of revenue from SurfControl that would have been recognized
during this period had SurfControl remained an independent company.
-- Non-GAAP operating income was $21.1 million compared with $22.3 million
in the second quarter of 2009.
-- Non-GAAP net income was $13.7 million, or 31 cents per diluted share,
compared with $13.7 million, or 30 cents per diluted share, in the
second quarter of 2009.

"Sales of our strategic security solutions continue to grow, driving
increases in overall contract duration, average contract value and the
number of large transactions," said Websense Chief Executive Officer, Gene
Hodges. "We are pleased with the initial response of our customers and
partners to the launch of the Web Security Gateway AnywhereT product. We
continue to generate a significant portion of our incremental billings from
new customers. These positive trends support our assessment that our
integrated security strategy is aligned to the market requirements and our
competitive position is strong.

"While we remain confident in our ability to leverage our technology
leadership and our large installed base, we see challenges to our overall
performance for the second half of the year from the volatility in European
currency exchange rates and signs of moderate softening in the global
economy, particularly as we transition our sales force to a more strategic
selling model," added Hodges. "Our revised guidance for 2010 reflects these
trends, the impact we have already seen in retention rates of our small
business customers and continued year-over-year declines in billings with
non-strategic original equipment manufacturers (OEMs).

"We currently expect 2010 billings in the range of $360 million to $370
million, with billings to end-user customers in the range of approximately
$352 million to $362 million. On a currency adjusted basis, the mid-point
of this range represents year-over-year growth of billings to end user
customers of approximately nine percent, within our previous growth
projection range of six to ten percent."

Quarterly Business Metrics Summary: *

Y/Y Y/Y FX
Q2'10 Q2'10 FX- Q2'09 Reported Neutral
Reported Neutral** Reported Change Change**
-------- -------- -------- -------- --------
Billings ($ in millions) $ 83.7 $ 84.8 $ 82.2 1.8% 3.1%

Billings to end-user
customers ($ in
millions) $ 82.0 $ 83.0 $ 78.9 4.0% 5.3%

Incremental billings
($ in millions) $ 22.5 $ 22.8 $ 19.5 15.0% 16.9%

Incremental billings
(% of total) 26.8% 26.9% 23.7% +3.1 pts +3.2 pts

Billings from renewals,
excluding OEM ($ in
millions) $ 59.5 $ 60.2 $ 59.3 0.3% 1.5%

International billings
($ in millions) $ 42.6 $ 43.6 $ 40.1 6.1% 8.8%

International billings
(% of total) 51% 51% 49% +2 pts +2 pts

Average annualized
contract value $ 8,400 -- $ 7,400 13.5% --

Average contract duration 0.8
(months) 24.0 -- 23.2 months --

** Exchange rates used in FX-neutral calculations

Euro $ 1.275 $ 1.387 -8.1%
Pound Sterling $ 1.484 $ 1.550 -4.3%

*A detailed description of the company's non-GAAP financial measures
appears 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
table "Reconciliation of GAAP to Non-GAAP Financial Measures."

Balance Sheet Metrics

-- Cash and cash equivalents of $82.2 million, compared with $75.6 million
at the end of the second quarter of 2009.
-- Total GAAP deferred revenue of $376.8 million, an increase of 12.3
percent compared with $335.6 million at the end of the second quarter
of 2009.
-- Non-GAAP deferred revenue of $378.5 million, an increase of 9.0 percent
compared with non-GAAP deferred revenue of $347.1 million at the end
of the second quarter of 2009. Non-GAAP deferred revenue at the end of
second quarter of 2010 and second quarter of 2009 included
approximately $1.7 million and $11.5 million, respectively, of deferred
revenue from SurfControl that was included in SurfControl's deferred
revenue as of the date of the acquisition, but is not included in the
company's GAAP deferred revenue on a post-acquisition basis due to a
required write-down of SurfControl's deferred revenue to fair value as
of the acquisition date.
-- Accounts receivable of $61.5 million, representing 66 days of sales
outstanding. This compares with 65 days outstanding at the end of the
first quarter of 2010 and 66 days outstanding at the end of the
second quarter of 2009.
-- During the quarter, the company repurchased approximately 907,000
shares of its common stock for approximately $20 million under a
10b5-1 stock repurchase plan and discretionary purchases.
-- The company repaid an additional $5 million on its term loan during
the quarter, reducing the term loan to $70 million as of June 30, 2010.

Outlook for Fiscal Year 2010

Websense provides its annual guidance on anticipated financial performance
for the fiscal 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. In providing
updated guidance, the company emphasizes that all forward-looking
statements are based on current expectations and currency exchange rates of
$1.29 for the Euro and $1.54 for the Pound Sterling and disclaims any
obligation to update the statements as circumstances change.

2010 Outlook
(as of 07/27/10)
-----------------------
Net billings $360 - $370 million

Billings to end-user customers $352 - $362 million

GAAP revenue $329 - $331 million

Non-GAAP revenue $333 - $337 million

Non-GAAP gross margin 87 - 88%

Non-GAAP operating expenses (excluding cost of
goods sold) +1 - 3 % from 2009

Non-GAAP earnings per diluted share $1.17 - $1.22

Estimated Non-GAAP tax rate 32 - 33%

Average diluted shares outstanding 43 - 44 million

Cash flow from operations $96 - $102 million

Capital expenditures $9 - $10 million

Non-GAAP guidance for 2010 revenue and diluted earnings per share includes
approximately $4.3 million in subscription revenue that was included in
SurfControl's deferred revenue as of the date of the acquisition, but will
not be recognized as revenue on a post-acquisition basis under GAAP due to
a required write-down of SurfControl's deferred revenue to fair value as of
the acquisition date.

Updated billings guidance for 2010 reflects a reduction of approximately
$10 million in billings as compared to prior annual guidance based on the
weakening of foreign currencies compared to the U.S. dollar, softening
macroeconomic concerns, and our ongoing transition of our sales force.
Updated billings guidance for 2010 also reflects a decline in OEM billings
by approximately $5 million from prior annual guidance.

Outlook for Third Quarter 2010

Websense provides guidance for revenue and non-GAAP earnings per diluted
share for the next quarter based on an estimate of revenue to be recognized
from current deferred revenue on the balance sheet, anticipated quarterly
net billings and operating expenses and average contract duration. In
providing quarterly guidance, the company emphasizes that all
forward-looking statements are based on current expectations and disclaims
any obligation to update the statements as circumstances change.

Q3'10 Outlook
(as of 07/27/10)
-----------------
GAAP revenue $82 - $84 million

Non-GAAP revenue $82 - $84 million

Non-GAAP earnings per diluted share $0.29 - $0.32

Non-GAAP guidance for revenue and diluted earnings per share for the third
quarter of 2010 includes approximately $0.6 million in subscription revenue
that was included in SurfControl's deferred revenue as of the date of the
acquisition, but will not be recognized as revenue on a
post-acquisition basis under GAAP due to a required write-down of
SurfControl's deferred revenue to fair value as of the acquisition date.

Based on the current outlook for billings and operating expenses, and
consistent with the company's subscription-based business model, daily
revenue recognition policy, and deferred revenue balances, Websense expects
non-GAAP revenue for the fourth quarter to increase approximately five
percent over the fourth quarter of 2009.

Conference Call

Management will host a conference call and simultaneous webcast to discuss
the financial results today, July 27, at 2:00 p.m. Pacific 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 September 30, 2010, and a taped replay of the call will be
available for one week at 800-642-1687 or 706-645-9291, pass code 83092154.

Non-GAAP Financial Measures

This news release provides financial measures for the second quarter of
2010, including measures for revenue, gross margin, income from operations,
net income and earnings per diluted share that include revenue from
SurfControl that would have been recognized during the second quarter of
2010 under subscriptions that were included in deferred revenue as of the
date of the acquisition but will not be recognized as revenue on a
post-acquisition basis under GAAP due to the impact of the write-down of
SurfControl's deferred revenue to fair value as of the acquisition date. In
addition, second quarter non-GAAP operating results for both years exclude
certain cash and non-cash expenses relating to the company's acquisitions,
primarily including amortization of intangible assets and deferred
financing fees, as well as share-based compensation expense and related tax
effects. Based on the foregoing, the company's presentation of non-GAAP
revenue, gross margin, operating expenses, income from operations, net
income and earnings per diluted share are not calculated in accordance with
GAAP. Management believes that these non-GAAP financial measures provide
meaningful supplemental information regarding our performance that enhances
management's and investors' ability to evaluate the company's operating
results, trends and prospects and to compare current operating results with
historic operating results. A reconciliation of the GAAP and non-GAAP
financial measures for the quarter and year-to-date periods and a more
detailed explanation of each non-GAAP financial measure and its uses are
provided at the end of this news release.

This news release also provides non-GAAP guidance for the fiscal year 2010,
including guidance for revenue and earnings per diluted share, that
includes revenue from SurfControl that would have been recognized during
the full year 2010 under subscriptions that were included in deferred
revenue as of the date of the acquisition but will not be recognized as
revenue on a post-acquisition basis under GAAP due to the impact of the
write-down of SurfControl's deferred revenue to fair value as of the
acquisition date. The full year 2010 guidance also is based on non-GAAP
operating expenses that are calculated in the same manner used to calculate
historical non-GAAP operating expenses as described above.

This news release also includes financial measures for net billings for the
second quarter of 2010 and guidance for net billings for fiscal year 2010
that are not numerical measures that can be calculated in accordance with
GAAP. Websense provides this measurement in reporting financial performance
because this measurement provides a consistent basis for understanding the
company's sales activities in the current period. The company believes the
billings measurement is useful to investors because the GAAP measurements
of revenue and deferred revenue in the current period include subscription
contracts commenced in prior periods. The rollforwards of deferred revenue
(which includes net billings and revenue) for the second quarter of 2010
are set forth at the end of this news release.

About Websense, Inc.

Websense, Inc. (NASDAQ: WBSN), a global leader in unified Web, data, and
email content security solutions, delivers the best 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 software-as-a-service (SaaS), Websense content
security solutions help organizations leverage new communication,
collaboration, and Web 2.0 business tools 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, Calif. with offices around the world. For more information,
visit http://www.websense.com.

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

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

Websense, the Websense logo and ThreatSeeker are registered trademarks of
Websense, Inc. in the United States and/or other countries. Websense has
numerous other unregistered trademarks in the United States and
internationally. All other trademarks are the property of their respective
owner.

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 our third quarter and full year financial estimates,
statements about our technology and product leadership, OEM revenue trends
and growth trends, and statements containing the words "planned,"
"expects," "believes," "strategy," "opportunity," "anticipates" and similar
words. The potential risks and uncertainties which contribute to the
uncertain nature of these statements include, among others, risks
associated with launching new product offerings, customer acceptance of the
company's services, products and fee structures in a changing market; the
success of Websense's brand development efforts; the volatile and
competitive nature of the Internet and security industries; changes in
domestic and international market conditions, risks relating to currency
exchange rates and impacts of macro-economic conditions on our customers,
risks relating to the required use of cash for debt servicing, the risks of
ongoing compliance with the covenants in the senior secured credit
facility, risks related to changes in accounting interpretations and the
other risks and uncertainties described in Websense's public filings with
the Securities and Exchange Commission, available at
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.

Websense, Inc.
Consolidated Statements of Income
(Unaudited and in thousands, except per share amounts)

Three Months Ended Six Months Ended
-------------------- --------------------
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
--------- --------- --------- ---------

Revenues $ 81,870 $ 77,837 $ 161,640 $ 155,403
Cost of revenues:
Cost of revenues 10,715 9,142 20,621 17,718
Amortization of acquired
technology 2,245 3,257 4,490 6,513
--------- --------- --------- ---------
Total cost of revenues 12,960 12,399 25,111 24,231
--------- --------- --------- ---------
Gross margin 68,910 65,438 136,529 131,172
Operating expenses:
Selling and marketing 38,957 41,442 79,706 81,334
Research and development 13,646 12,606 27,771 25,452
General and administrative 9,241 9,999 18,317 21,160
--------- --------- --------- ---------
Total operating expenses 61,844 64,047 125,794 127,946
--------- --------- --------- ---------
Income from operations 7,066 1,391 10,735 3,226
Interest expense (898) (1,747) (2,043) (3,959)
Other (expense) income, net (146) 72 (890) 429
--------- --------- --------- ---------
Income (loss) before income
taxes 6,022 (284) 7,802 (304)
Provision (benefit) for income
taxes 2,902 (3,619) 3,847 (2,552)
--------- --------- --------- ---------
Net income $ 3,120 $ 3,335 $ 3,955 $ 2,248
========= ========= ========= =========

Basic net income per share $ 0.07 $ 0.08 $ 0.09 $ 0.05
========= ========= ========= =========
Diluted net income per share $ 0.07 $ 0.07 $ 0.09 $ 0.05
========= ========= ========= =========
Weighted average shares - basic 42,861 44,384 42,971 44,603
========= ========= ========= =========
Weighted average shares -
diluted 43,932 44,857 44,017 44,996
========= ========= ========= =========

Financial Data:
Total deferred revenue $ 376,806 $ 335,623 $ 376,806 $ 335,623
========= ========= ========= =========

Websense, Inc.
Consolidated Balance Sheets
(In thousands)

June 30, December 31,
2010 2009
------------ ------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 82,219 $ 82,862
Cash and cash equivalents - restricted 213 267
Accounts receivable, net 61,452 82,529
Income tax receivable/prepaid income tax 7,481 11,446
Current portion of deferred income taxes 37,690 36,538
Other current assets 13,401 11,461
------------ ------------
Total current assets 202,456 225,103
Cash and cash equivalents - restricted, less
current portion 395 167
Property and equipment, net 16,470 16,494
Intangible assets, net 54,312 67,563
Goodwill 372,445 372,445
Deferred income taxes, less current portion 12,096 11,795
Deposits and other assets 8,832 8,094
------------ ------------
Total assets $ 667,006 $ 701,661
============ ============

Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 7,924 $ 5,135
Accrued compensation and related benefits 18,782 21,953
Other accrued expenses 18,298 21,253
Current portion of income taxes payable 2,562 1,938
Current portion of senior secured term loan 11,846 12,429
Current portion of deferred tax liability 3,073 4,572
Current portion of deferred revenue 237,856 239,010
------------ ------------
Total current liabilities 300,341 306,290
Other long term liabilities 595 10
Income taxes payable, less current portion 16,703 15,988
Senior secured term loan, less current portion 58,154 74,571
Deferred tax liability, less current portion 1,187 970
Deferred revenue, less current portion 138,950 141,102
------------ ------------
Total liabilities 515,930 538,931
Stockholders' equity:
Common stock 541 529
Additional paid-in capital 356,292 330,451
Treasury stock, at cost (236,375) (194,672)
Retained earnings 32,371 28,416
Accumulated other comprehensive loss (1,753) (1,994)
------------ ------------
Total stockholders' equity 151,076 162,730
------------ ------------
Total liabilities and stockholders' equity $ 667,006 $ 701,661
============ ============

Websense, Inc.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)

Six Months Ended
------------------
June 30, June 30,
2010 2009
-------- --------
Operating activities:
Net income $ 3,955 $ 2,248
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,662 25,495
Share-based compensation 12,713 12,257
Deferred income taxes (2,908) (8,227)
Unrealized (gain) loss on foreign exchange (553) 114
Excess tax benefit from share-based compensation (933) (141)
Changes in operating assets and liabilities:
Accounts receivable 22,054 20,962
Other assets (3,129) (1,826)
Accounts payable 3,128 1,815
Accrued compensation and related benefits (4,624) (438)
Other liabilities (2,804) (1,441)
Deferred revenue (3,305) (6,160)
Income taxes payable and receivable/prepaid 4,910 (3,577)
-------- --------
Net cash provided by operating activities 47,166 41,081
-------- --------
Investing activities:
Change in restricted cash and cash equivalents (196) 913
Purchase of property and equipment (3,868) (6,137)
-------- --------
Net cash used in investing activities (4,064) (5,224)
-------- --------
Financing activities:
Principal payments on senior secured term loan (17,000) (15,000)
Principal payment on capital lease obligation (532) -
Proceeds from exercise of stock options 11,075 2,194
Proceeds from issuance of common stock for stock
purchase plan 3,131 2,787
Excess tax benefit from share-based compensation 933 141
Purchase of treasury stock (39,996) (14,648)
-------- --------
Net cash used in financing activities (42,389) (24,526)
-------- --------
Effect of exchange rate changes on cash and cash
equivalents (1,356) 123
(Decrease) increase in cash and cash equivalents (643) 11,454
Cash and cash equivalents at beginning of period 82,862 64,096
-------- --------
Cash and cash equivalents at end of period $ 82,219 $ 75,550
======== ========

Websense, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(Unaudited and in thousands, except per share amounts)

Three Months Ended Six Months Ended
-------------------- --------------------
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
--------- --------- --------- ---------

GAAP Revenues $ 81,870 $ 77,837 $ 161,640 $ 155,403
Deferred revenue related to
SurfControl acquisition (1) 1,376 4,999 3,423 10,796
--------- --------- --------- ---------
Non-GAAP Revenues $ 83,246 $ 82,836 $ 165,063 $ 166,199
========= ========= ========= =========

GAAP Gross margin $ 68,910 $ 65,438 $ 136,529 $ 131,172
Deferred revenue related to
SurfControl acquisition (1) 1,376 4,999 3,423 10,796
Amortization of acquired
technology (3) 2,124 3,036 4,249 6,072
Restructuring and
integration related items(4) - - - 4
Share-based compensation (2) 364 368 696 667
--------- --------- --------- ---------
Gross margin adjustment 3,864 8,403 8,368 17,539
--------- --------- --------- ---------
Non-GAAP Gross margin $ 72,774 $ 73,841 $ 144,897 $ 148,711
========= ========= ========= =========

GAAP Operating expenses $ 61,844 $ 64,047 $ 125,794 $ 127,946
Amortization of other
intangible assets (3) (4,381) (6,590) (8,761) (13,181)
Restructuring and
integration related items
(4) - (135) - (221)
Share-based compensation (2) (5,765) (5,733) (12,017) (11,590)
--------- --------- --------- ---------
Operating expense
adjustment (10,146) (12,458) (20,778) (24,992)
--------- --------- --------- ---------
Non-GAAP Operating expenses $ 51,698 $ 51,589 $ 105,016 $ 102,954
========= ========= ========= =========

GAAP Income from operations $ 7,066 $ 1,391 $ 10,735 $ 3,226
Gross margin adjustment 3,864 8,403 8,368 17,539
Operating expense
adjustment 10,146 12,458 20,778 24,992
--------- --------- --------- ---------
Non-GAAP Income from operations $ 21,076 $ 22,252 $ 39,881 $ 45,757
========= ========= ========= =========

GAAP Net income $ 3,120 $ 3,335 $ 3,955 $ 2,248
Gross margin adjustment 3,864 8,403 8,368 17,539
Operating expense
adjustment 10,146 12,458 20,778 24,992
Amortization of deferred
financing fees (5) 167 150 455 589
Income tax effect on the
above items (6) (3,608) (10,666) (8,272) (17,110)
--------- --------- --------- ---------
Non-GAAP Net income $ 13,689 $ 13,680 $ 25,284 $ 28,258
========= ========= ========= =========

GAAP Net income per share $ 0.07 $ 0.07 $ 0.09 $ 0.05
Non-GAAP adjustments as
described above per share,
net of tax (1-6) 0.24 0.23 0.48 0.58
--------- --------- --------- ---------
Non-GAAP Net income per share $ 0.31 $ 0.30 $ 0.57 $ 0.63
========= ========= ========= =========

The non-GAAP financial measures included in the tables above are non-GAAP
revenues, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP
income from operations, non-GAAP net income and non-GAAP net income per
share, which adjust for the following items: acquisition related
adjustments, share-based compensation expense, amortization of intangible
assets 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.

(1) Deferred revenue related to SurfControl. We completed our acquisition
of SurfControl in October 2007. At the time of the acquisition, SurfControl
had recorded deferred revenue related to subscriptions commenced in the
past for which revenue would be recognized in future periods (during the
term of the subscriptions) as revenue recognition criteria are satisfied.
The purchase accounting rules required us to write down a significant
portion of this deferred revenue to its then current fair value.
Consequently, in post acquisition periods, we do not recognize the full
amount of this deferred revenue. When measuring the performance of our
business, however, we add back non-GAAP revenue associated with the
SurfControl deferred revenue that would have been recognized during the
relevant accounting period that was excluded as a result of these purchase
accounting adjustments, as we believe this provides information about the
impact on operations of the acquired business in a manner consistent with
the revenue recognition for our pre-existing services. We further believe
that the inclusion of non-GAAP revenue enables investors to better
understand the impact of the acquisition on the baseline revenue of the
combined company and provides useful information to investors on revenue
trends impacting the combined business.

(2) 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.

(3) Amortization of acquired technology and other intangible assets. When
conducting internal development of intangible assets (including developed
technology, customer relationships, trade-marks, 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.

(4) Restructuring and integration. We have engaged in various restructuring
and integration activities in connection with our acquisitions that have
resulted in costs associated with severance, benefits, excess facilities,
integration travel, retention bonuses and professional fees. Each
restructuring and integration has been a discrete event based on a unique
set of business objectives or circumstances, and each has differed from the
others in terms of its operational implementation, business impact and
scope. We do not engage in these activities in the ordinary course of our
business. We believe that it is important to understand these charges;
however, we do not believe that these charges are indicative of future
operating results and that investors benefit from an understanding of our
operating results without giving effect to them, including in comparison to
operating results for periods where no restructuring and integration costs
were incurred.

(5) Amortization of deferred financing fees. This is a non-cash charge that
can vary significantly in size and frequency depending on the principal
payments we make on our senior secured term loan and, therefore, are
disregarded by the Company's management when evaluating our ongoing
performance and/or predicting our earnings trends, and 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.

(6) Income tax effect on the above items. This amount adjusts the provision
for income taxes using our non-GAAP tax rate to reflect the effect of the
non-GAAP adjustments on non-GAAP net income.

Websense, Inc.
Rollforward of GAAP Deferred Revenue
(Unaudited and in thousands)

GAAP deferred revenue balance at March 31, 2010 $ 374,990
Net billings during second quarter 2010 83,686
Less GAAP revenue recognized during second quarter 2010 (81,870)
------------
GAAP deferred revenue balance at June 30, 2010 $ 376,806
============

Websense, Inc.
Rollforward of Non-GAAP Deferred Revenue
(Unaudited and in thousands)

Non-GAAP deferred revenue balance at March 31, 2010 $ 378,045
Net billings during second quarter 2010 83,686
Less Non-GAAP revenue recognized during second quarter 2010 (83,246)
------------
Non-GAAP deferred revenue balance at June 30, 2010 $ 378,485
============

Websense, Inc.
Reconciliation of GAAP to Non-GAAP Deferred Revenue
(Unaudited and in thousands)

GAAP deferred revenue balance at June 30, 2010 $ 376,806
Addback: Deferred revenue related to SurfControl acquisition 1,679
------------
Non-GAAP deferred revenue balance at June 30, 2010 $ 378,485
============

Source:

Marketwire

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