FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
ý QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
o TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 000-30093
Websense, Inc.
(Exact name of registrant as specified in its charter)
|
Delaware |
|
51-0380839 |
|
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
10240 Sorrento Valley Road
San Diego, California 92121
858-320-8000
(Address of principal executive offices, zip code and telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act): Yes ý No o
The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of July 31, 2004 was 23,276,691.
Websense, Inc.
Form 10-Q
For the Period Ended June 30, 2004
TABLE OF CONTENTS
i
Part I – Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Websense, Inc.
(Unaudited and in thousands)
|
|
|
June 30, |
|
December 31, |
|
||
|
|
|
|
|
(See Note 1) |
|
||
|
Assets |
|
|
|
|
|
||
|
Current assets: |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
34,382 |
|
$ |
35,324 |
|
|
Marketable securities |
|
178,446 |
|
147,535 |
|
||
|
Accounts receivable, net of allowance for doubtful accounts |
|
28,558 |
|
27,999 |
|
||
|
Deferred income taxes |
|
8,733 |
|
8,733 |
|
||
|
Other current assets |
|
1,812 |
|
1,271 |
|
||
|
Total current assets |
|
251,931 |
|
220,862 |
|
||
|
|
|
|
|
|
|
||
|
Property and equipment, net |
|
3,680 |
|
2,997 |
|
||
|
Deferred income taxes, less current portion |
|
8,672 |
|
8,672 |
|
||
|
Deposits and other assets |
|
453 |
|
418 |
|
||
|
Total assets |
|
$ |
264,736 |
|
$ |
232,949 |
|
|
|
|
|
|
|
|
||
|
Liabilities and stockholders’ equity |
|
|
|
|
|
||
|
Current liabilities: |
|
|
|
|
|
||
|
Accounts payable |
|
$ |
1,360 |
|
$ |
743 |
|
|
Accrued payroll and related benefits |
|
5,035 |
|
5,241 |
|
||
|
Other accrued expenses |
|
4,608 |
|
3,835 |
|
||
|
Income taxes payable |
|
3,445 |
|
241 |
|
||
|
Current portion of deferred revenue. |
|
73,494 |
|
65,480 |
|
||
|
Total current liabilities |
|
87,942 |
|
75,540 |
|
||
|
|
|
|
|
|
|
||
|
Deferred revenue, less current portion |
|
31,518 |
|
28,480 |
|
||
|
|
|
|
|
|
|
||
|
Stockholders’ equity: |
|
|
|
|
|
||
|
Common stock |
|
238 |
|
228 |
|
||
|
Additional paid-in capital |
|
132,578 |
|
120,639 |
|
||
|
Treasury stock |
|
(13,711 |
) |
(7,684 |
) |
||
|
Retained earnings |
|
26,665 |
|
15,731 |
|
||
|
Accumulated other comprehensive income (loss) |
|
(494 |
) |
15 |
|
||
|
Total stockholders’ equity |
|
145,276 |
|
128,929 |
|
||
|
Total liabilities and stockholders’ equity |
|
$ |
264,736 |
|
$ |
232,949 |
|
See accompanying notes.
1
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, |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Revenue |
|
$ |
26,643 |
|
$ |
19,524 |
|
$ |
51,254 |
|
$ |
38,028 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cost of revenue |
|
1,774 |
|
1,290 |
|
3,465 |
|
2,595 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Gross margin |
|
24,869 |
|
18,234 |
|
47,789 |
|
35,433 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
||||
|
Selling and marketing |
|
10,449 |
|
7,546 |
|
19,865 |
|
14,181 |
|
||||
|
Research and development |
|
3,534 |
|
3,106 |
|
7,101 |
|
6,324 |
|
||||
|
General and administrative |
|
2,133 |
|
1,672 |
|
4,352 |
|
3,216 |
|
||||
|
Amortization of stock-based compensation |
|
— |
|
22 |
|
— |
|
65 |
|
||||
|
Total operating expenses |
|
16,116 |
|
12,346 |
|
31,318 |
|
23,786 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income from operations |
|
8,753 |
|
5,888 |
|
16,471 |
|
11,647 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Other income, net |
|
456 |
|
780 |
|
869 |
|
1,455 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income before income taxes |
|
9,209 |
|
6,668 |
|
17,340 |
|
13,102 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Provision for income taxes |
|
3,402 |
|
2,580 |
|
6,406 |
|
5,154 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income |
|
$ |
5,807 |
|
$ |
4,088 |
|
$ |
10,934 |
|
$ |
7,948 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income per share: |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic net income per share |
|
$ |
0.25 |
|
$ |
0.19 |
|
$ |
0.48 |
|
$ |
0.36 |
|
|
Diluted net income per share |
|
$ |
0.24 |
|
$ |
0.18 |
|
$ |
0.46 |
|
$ |
0.35 |
|
|
Weighted average shares – basic |
|
22,971 |
|
21,882 |
|
22,824 |
|
21,838 |
|
||||
|
Weighted average shares – diluted |
|
23,928 |
|
22,613 |
|
23,806 |
|
22,673 |
|
||||
See accompanying notes.
2
Websense, Inc.
Consolidated Statement of Stockholders’ Equity
(Unaudited and in thousands)
|
|
|
|
|
Additional |
|
Treasury |
|
Retained |
|
Accumulated |
|
Total |
|
||||||||
|
|
|
Shares |
|
Amount |
|
|
|
|
|
|
|||||||||||
|
Balance at December 31, 2003 |
|
22,445 |
|
$ |
228 |
|
$ |
120,639 |
|
$ |
(7,684 |
) |
$ |
15,731 |
|
$ |
15 |
|
$ |
128,929 |
|
|
Issuance of common stock upon exercise of options |
|
812 |
|
9 |
|
10,689 |
|
— |
|
— |
|
— |
|
10,698 |
|
||||||
|
Issuance of common stock for purchase plan |
|
97 |
|
1 |
|
1,250 |
|
— |
|
— |
|
— |
|
1,251 |
|
||||||
|
Issuance of common stock upon exercise of warrant |
|
8 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
||||||
|
Purchase of treasury stock |
|
(205 |
) |
— |
|
— |
|
(6,027 |
) |
— |
|
— |
|
(6,027 |
) |
||||||
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net income |
|
— |
|
— |
|
— |
|
— |
|
10,934 |
|
— |
|
10,934 |
|
||||||
|
Unrealized loss on securities available for sale |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(345 |
) |
(345 |
) |
||||||
|
Unrealized loss on fair market valuation of foreign exchange contracts |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(164 |
) |
(164 |
) |
||||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
10,425 |
|
||||||
|
Balance at June 30, 2004 |
|
23,157 |
|
$ |
238 |
|
$ |
132,578 |
|
$ |
(13,711 |
) |
$ |
26,665 |
|
$ |
(494 |
) |
$ |
145,276 |
|
See accompanying notes.
3
Websense, Inc.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
|
|
|
Six months ended |
|
||||
|
|
|
June 30, |
|
June 30, |
|
||
|
Operating activities: |
|
|
|
|
|
||
|
Net income |
|
$ |
10,934 |
|
$ |
7,948 |
|
|
|
|
|
|
|
|
||
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
||
|
Depreciation |
|
1,066 |
|
979 |
|
||
|
Amortization of deferred compensation |
|
— |
|
65 |
|
||
|
Deferred revenue |
|
11,052 |
|
6,414 |
|
||
|
Unrealized loss on foreign exchange contracts |
|
(164 |
) |
— |
|
||
|
Changes in operating assets and liabilities: |
|
|
|
|
|
||
|
Accounts receivable |
|
(559 |
) |
1,382 |
|
||
|
Deposits and other assets |
|
(576 |
) |
(273 |
) |
||
|
Accounts payable |
|
617 |
|
16 |
|
||
|
Accrued payroll and related benefits |
|
(206 |
) |
322 |
|
||
|
Other accrued expenses |
|
773 |
|
(465 |
) |
||
|
Income taxes payable |
|
3,204 |
|
2,571 |
|
||
|
Net cash provided by operating activities |
|
26,141 |
|
18,959 |
|
||
|
|
|
|
|
|
|
||
|
Investing activities: |
|
|
|
|
|
||
|
Purchases of property and equipment |
|
(1,749 |
) |
(997 |
) |
||
|
Purchases of marketable securities |
|
(147,553 |
) |
(61,553 |
) |
||
|
Maturities of marketable securities |
|
109,329 |
|
61,473 |
|
||
|
Sales of marketable securities |
|
6,968 |
|
27,511 |
|
||
|
Net cash provided by (used in) investing activities |
|
(33,005 |
) |
26,434 |
|
||
|
|
|
|
|
|
|
||
|
Financing activities: |
|
|
|
|
|
||
|
Proceeds from exercise of stock options |
|
10,698 |
|
401 |
|
||
|
Proceeds from issuance of common stock for stock purchase plan |
|
1,251 |
|
853 |
|
||
|
Purchases of treasury stock |
|
(6,027 |
) |
(2,416 |
) |
||
|
Net cash provided by (used in) financing activities |
|
5,922 |
|
(1,162 |
) |
||
|
|
|
|
|
|
|
||
|
Increase (decrease) in cash and cash equivalents |
|
(942 |
) |
44,231 |
|
||
|
|
|
|
|
|
|
||
|
Cash and cash equivalents at beginning of period |
|
35,324 |
|
29,263 |
|
||
|
|
|
|
|
|
|
||
|
Cash and cash equivalents at end of period |
|
$ |
34,382 |
|
$ |
73,494 |
|
See accompanying notes.
4
Websense, Inc.
Notes To Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information or footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of our financial position and of the results for the interim periods presented.
These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2003, included in Websense, Inc.’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. Operating results for the three months ended June 30, 2004 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2004. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
2. Net Income Per Share
Websense computes net income per share in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share (“EPS”). Under the provisions of SFAS No. 128, basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares for all periods presented consist of dilutive stock options.
Dilutive securities include stock options, warrants and restricted stock subject to vesting. During the quarters ended June 30, 2004 and 2003, the difference between the weighted average shares used in determining basic EPS versus diluted EPS related to dilutive stock options and warrants totaling 957,000 and 731,000, respectively. Potentially dilutive securities totaling 163,000 and 2,407,000 for the quarters ended June 30, 2004 and 2003, respectively, were excluded from historical basic and diluted earnings per share because of their anti-dilutive effect as a result of stock options which have exercise prices greater than the average market price of the common shares.
During the first six months of 2004 and 2003, the difference between the weighted average shares used in determining basic EPS versus diluted EPS related to dilutive stock options and warrants totaling 982,000 and 835,000, respectively. Potentially dilutive securities totaling 143,000 and 1,814,000 for the first six months of 2004 and 2003, respectively, were excluded from historical basic and diluted earnings per share because of their anti-dilutive effect as a result of stock options which have exercise prices greater than the average market price of the common shares.
5
The following is a reconciliation of the numerator and denominator used in calculating basic EPS to the numerator and denominator used in calculating diluted EPS for all periods presented:
|
|
|
Net Income |
|
Shares |
|
Per Share |
|
||
|
|
|
(In thousands, except per share amounts) |
|
||||||
|
For the Three Months Ended: |
|
|
|
|
|
|
|
||
|
June 30, 2004: |
|
|
|
|
|
|
|
||
|
Basic EPS |
|
$ |
5,807 |
|
22,971 |
|
$ |
0.25 |
|
|
Effect of options |
|
— |
|
957 |
|
(0.01 |
) |
||
|
Diluted EPS |
|
$ |
5,807 |
|
23,928 |
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
||
|
June 30, 2003: |
|
|
|
|
|
|
|
||
|
Basic EPS |
|
$ |
4,088 |
|
21,882 |
|
$ |
0.19 |
|
|
Effect of options |
|
— |
|
731 |
|
(0.01 |
) |
||
|
Diluted EPS |
|
$ |
4,088 |
|
22,613 |
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
||
|
For the Six Months Ended: |
|
|
|
|
|
|
|
||
|
June 30, 2004: |
|
|
|
|
|
|
|
||
|
Basic EPS |
|
$ |
10,934 |
|
22,824 |
|
$ |
0.48 |
|
|
Effect of options |
|
— |
|
982 |
|
(0.02 |
) |
||
|
Diluted EPS |
|
$ |
10,934 |
|
23,806 |
|
$ |
0.46 |
|
|
|
|
|
|
|
|
|
|
||
|
June 30, 2003: |
|
|
|
|
|
|
|
||
|
Basic EPS |
|
$ |
7,948 |
|
21,838 |
|
$ |
0.36 |
|
|
Effect of options |
|
— |
|
835 |
|
(0.01 |
) |
||
|
Diluted EPS |
|
$ |
7,948 |
|
22,673 |
|
$ |
0.35 |
|
3. Amortization of Stock-Based Compensation
For the three and six months ended June 30, 2004, the Company recorded no amortization of stock-based compensation. The allocation of the expense by operating expense category in the three and six months ended in the prior year is as follows (in thousands):
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||
|
|
|
June 30, 2003 |
|
June 30, 2003 |
|
||
|
Selling and marketing |
|
$ |
10 |
|
$ |
24 |
|
|
Research and development |
|
5 |
|
13 |
|
||
|
General and administrative |
|
7 |
|
28 |
|
||
|
Total amortization of stock-based compensation |
|
$ |
22 |
|
$ |
65 |
|
6
4. Comprehensive Income
The components of comprehensive income, as required to be reported by SFAS No. 130, Reporting Comprehensive Income, were as follows (in thousands):
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
June 30, 2004 |
|
June 30, 2003 |
|
June 30, 2004 |
|
June 30, 2003 |
|
||||
|
Net income |
|
$ |
5,807 |
|
$ |
4,088 |
|
$ |
10,934 |
|
$ |
7,948 |
|
|
Change in unrealized gain (loss) on investments |
|
(348 |
) |
(276 |
) |
(345 |
) |
(410 |
) |
||||
|
Change in unrealized gain (loss) on fair market valuation of foreign exchange contracts |
|
36 |
|
— |
|
(164 |
) |
— |
|
||||
|
Comprehensive income |
|
$ |
5,495 |
|
$ |
3,812 |
|
$ |
10,425 |
|
$ |
7,538 |
|
Accumulated other comprehensive income (loss) totaled $(494,000) and $15,000 at June 30, 2004 and December 31, 2003, respectively.
5. Stock-Based Compensation
Pro forma information regarding net income (loss) is required by SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting for Stock-Based Compensation – Transition and Disclosure, and has been determined as if the Company has accounted for its employee stock options and shares purchased under the employee stock purchase plan under the fair value method of SFAS 123, as amended by SFAS 148. The pro forma effects of stock-based compensation on net income and net income per share have been estimated at the date of grant using the Black-Scholes option pricing model based on the following weighted average assumptions since the Company’s initial public offering in March of 2000: risk free interest rates of 2.36% to 6.0%, dividend yields of 0%, expected volatility of 54% to 132%, and life of 5 years.
7
The Company’s adjusted pro forma information is as follows (in thousands, except per share amounts):
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
||||
|
Net income as reported |
|
$ |
5,807 |
|
$ |
4,088 |
|
$ |
10,934 |
|
$ |
7,948 |
|
|
Stock based employee compensation cost included in net income as reported, net of tax (1) |
|
— |
|
13 |
|
— |
|
40 |
|
||||
|
Compensation expense under FAS 123, net of tax (2) |
|
(2,568 |
) |
(2,149 |
) |
(5,166 |
) |
(4,203 |
) |
||||
|
Pro forma net income |
|
$ |
3,239 |
|
$ |
1,952 |
|
$ |
5,768 |
|
$ |
3,785 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic net income per share as reported |
|
$ |
0.25 |
|
$ |
0.19 |
|
$ |
0.48 |
|
$ |
0.36 |
|
|
Pro forma basic net income per share |
|
$ |
0.14 |
|
$ |
0.09 |
|
$ |
0.25 |
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted net income per share as reported |
|
$ |
0.24 |
|
$ |
0.18 |
|
$ |
0.46 |
|
$ |
0.35 |
|
|
Pro forma diluted net income per share |
|
$ |
0.14 |
|
$ |
0.09 |
|
$ |
0.24 |
|
$ |
0.17 |
|
(1) The Company was recognizing deferred stock-based compensation expense on the deemed fair value of options granted prior to the initial public offering in March 2000. This expense was amortized on an accelerated basis, in accordance with FIN 28, over approximately a four-year period, which began in March 2000 and ended in December 2003.
(2) The Company had an effective tax rate of 37% and 39% in the three months ended June 30, 2004 and 2003, respectively. The Company had an effective tax rate of 37% and 39% in the six months ended June 30, 2004 and 2003, respectively.
For purposes of pro forma disclosures, the estimated fair value is amortized to expense over the options vesting period. The effect of applying SFAS 123, as amended by SFAS 148, for purposes of providing pro forma disclosures may not be representative of the effects on our operating results in future years.
6. Tax Matters
From time to time, the Company is audited by various state, federal and international authorities relating to tax matters. The Company fully cooperates with all audits, but defends its positions vigorously. The Company’s audits are in various stages of completion; however, no outcome for a particular audit can be determined with certainty prior to the conclusion of the audit and appeals process. As each audit is concluded, adjustments, if any, are appropriately recorded in the Company’s financial statements in the period determined. To provide for potential tax exposures, the Company maintains allowances for tax contingencies based on reasonable estimates of the Company’s potential exposure with respect to the tax liabilities that may result from such audits. However, if the reserves are insufficient upon completion of any audits, there could be an adverse impact on the Company’s financial position and results of operations.
7. Reclassifications
Certain reclassifications have been made for consistent presentation.
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the financial statements and related notes contained elsewhere in this report. See “Risks and Uncertainties” regarding certain factors known to us that could cause reported financial information not to be necessarily indicative of future results.
Forward Looking Statements
This report on Form 10-Q may contain “forward-looking statements” within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which represent our expectations or beliefs concerning various future events, may contain words such as “may,” “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or other words indicating future results. Such statements may include but are not limited to statements concerning the following:
• anticipated trends in revenue;
• growth opportunities in domestic and international markets;
• customer acceptance and satisfaction with our products;
• expected trends in operating and other expenses;
• anticipated cash and intentions regarding usage of cash;
• changes in effective tax rates; and
• anticipated product enhancements or releases.
These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. We assume no obligation to update any forward-looking statements to reflect events or circumstances arising after the date of this report.
Overview
We provide Employee Internet Management, or EIM, solutions that enable organizations to analyze, report and manage how their employees use computing resources at work, including Internet access, instant messaging, peer-to-peer file sharing, network bandwidth and desktop applications. Our primary product, Websense Enterprise®, gives organizations the ability to rapidly implement and configure Internet access policies in support of their efforts to improve employee productivity, conserve network bandwidth, mitigate potential legal liability and enhance network security. In 1996, we released our first software product, Websense Internet Screening System, and since that time, we have focused our business on developing and selling EIM solutions. In December 1999, we released Websense Enterprise Version 4, which was sold through March 2003. We launched the next generation of Websense software - Websense Enterprise Version 5 - in March 2003, including enhanced EIM capabilities. We have also introduced Premium GroupTM databases and add-on modules featuring new network and application management technology such as Client Policy ManagerTM, Bandwidth Optimizer™ and Instant Messaging Attachment Manager™. We currently derive nearly all of our revenue from subscriptions to the Websense Enterprise solution and expect this trend to continue in the future as more offerings are added to the Websense Enterprise platform.
9
During the six months ended June 30, 2004, we derived 32% of revenue from international sales compared with 29% for the six months ended June 30, 2003. International revenue increased 55% in the second quarter of 2004 over the second quarter of 2003, with the United Kingdom comprising approximately 9% of our total revenue. We believe international markets represent a significant growth opportunity and we are continuing to expand our international operations, particularly in selected countries in the European and Asia/Pacific markets.
We sell Websense Enterprise through both indirect and direct channels. Sales through indirect channels currently account for more than 80% of our revenue, and our strategy is to continue to rely on indirect sales channels for a significant majority of our sales.
As described elsewhere in this report, we recognize revenue from subscriptions to Websense Enterprise on a monthly straight-line basis over the term of the subscription. We recognize the operating expenses related to these sales as they are incurred. These operating expenses include sales commissions, which are based on the total amount of the subscription contract and are fully expensed in the period the product is delivered. Operating expenses have continued to increase as compared with prior periods due to expanded selling and marketing efforts, continued product research and development and investments in administrative infrastructure to support subscription sales that we will recognize as revenue in subsequent periods.
Critical Accounting Policies
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition. When a purchase decision is made for Websense Enterprise, customers enter into a subscription agreement, which is generally 12, 24 or 36 months in duration and for a fixed number of users. Other services such as upgrades/enhancements and standard post-contract technical support services are sold together with Websense Enterprise and provided throughout the subscription term. We recognize revenue on a monthly straight-line basis over the term of the subscription agreement provided collectibility is reasonably assured. Upon entering into a subscription arrangement for a fixed or determinable fee, we electronically deliver access codes to users and then promptly invoice customers for the full amount of their subscriptions. Payment is due for the full term of the subscription, generally within 30 days of the invoice. We record amounts billed to customers in excess of recognizable revenue as deferred revenue on our balance sheet. Upon expiration of the subscription, customers who wish to re-subscribe typically must do so at then current rates to continue using Websense Enterprise. Our revenue is significantly influenced by new and renewal subscriptions, and a decrease in subscription amounts could negatively impact our future revenue.
Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of our customers to make required payments to pay their invoice(s). If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Deferred Tax Assets. As required by Statement of Financial Accounting Standards No. 109 (“SFAS 109”), we recognize tax assets on the balance sheet if it is “more likely than not” that they will be realized on future tax returns. Based on our earnings history and anticipated future taxable income, we believe that it is more likely than not that our U.S. deferred tax assets will be realized. However, should we determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax assets would be charged against income in the period such determination was made. As of December 31, 2003, we had $17.4 million in deferred tax assets.
10
Three months ended June 30, 2004, compared with the three months ended June 30, 2003
The following table summarizes our operating results as a percentage of total revenue for each of the periods shown.
|
|
|
Three Months Ended |
|
||
|
|
|
June 30, 2004 |
|
June 30, 2003 |
|
|
|
|
(Unaudited) |
|
||
|
|
|
|
|
|
|
|
Revenue |
|
100 |
% |
100 |
% |
|
|
|
|
|
|
|
|
Cost of revenue |
|
7 |
|
7 |
|
|
|
|
|
|
|
|
|
Gross margin |
|
93 |
|
93 |
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
Selling and marketing |
|
39 |
|
39 |
|
|
Research and development |
|
13 |
|
16 |
|
|
General and administrative |
|
8 |
|
8 |
|
|
Total operating expenses |
|
60 |
|
63 |
|
|
|
|
|
|
|
|
|
Income from operations |
|
33 |
|
30 |
|
|
|
|
|
|
|
|
|
Other income, net |
|
2 |
|
4 |
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
35 |
|
34 |
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
13 |
|
13 |
|
|
|
|
|
|
|
|
|
Net income |
|
22 |
% |
21 |
% |
11
Research and development. Research and development expenses consist primarily of salaries and benefits for software developers, contract programmers, and allocated facilities costs and equipment depreciation. Research and development expenses increased to $3.5 million in the second quarter of 2004 from $3.1 million in the second quarter of 2003. The increase of $400,000 in research and development expenses was primarily a result of allocated costs as well as personnel added to support our expanding list of technology partners, the enhancements of Websense Enterprise and additional products. We expect research and development expenses to increase in absolute dollars in future periods as a result of our continued enhancements of Websense Enterprise and additional products.
General and administrative. General and administrative expenses consist primarily of salaries, benefits and related expenses for our executive, finance, human resources and administrative personnel, third party professional service fees, allocated facilities costs and depreciation expenses. General and administrative expenses increased to $2.1 million in the second quarter of 2004 from $1.7 million in the second quarter of 2003. The $400,000 increase in general and administrative expenses is primarily a result of an increase in professional accounting fees, driven primarily by compliance with the Sarbanes-Oxley Act of 2002, and additional personnel needed to support our growing operations, both domestically and internationally. We expect general and administrative expenses to increase in absolute dollars in future periods, reflecting growth in operations, increasing expenses associated with being a public company and expansion of our international operations.
12
13
Six months ended June 30, 2004, compared with the six months ended June 30, 2003
The following table summarizes our operating results as a percentage of total revenue for each of the periods shown.
|
|
|
Six Months Ended |
|
||
|
|
|
June 30, 2004 |
|
June 30, 2003 |
|
|
|
|
(Unaudited) |
|
||
|
|
|
|
|
|
|
|
Revenue |
|
100 |
% |
100 |
% |
|
|
|
|
|
|
|
|
Cost of revenue |
|
7 |
|
7 |
|
|
|
|
|
|
|
|
|
Gross margin |
|
93 |
|
93 |
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
Selling and marketing |
|
39 |
|
37 |
|
|
Research and development |
|
14 |
|
17 |
|
|
General and administrative |
|
8 |
|
8 |
|
|
Total operating expenses |
|
61 |
|
62 |
|
|
|
|
|
|
|
|
|
Income from operations |
|
32 |
|
31 |
|
|
|
|
|
|
|
|
|
Other income, net |
|
2 |
|
4 |
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
34 |
|
35 |
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
13 |
|
14 |
|
|
|
|
|
|
|
|
|
Net income |
|
21 |
% |
21 |
% |
14
Research and development. Research and development expenses increased to $7.1 million in the first six months of 2004 from $6.3 million in the first six months of 2003. The increase of $800,000 in research and development expenses was primarily a result of allocated costs as well as personnel added to support our expanding list of technology partners, the enhancements of Websense Enterprise and additional products. We expect research and development expenses to increase in absolute dollars in future periods as a result of our continued enhancements of Websense Enterprise and additional products.
General and administrative. General and administrative expenses increased to $4.4 million in the first six months of 2004 from $3.2 million in the first six months of 2003. The $1.2 million increase in general and administrative expenses is primarily a result of an increase in professional accounting fees driven primarily by compliance with the Sarbanes-Oxley Act of 2002, state sales tax expenses and additional
15
personnel needed to support our growing operations, both domestically and internationally. We expect general and administrative expenses to increase in absolute dollars in future periods, reflecting growth in operations, increasing expenses associated with being a public company and expansion of our international operations.
Liquidity and Capital Resources
As of June 30, 2004, we had cash and cash equivalents of $34.4 million, investments in marketable securities of $178.4 million and accumulated earnings of $26.7 million.
Net cash provided by operating activities was $26.1 million in the first six months of 2004 compared with $19.0 million in the first six months of 2003. The $7.1 million increase in cash provided by operating activities in the first six months of 2004 was primarily due to an increase in our net income and an increase in deferred revenue (subscription amounts in excess of recognizable revenue are recorded as deferred revenue). Our operating cash flow and revenue are significantly influenced by subscription renewals and a decrease in subscription renewals would negatively impact our operating cash flow and revenue.
Net cash used in investing activities was $33.0 million in the first six months of 2004 compared with net cash provided by investing activities of $26.4 million in the first six months of 2003. The $59.4 million increase in cash used by investing activities in the first six months of 2004 was primarily due to fewer maturities and sales of marketable securities to offset purchases of marketable securities as we shifted our investment strategy to purchase more tax-exempt investments.
16
Net cash provided by financing activities was $5.9 million in the first six months of 2004 compared with net cash used by financing activities of $1.2 million in the first six months of 2003. The $7.1 million increase in net cash provided by financing activities in the first six months of 2004 is primarily due to the proceeds from stock options exercised by employees, partially offset by the use of $6.0 million for the repurchase of 205,000 shares of our common stock.
We have operating lease commitments of approximately $0.8 million during the remainder of 2004, $1.5 million in 2005, $1.5 million in 2006 and $1.4 million in 2007. A significant majority of our operating lease commitments are related to our corporate headquarters lease, which was renewed in April 2002. The lease renewal incentives resulted in no rent payments in the third and fourth quarters of 2002 and escalating rent payments from 2004 to 2007. The rent expense related to our corporate headquarters lease renewal is recorded monthly on a straight-line basis in accordance with generally accepted accounting principles.
Future minimum annual lease payments under non-cancelable operating leases at June 30, 2004 are as follows (in thousands):
|
2004 |
|
$ |
809 |
|
|
2005 |
|
1,463 |
|
|
|
2006 |
|
1,501 |
|
|
|
2007 |
|
1,389 |
|
|
|
|
|
$ |
5,162 |
|
As of June 30, 2004 and 2003, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
On April 3, 2003, we announced that our Board of Directors authorized a stock repurchase program of up to 2 million shares of our common stock. The repurchases will be made from time to time on the open market at prevailing market prices or in privately negotiated transactions. Depending on market conditions and other factors, purchases under this program may be commenced or suspended at any time, or from time to time, without prior notice. As of June 30, 2004, we had repurchased 601,000 shares of our common stock under this program, for an aggregate of $13.7 million at an average price of $22.81 per share.
We believe that our cash and cash equivalents balances and investments in marketable securities will be sufficient to satisfy our cash requirements for the foreseeable future. We intend to continue to invest our cash in excess of current operating requirements in interest-bearing, investment-grade securities.
17
Risks and Uncertainties
Risks and uncertainties that could impact our business, consolidated financial position, results of operations and cash flows and cause future results to differ from our expectations include the following: customer acceptance of our services, products and fee structures; the success of our brand development efforts; the volatile and competitive nature of the Internet industry; changes in domestic and international market conditions and the entry into and development of international markets for our products; risks relating to intellectual property ownership; and the risks and uncertainties identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and other filings with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risk exposures are related to our cash, cash equivalents and investments. We invest our excess cash in highly liquid short-term investments, municipal securities, commercial paper, corporate bonds, and mortgage-backed securities. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our investments and therefore impact our cash flows and results of operations.
We are exposed to changes in interest rates primarily from our short-term available-for-sale investments. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive financial instruments at June 30, 2004. Changes in interest rates over time will, however, affect our interest income.
For the quarter ended June 30, 2004, all of our billings, including those billed by our operations in Ireland, were denominated in our functional currency, which is the U.S. dollar. Working funds necessary to facilitate the short-term operations of our subsidiaries are kept in the local currencies in which they do business.
We utilize foreign exchange contracts to hedge foreign currency market exposures of underlying assets and liabilities. Our objective is to reduce the risk to earnings and cash flows associated with changes in foreign currency exchange rates. We do not use foreign exchange contracts for speculative or trading purposes. As of June 30, 2004, we had committed to 12 foreign exchange contracts to purchase Euro and British Pounds for $4.2 million. Our Euro commitment represents 1.2 million Euros at a weighted average forward rate of 1.2797. Our British Pound commitment represents 1.4 million British Pounds at a weighted average forward rate of 1.8645. The fair value of these foreign exchange contracts was $4.0 million at June 30, 2004. All of the foreign exchange contracts will be settled before December 31, 2004.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a – 15(e) and 15d – 15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to ensure that we are able to collect the information we are required to disclose in the reports we file under the Exchange Act, and to record, process, summarize and report this information within the time periods specified in the rules of the Securities and Exchange Commission. Our Chief Executive and Chief Financial Officers evaluated our
18
disclosure controls and procedures as of the end of the period covered by this report. Based on their evaluation, our Chief Executive and Chief Financial Officers have concluded that these controls and procedures are effective.
There have been no significant changes in our internal control over financial reporting or in other factors that could significantly affect our internal control over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses, during the period covered by this report.
19
Part II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Securities
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) On March 28, 2000, we completed our initial public offering for the sale of 4,000,000 shares of common stock at a price to the public of $18 per share, which resulted in net proceeds of $65.7 million after payment of the underwriters’ commissions and deductions of offering expenses. The registration statement (No. 333-95619) relating to our initial public offering was declared effective on March 28, 2000. Subsequent to our initial public offering, a portion of the offering proceeds were used to repay the $1.5 million balance of our fixed term loan agreements with financial institutions. The remaining proceeds have conformed with our intended use outlined in the prospectus related to such offering. We currently have approximately $64.2 million remaining from the proceeds of our initial public offering.
20
(e) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
|
Month |
|
Number of |
|
Average |
|
Cumulative |
|
Maximum number |
|
|
|
April 1st through 30th of 2004 |
|
— |
|
— |
|
496,000 |
|
1,504,000 |
|
|
|
May 1st through 31st of 2004 |
|
105,000 |
|
$ |
29.24 |
|
601,000 |
|
1,399,000 |
|
|
June 1st through 30th of 2004 |
|
— |
|
— |
|
601,000 |
|
1,399,000 |
|
|
|
Total |
|
105,000 |
|
$ |
29.24 |
|
601,000 |
|
1,399,000 |
|
1. The purchases were made in open-market transactions.
2. On April 3, 2003, we announced that our Board of Directors authorized a stock repurchase program of up to 2 million shares of our common stock.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on Wednesday, June 2, 2004. The following matters were voted upon at the meeting and were adopted by the margins indicated:
1. The stockholders elected two Directors to hold office for a term expiring upon the 2007 Annual Meeting of Stockholders.
|
|
|
Number of Shares |
|
||
|
Name of Director Elected |
|
For |
|
Withheld |
|
|
|
|
|
|
|
|
|
John B. Carrington |
|
21,458,792 |
|
290,777 |
|
|
Gary E. Sutton |
|
21,213,618 |
|
535,951 |
|
The following individuals are continuing directors with terms expiring upon the 2005 Annual Meeting of Stockholders: Mark S. St.Clare and Peter C. Waller.
The following individuals are continuing directors with terms expiring upon the 2006 Annual Meeting of Stockholders: Bruce T. Coleman and John F. Schaefer.
21
2. The stockholders ratified the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2004.
|
For |
|
21,047,831 |
|
|
Against |
|
700,185 |
|
|
Abstain |
|
1,553 |
|
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
|
|
3.1(1) |
Amended and Restated Certificate of Incorporation |
|
|
3.2(1) |
Restated Bylaws |
|
|
4.1(1) |
Specimen Stock Certificate of Websense, Inc |
|
|
31.1 |
Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) or 15d-14(a). |
|
|
31.2 |
Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) or 15d-14(a). |
|
|
32.1 |
Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350). |
|
|
32.2 |
Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350). |
(1) Previously filed as an exhibit to our Registration Statement on Form S-1, as amended, (File No 333-95619) and incorporated herein by reference.
(b) Reports on Form 8-K
On April 27, 2004, the Company filed a Current Report on Form 8-K reporting that financial results for its first quarter ended March 31, 2004 were available in a press release dated April 27, 2004.
22
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
WEBSENSE, INC. |
||||
|
|
|
||||
|
Date: August 6, 2004 |
By: |
/s/ JOHN B. CARRINGTON |
|
||
|
|
|
John B. Carrington |
|||
|
|
|
Chairman of the Board and |
|||
|
|
|
Chief Executive Officer |
|||
|
|
|
|
|||
|
Date: August 6, 2004 |
By: |
/s/ DOUGLAS C. WRIDE |
|
||
|
|
|
Douglas C. Wride |
|||
|
|
|
Chief Financial Officer |
|||
23
EXHIBIT INDEX
|
Exhibit |
|
Description |
|
|
|
|
|
3.1(1) |
|
Amended and Restated Certificate of Incorporation |
|
3.2(1) |
|
Restated Bylaws |
|
4.1(1) |
|
Specimen Stock Certificate of Websense, Inc |
|
31.1 |
|
Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) or 15d-14(a). |
|
31.2 |
|
Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) or 15d-14(a). |
|
32.1 |
|
Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350). |
|
32.2 |
|
Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350). |
(1) Previously filed as an exhibit to our Registration Statement on Form S-1, as amended, (File No 333-95619) and incorporated herein by reference.