Websense Inc. (WBSN) filed Amended Quarterly Report for the period ended 2009-06-30.
Websense Inc. provide employee Internet management products that enable businesses to monitor report and manage how their employees use the Internet. The Websense Enterprise software and database product gives managers the ability to implement Internet access policies for different users and groups within their businesses and supports their efforts to improve employee productivity conserve network bandwidth and mitigate potential legal liability. Websense Inc. has a market cap of $739.8 million; its shares were traded at around $16.74 with a P/E ratio of 19 and P/S ratio of 2.5.
Highlight of Business Operations:
Revenue increased to $77.8 million in the second quarter of 2009 from $70.3 million in the second quarter of 2008. The increase was primarily a result of additional customer seats in new, renewed and upgraded subscriptions and increased OEM revenue, from the second quarter of 2008 to the second quarter of 2009. The number of product seats under subscription increased from 42.1 million as of June 30, 2008 to 43.6 million as of June 30, 2009, but decreased on a consecutive quarter basis from 44.4 million as of March 31, 2009. Revenue from products sold in the United States accounted for $38.4 million or 49% of second quarter 2009 revenue compared to $41.0 million or 58% in the second quarter of 2008. Revenue from products sold internationally accounted for $39.4 million or 51% of second quarter 2009 revenue compared to $29.3 million or 42% in the second quarter of 2008. We had current deferred revenue of $217.4 million as of June 30, 2009, compared to $206.7 million as of June 30, 2008, and $217.3 million as of March 31, 2009. For the remainder of 2009, we expect our revenue to increase slightly over 2008 revenue levels due to the amount of current deferred revenue that will be recognized as revenue during 2009, subscriptions that are scheduled for renewal that are expected to be renewed and expected new business for which some revenue will be recognized during 2009. We expect our deferred revenue balances in future periods to be negatively affected by the impact of the worldwide recession on our subscription renewals for web filtering and email security products, which have resulted in a shortening of duration of contracts, a slight reduction in the number of seats under subscription and delayed or non-renewal of contracts for these products. Generally our revenue in subsequent periods may be impacted by our deferred revenue balance entering the period, the number of product seats under subscription, the duration of contracts for renewal and new subscriptions, the timing of sales of renewal and new subscriptions, the average annual contract value and per seat price, and currency exchange rates impacting new and renewal subscriptions in international markets.
Cost of revenues. Cost of revenues consists of the costs of content review, technical support and infrastructure costs associated with maintaining our databases and costs associated with providing our hosted security services. Cost of revenue also includes our amortized costs of acquiring and configuring our V10000 appliance. Cost of revenues increased to $9.1 million in the second quarter of 2009 from $8.6 million in the second quarter of 2008. The $0.5 million increase was primarily due to increased personnel costs in our technical support and database groups in 2009 from 2008 as our full-time employee headcount in cost of revenue departments increased from an average of 209 employees during the second quarter of 2008 to an average of 254 employees during the second quarter of 2009. We allocate the costs for human resources, employee benefits, payroll taxes, information technology, facilities and fixed asset depreciation to each of our functional areas based on headcount data. As a percentage of revenue, cost of revenues remained the same at 12% during the second quarter of 2009 compared to 2008. For the remainder of 2009, we expect cost of revenue will increase in absolute dollars due to the higher headcount and expected increases in appliance sales as compared to 2008 but as a percentage of revenue will remain approximately the same as compared to 2008.
Amortization of acquired technology. Amortization of acquired technology, which primarily relates to the developed technology acquired from the PortAuthority and SurfControl acquisitions in 2007, was $3.3 million in the second quarter of 2009 compared to $3.1 million in the second quarter of 2008. The increase of $0.2 million in amortization of acquired technology from the second quarter of 2008 to the second quarter of 2009 was primarily due to the acquisition of additional acquired technology in the second half of 2008. As of June 30, 2009, the acquired technology is being amortized over a remaining weighted average period of 2.0 years. We expect to incur $6.4 million in amortization expense of acquired technology during the remainder of 2009 and that 2009 levels will be slightly higher than 2008 in absolute dollars.
Gross margin increased to $65.4 million in the second quarter of 2009 from $58.6 million in the second quarter of 2008. As a percentage of revenue, gross margin remained the same at 84% in the second quarter of 2009 compared to the second quarter of 2008. We expect that gross margin as a percentage of revenue will remain in excess of 80% for the remainder of 2009.
Selling and marketing. Selling and marketing expenses consist primarily of salaries, commissions and benefits related to personnel engaged in selling, marketing and customer support functions, including costs related to public relations, advertising, promotions and travel, amortization of acquired customer relationships as well as allocated costs. Selling and marketing expenses do not include payments to channel partners for marketing services and rebates. Selling and marketing expenses decreased to $41.4 million, or 53% of revenue, in the second quarter of 2009, from $44.4 million, or 64% of revenue, in the second quarter of 2008. The $3.0 million decrease was primarily due to a reduction in the amortization of acquired intangibles (customer relationships) of approximately $2.8 million and reduced discretionary costs and allocations of $0.9 million relating to the substantial completion of SurfControl integration activities during 2008 offset by increased personnel costs of $0.7 million. As of June 30, 2009, the acquired customer relationships intangible assets are being amortized over a remaining weighted average period of approximately 5.1 years. Although our headcount in sales and marketing increased from an average of 518 employees during the second quarter of 2008 to 613 employees for the second quarter of 2009, the impact was partially offset by the favorable movement in currency exchange rates in the second quarter of 2009 compared to the second quarter of 2008. We expect overall selling and marketing expenses to be approximately the same in absolute dollars for the remainder of 2009 as compared to 2008 primarily due to a reduction of amortization of acquired intangibles from the SurfControl acquisition due to the accelerated nature of the amortization and the elimination of the non-recurring acquisition related expenses associated with PortAuthority and SurfControl, offset by having additional sales and marketing personnel to support our expanding selling and marketing efforts worldwide. We also expect that selling and marketing expenses as a percentage of revenue will decrease in 2009 compared to 2008 due to the expected increase in revenue. We expect amortization of acquired intangibles of $13.2 million for the remainder of 2009 as a result of the amortization of acquired intangibles from the SurfControl and PortAuthority acquisitions.
Research and development. Research and development expenses consist primarily of salaries and benefits for software developers and allocated costs. Research and development expenses decreased to $12.6 million, or 16% of revenue, in the second quarter of 2009 from $13.2 million, or 19% of revenue, in the second quarter of 2008. The decrease of $0.6 million in research and development expenses was primarily due to a reduction in contractor services relating to our DLP product of $0.4 million and a reduction in allocated costs of $0.5 million relating to the substantial completion of SurfControl integration activities during 2008 offset by increased personnel costs of $0.3 million. Although our headcount increased in research and development from an average of 342 employees for the second quarter of 2008 to 398 employees for the second quarter of 2009, the impact was partially offset by the favorable movement in currency exchange rates in the second quarter of 2009 compared to the second quarter of 2008. For the remainder of 2009, we expect research and development expenses to increase in absolute dollars as compared to 2008 due to having an expanded base of product offerings and the hiring of personnel to support our continued enhancements and new products. We are managing the increase in our absolute research and development expenses by operating research and development facilities in multiple international locations, including a facility in Beijing, China, that have lower costs than our operations in the United States. During the first quarter of 2009, we relocated our research and development facility in Sydney, Australia to our Beijing, China facility. We also have research and development facilities in Ra’anana, Israel, Los Gatos and San Diego, California and Reading, England. While we expect research and development expenses to increase in absolute dollars for the remainder of 2009, we expect that research and development expenses as a percentage of revenue will decrease in 2009 compared to 2008 due
WBSN is in the portfolios of Michael Price of MFP Investors LLC, PRIMECAP Management.
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