Q213 Investor Presentation
- 1. © 2013 Websense, Inc. Page 1 TRITON STOPS MORE THREATS. WE CAN PROVE IT. Q2’13 Investor Presentation
- 2. © 2013 Websense, Inc. Page 2 GAAP to Non-GAAP Reconciliation During this presentation references to financial measures of Websense, Inc. (“Websense”) will include references to non-GAAP financial measures. Websense provides a reconciliation between GAAP and non-GAAP financial information on our website at www.Websense.com under “About Us” in the “Investors” section. www.investor.websense.com Forward Looking Statements This presentation contains projections and other forward-looking statements regarding future events or the future financial performance of Websense, including future operating results. These projections and statements are only predictions. Actual events or results may differ materially from those in the projections or other forward-looking statements. Please see Websense’s filings with the SEC, including its most recent filings on Form 10-K, for a discussion of important risk factors that could cause actual events or results to differ materially from those in the projections or other forward-looking statements.
- 3. © 2013 Websense, Inc. Page 3 Agenda Company overview Aligned with modern security needs Investing in sales coverage to drive growth Attractive subscription-based business model
- 4. © 2013 Websense, Inc. Page 4 About Websense • Market leader – Advanced web security, email security, mobile security and data loss prevention (DLP) solutions – Market share leader in content security – Recognized by leading analysts • Technology pioneer – 16 years classifying content and threats – >180 patents granted or pending – First to market with unified web/email/data security, hybrid Cloud/on-premise, Threatseeker, ACE, Defensio • Global presence – ~1,600 employees in more than 35 countries – 4,000 resellers in 130 countries – R&D on multiple continents – Follow-the-sun technical support – ~50% of revenue outside the U.S. • Financial strength – Attractive business model with subscription revenues of more than 90% in 2012 – 2012 annual billings of $369.5 million Web Security Products: 2012 MarketScape Leader 2013 Content-Aware Data Loss Prevention MQ: Leaders Quadrant 2012 Secure Email Gateway MQ: Visionaries Quadrant 2012 Secure Web Gateway MQ: Leaders Quadrant 2012 Email Content Security: Leader, Forrester Wave Best Web Content Management Product 2013 Best Regulatory Compliance Solution 2013 7 Nominations: Infosecurity Europe 2013 Vendor with most nominations
- 5. © 2013 Websense, Inc. Page 5 Websense Transformation Vision Sales and Support Data-centric security 2006 Transaction to Strategic 2010-2011R&D investment 2007-2011 TRITON solutions Web filtering company ($750M market opportunity) Content Security Leader (>$6B market opportunity) Expanding Sales Coverage 2012-2013 Sales Expansion
- 6. © 2013 Websense, Inc. Page 6 ACE-in-the-Cloud Spear-Phishing APT WSG Threat Scope Mobile Security On-Premise TRITON Cloud-Enabled TRITON Web Security Suite Web Filter 2013+ TRITON Enterprise Transition from Websense Legacy to TRITON ~ $335M Software Install Base~ $250M Software Install Base Upgrade cycle began in 2H 2011 Upgrade cycle began in 2009 In 2012, we sold $233 million of TRITON products, compared with $93 million in 2009, for a CAGR of 36%. ~ $40M Software Install Base TRITON SuitesTRITON ProductsLegacy ~$80M Appliance Install Base
- 7. © 2013 Websense, Inc. Page 7 Increased Value of the Install Base Legacy 40% TRITON Products 53% TRITON Suites 7% 2013 The quantity and quality of the install base continue to improve. Legacy 50% TRITON Products 47% TRITON Suites 3% 2012 $600M Software Install Base $55M Hardware Install Base $625M Software Install Base $80M Hardware Install Base
- 8. © 2013 Websense, Inc. Page 8 Agenda Company overview Aligned with modern security needs Investing in sales coverage to drive growth Attractive subscription-based business model
- 9. © 2013 Websense, Inc. Page 9 TRITON Advanced Security Threat Seeker Network Global SaaS Infrastructure
- 10. © 2013 Websense, Inc. Page 10 2013: The Year of the TRITON Platform Industry’s First Real-Time Web Security Industry’s First Hybrid Content Security Industry’s First Integrated Content Security TRITON – The Best Content Security Platform Most Scalable & Extensible Content Security Solution 2009 2010 2011 2012 2013 and beyond
- 11. © 2013 Websense, Inc. Page 11 Solutions Feature Matrix Web filter and Web Security Suite Web Security Gateway Web Security Gateway Anywhere TRITON Security Gateway Anywhere TRITON Enterprise General availability 2000-2005 Q4 2008 Q2 2010 Q2 2011 Q2 2011 ~List price per seat (@ 1,000 users) $15-30 $40 $50 $60 $70 Functionality URL filtering X X X X X Real-time Web Security X X X X Web channel TruWeb™ DLP X X X Email security X X Email channel TruEmail™ DLP X X Enterprise DLP X Deployment options Software-only X X Appliance X (WSS) X X X X Hybrid appliance/cloud service X X X
- 12. © 2013 Websense, Inc. Page 12 ADVANCED threat detection mechanisms COMPREHENSIVE protection of network communication channels & endpoints WHY customers choose EASE of integration with existing network FLEXIBLE deployment options TRACK & PROTECT data ON or OFF network Key Differentiators
- 13. © 2013 Websense, Inc. Page 13 Websense Addressable Market $5.9B $6.4B 2013 2014 (1) IDC "Worldwide Web Security 2012-2016 Forecast and 2011 Vendor Shares” (Doc #235515), by Phil Hochmuth, July 2012 (2) IDC "Worldwide Messaging Security 2012-2016 Forecast and 2011 Vendor Shares" (Doc #235544), by Phil Hochmuth, June 2012 (3) IDC, "Worldwide Data Loss Prevention 2012-2016 Forecast and 2011 Vendor Shares" (Doc #23657) by Phil Hochmuth. September 2012 (4) Infonetics Research, "Content Security Appliances, Software and SaaS Quarterly Worldwide Market Share and Forecasts: 3Q12", 11/27/12 $0 $1 $2 $3 $4 $5 $6 $7 $Billions Integrated Content Security Gateway Data Loss Prevention Email Security On Premise Cloud Security (Web and Email) Web Security Appliance Web Security Software Incremental opportunity with TRITON products ~10% CAGR
- 14. © 2013 Websense, Inc. Page 14 Websense Prove It Initiative TRITON STOPS MORE THREATS, WE CAN PROVE IT
- 15. © 2013 Websense, Inc. Page 15 TRITON Stops More Threats. We can Prove It.
- 16. © 2013 Websense, Inc. Page 16 Agenda Company overview Aligned with modern security needs Investing in sales coverage to drive growth Attractive subscription-based model
- 17. © 2013 Websense, Inc. Page 17 Sales Force Expansion Follows Transformation The sales force investment is designed to drive both new customer acquisition and install base upgrades – when we compete, we win. 2011 Focus on Install Base Growth 2012 Drive Double-Digit New Customer Growth 2013 Drive Consistent Execution on Both Fronts
- 18. © 2013 Websense, Inc. Page 18 Economics of a Sales Team Investment In first year, a new sales team generates more billings than expense, with revenue outpacing costs in future periods. YEAR 1 Billings YEAR 2 YEAR 3 Billings Fully Loaded Costs Fully Loaded Costs Fully Loaded Costs Revenue Billings
- 19. © 2013 Websense, Inc. Page 19 Expense Growth Will Follow Seasonal Patterns -4% 0% 4% 8% 12% 16% $40 $45 $50 $55 $60 $65 $70 Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13E Q3'13E Q4'13E SequentialGrowth Millions Non-GAAP Operating Expenses Sequential Growth 2013 sales expansion investment was front-loaded in Q4’12 and Q1’13. 2013 Impact of decline in YoY billings 2012 Based on guidance provided 01/29/13.
- 20. © 2013 Websense, Inc. Page 20 $0 $0 $0 $1 $2 $3 2012 2013 2014+ Consistent Growth Drives Subscription Model $369M $384M* $400M+ *Midpoint of guidance provided 01/29/13 ~200 Reps ~240 Reps 240+ Reps Our investment in sales capacity will yield billings growth in 2013, with future ability to drive billings growth through productivity improvements. Productivity Per Rep Install Base Billings New Logo Billings
- 21. © 2013 Websense, Inc. Page 21 Agenda Company overview Aligned with modern security needs Investing in sales coverage to drive growth Attractive subscription-based business model
- 22. © 2013 Websense, Inc. Page 22 Expiration/renewal Expansion of TRITON billings drives improved customer retention rates Income statement Revenue follows billings growth. In 2013, revenue is impacted by the continued recognition of deferred appliance revenue and costs. Upgrade and “new logo” opportunities Migration to TRITON and within the TRITON portfolio of products yields growth Cash flow statement Cash flow from operations is expected to grow each quarter in 2013 on a year-over-year basis. Subscription Model Dynamics Billings (Non-GAAP) Cash Flow Renewal/ Upgrade Revenue
- 23. © 2013 Websense, Inc. Page 23 $347.0 $362.9 $369.5 $374-394 $0 $100 $200 $300 $400 2010 2011 2012 2013E* Millions TRITON Non-TRITON Total Billings (Non-GAAP) TRITON billings growth drives overall growth and quality of the installed base. 61% 39% 47% 53% 37% 63% *Guidance range as of 04/25/13
- 24. © 2013 Websense, Inc. Page 24 TRITON Billings TRITON solutions include the TRITON family of security gateways for web, email, mobile and data security (including related appliances and technical support subscriptions), Websense Data Security Suite and cloud-based security solutions. $34.4 $44.5 $45.3 $68.3 $49.0 $50.8 $49.4 $83.7 $54.7 45% 52% 54% 59% 61% 59% 61% 69% 67% 0% 10% 20% 30% 40% 50% 60% 70% 80% $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 %ofTotalBillings Millions $ % of total billings
- 25. © 2013 Websense, Inc. Page 25 Lifetime Value of a TRITON Customer Each sales cycle generates incremental customer purchases and strengthens commitment to the TRITON security platform. Customer off-cycle unlocks product upgrades or expands coverage At renewal: • Unlock product upgrades • Renew for 1-3 years • Refresh appliance Customer has strengthened commitment to TRITON architecture TRITON customer has higher renewal rates of 85-90% Customer signs initial TRITON transaction (Typically 3-year contract + appliance)
- 26. © 2013 Websense, Inc. Page 26 $394.3 $393.0 $401.1 $424-434 -$50 $50 $150 $250 $350 $450 2010 2011 2012 2013E* Millions Software and Service Appliance OEM Deferred Revenue Growth in software and service billings drives increases in deferred revenue. *Guidance range as of 04/25/13
- 27. © 2013 Websense, Inc. Page 27 Mix Shift Toward TRITON Buying Patterns Remain Stable Customers consistently make long term commitment to TRITON products. 2010 Billings TRITON 39% / Legacy 61% 2013 Billings TRITON ~70% / Legacy ~30% 25-29 months Legacy 20-21 months 26-28 months Legacy 19-20 months Average Contract Duration 22-24 months Average Contract Duration 24-26 months
- 28. © 2013 Websense, Inc. Page 28 Legacy 65% TRITON Products 34% TRITON Suites 1% 2012 Legacy 77% TRITON Products 23% 2011 Improved Quality of Up-for-Renewal in 2013 The improved quality of the 2013 up-for-renewal subscriptions supports more consistent billings growth opportunity. Legacy 52% TRITON Products 46% TRITON Suites 2% 2013
- 29. © 2013 Websense, Inc. Page 2929 Value Creation Priorities Sustainable growth Cash flow and profitability Shareholder value Investing in sales capacity to grow the install base and new logo billings Excess US-based free cash flow used for share repurchases Sales performance Expense management for growth Billings Business Productivity Capital Allocation Deliver shareholder value through top-line growth
- 30. © 2013 Websense, Inc. Page 30 TRITON STOPS MORE THREATS. WE CAN PROVE IT. Q1’13 Financial Results April 25, 2013
- 31. © 2013 Websense, Inc. Page 31 Billings Metrics TRITON solutions include the TRITON family of security gateways for web, email, mobile and data security (including related appliances and technical support subscriptions), Websense Data Security Suite and cloud-based security solutions. Software and service $74.6 $74.9 0% Appliance $6.0 $6.9 15% Total billings $80.6 $81.8 2% Billings by Product Category TRITON $49.0 $54.7 11% Non-TRITON $31.6 $27.1 -14% Billings by Region U.S. $37.5 $39.0 4% International $43.1 $42.8 -1% Contract Metrics Number of customer transactions >$100k 121 144 19% Average contract duration (months) 25.5 23.3 -9% Q1'13 $ in millions, except no. of transactions, average contract duration and percentages $ % ∆Q1'12
- 32. © 2013 Websense, Inc. Page 32 Revenues and Deferred Revenue 1. Excludes pre-2011 appliance revenues. 2. Previously deferred. On January 1, 2011, Websense was required to adopt Accounting Standards Update (ASU) 2009-13 (Multiple Deliverable Revenue Arrangements) and ASU 2009-14 (Certain Revenue Arrangements that Include Software Elements), which require the immediate recognition of appliance revenues upon sale. Prior to January 1, 2011, the company recognized revenue and costs from appliance sales ratably according to the original subscription terms. Q1'12 $ % ∆ Software and service $82.0 $80.1 -2% Current period appliance1 $5.8 $6.5 12% Pre-2011 appliance2 $1.7 $0.8 -53% Total appliance $7.5 $7.3 -3% Total revenues $89.5 $87.5 -2% Software and service $375.9 $390.9 4% Appliance $8.2 $4.5 -45% Total deferred revenue $384.1 $395.4 3% Q1'13 Revenues ($ in millions, except percentages) Deferred Revenue ($ in millions, except percentages)
- 33. © 2013 Websense, Inc. Page 33 Revenue-based Operating Models 1. Excludes pre-2011 appliance revenues. 2. Previously deferred. On January 1, 2011, Websense was required to adopt Accounting Standards Update (ASU) 2009-13 (Multiple Deliverable Revenue Arrangements) and ASU 2009-14 (Certain Revenue Arrangements that Include Software Elements), which require the immediate recognition of appliance revenues upon sale. Prior to January 1, 2011, the company recognized revenue and costs from appliance sales ratably according to the original subscription terms. Q1'12 Q1'13 Software and service 91.6% 91.6% Current period appliance1 6.5% 7.4% Pre-2011 appliance2 1.9% 0.9% Total appliance 8.4% 8.4% Total GAAP revenues 100.0% 100.0% GAAP Margins Gross profit margin % 84.2% 83.6% Operating expenses % 72.2% 79.6% Operating margin % 12.0% 4.0% Non-GAAP Margins Non-GAAP gross profit margin % 85.2% 83.9% Non-GAAP operating expenses % 65.3% 72.5% Non-GAAP operating margin % 19.9% 11.4% Revenues
- 34. © 2013 Websense, Inc. Page 34 Billings-based Operating Models (Non-GAAP) Operating model as a percent of billings, excluding appliance costs associated with pre-2011 appliance sales. 1. Excludes previously deferred appliance costs of $0.8 million in Q1’12 and $0.3 million in Q1’13 associated with pre-2011 appliance sales. Q1'12 Q1'13 Software and service billings 92.6% 91.6% Appliance billings 7.4% 8.4% Total billings 100.0% 100.0% Non-GAAP Gross Profit Margin Gross margin software and service % 86.5% 85.1% Gross margin appliance %1 59.2% 62.1% Billings gross margin %1 84.5% 83.2% Non-GAAP Operating Expense and Margin Sales and marketing % 44.4% 49.5% Research & development % 17.4% 19.0% General & administrative % 10.8% 9.1% Total expenses % 72.5% 77.6% Billings non-GAAP operating margin %1 11.9% 5.6% Billings Mix
- 35. © 2013 Websense, Inc. Page 35 Balance Sheet Highlights 1. Excludes deferred revenue from pre-2011 appliance sales. $ millions, except DSO and percentages Q1'12 Q1'13 $ Chg % Chg Cash and receivables Cash and cash equivalents (excluding restricted cash) Accounts receivable $61.9 $57.9 ($4.0) -6% Days billings outstanding (DSO) 69 days 64 days Deferred revenues Current deferred revenue $242.4 $242.0 ($0.4) 0% Long term deferred revenue $141.7 $153.4 $11.7 8% Total deferred revenue $384.1 $395.4 $11.3 3% Deferred software and service revenue 1 $375.9 $390.8 $14.9 4% Borrowings Balance on revolving credit facility $68.0 $68.0 $0.0 0% Y/Y Comparison $70.3 $83.7 $13.4 19%
- 36. © 2013 Websense, Inc. Page 36 Cash Flow Highlights 1. Free cash flow = cash flow from operations less purchases of property, plant, and equipment. 2. Cash taxes and interest paid are included in cash flow from operations. $ in millions Q1'12 $ ∆ Cash flow from operations Net income ($1.8) $2.8 $4.6 Adjustments to reconcile net income to net cash provided by operating activities $9.9 $10.4 $0.5 Changes in operating assets and liabilities $14.3 $16.0 $1.8 Net cash provided by operating activities $22.4 $29.2 $6.9 Free cash flow Purchase of property and equipment ($2.8) ($2.9) ($0.1) Free cash flow 1 $19.6 $26.3 $6.8 Financing cash flows Borrowings (repayments), net ($5.0) $0.0 $5.0 Purchase of treasury stock ($20.5) ($5.1) $15.4 Supplemental cash flow disclosures 2 Cash taxes paid (net of refunds) $3.0 $1.1 ($1.9) Interest paid $0.6 $0.5 ($0.1) Q1'13
- 37. © 2013 Websense, Inc. Page 37 Q2 2013 Outlook $ in millions, except per share and percentages GAAP Revenues $89.9 $86 - $89 -4% - -1% Cash flow from operations $9.9 $9 - $11 Capital expenditures $3.3 Weighted average diluted shares 37.5 Non-GAAP Software and service billings % 91.8% 92% - 93% Appliance billings % 8.2% 7% - 8% Total billings $85.4 $86.5 - $91.5 1% - 7% Non-GAAP gross profit margin 84.6% Non-GAAP operating margin 20.8% 9% - 12% Billings non-GAAP operating margin %1 17.5% 9% - 14% Diluted non-GAAP EPS $0.39 $0.17 - $0.21 -56% - -46% Non-GAAP tax rate 19.0% 19.0% (as of 04/25/13) ~ 83% ~ $4 ~ 37 Q2'12 Actual Q2'13 Guidance Range Y/Y Chg
- 38. © 2013 Websense, Inc. Page 38 2013 Outlook $ in millions, except per share and percentages GAAP Revenues $361.5 $351 - $361 -3% - 0% Cash flow from operations $48.9 $66 - $76 Capital expenditures $12.5 $15 - $17 Weighted average diluted shares 37.5 Non-GAAP Revenue Based Non-GAAP gross profit margin 84.6% Non-GAAP operating margin 19.3% 11% - 13% Diluted non-GAAP EPS $1.46 $0.78 - $0.93 -47% - -36% Non-GAAP tax rate 19.0% Non-GAAP Billings Based Software and service billings % 92.3% 92% - 93% Appliance billings % 7.7% 7% - 8% Total billings $369.5 $374 - $394 1% - 7% Billings operating margin 21.8% 17% - 20% 2012 Actual 2013 Guidance (as of 04/25/13) Range Y/Y Chg ~37 ~83% 19.0%
- 39. © 2013 Websense, Inc. Page 39 Billings-based Operating Model 1. Based on non-GAAP expenses, excluding deferred appliance expenses associated with pre-2011 appliance sales. 2012A Guidance 2013 Billings Billings Billings Mix Software and services % 92.3% 92% - 93% 90% - 92% Hardware % 7.7% 7% - 8% 7% - 9% Sales and marketing % 38.4% 37% - 38% Research and development % 15.8% 14% - 15% General and administrative % 9.6% 7.5% - 8.5% Operating expense 63.8% 65% - 67% 59% - 62% Billings non-GAAP operating margin % 1 21.8% 17% - 20% 24% - 26% Long-term Target Model Billings Costs as a % of Billings Our long-term vision is to grow billings with margin improvement over time.
- 40. © 2013 Websense, Inc. Page 40 Billings-based Operating Model 1. Based on non-GAAP expenses, excluding deferred appliance expenses associated with pre-2011 appliance sales. 2012 2013 2012 2013 2012 2013 2012 2013 Total billings ($ in millions) $ 80.6 $ 81.8 $ 85.4 $ 81.5 $ 122.0 Billings Mix Software and service 92.6% 91.6% 91.8% 91.5% 92.9% Current period appliance 7.4% 8.4% 8.2% 8.5% 7.1% Non-GAAP Gross Profit Margin % 1 Software and service gross margin % 86.5% 85.1% 86.7% 85.4% 90.5% Appliance gross margin % 59.2% 62.1% 61.3% 60.7% 62.9% Billings gross margin % 84.5% 83.2% 84.6% 83.3% 88.6% Sales and marketing % 44.4% 49.5% 39.8% 40.0% 32.3% Research and development % 17.4% 19.0% 17.0% 18.0% 12.6% General and administrative % 10.8% 9.1% 10.3% 10.5% 7.7% Total expenses 72.6% 77.6% 67.1% 68.6% 52.6% Billings non-GAAP operating margin % 1 11.9% 5.6% 17.5% 14.8% 36.0% Q1 Q2 Q3 Q4 Non-GAAP Operating Expenses and Income %
- 41. © 2013 Websense, Inc. Page 41 2013 Guidance Assumptions as of 04/25/13 Exchange Rates Q1 Q2 Q3 Q4 ~% Billings (expected) Guidance Assumption 2012 2013 2012 2013 2012 2013 2012 2013 GBP Euro ~12% ~12% $1.52 $1.28 $1.59 $1.33 $1.55 $1.32 $1.58 $1.27 $1.58 $1.25 $1.61 $1.30 Currency impact on financial results Weaker dollar relative to the prior period increases billings and expenses; stronger dollar relative to prior periods decreases billings and expenses. Deferred revenue primarily denominated in US dollars.