IT security company



beat analyst expectations for the third quarter but said it is dropping quarterly guidance for the next fiscal year because of accounting problems stemming from a key acquisition.

Websense, which offers web filtering and management products that prevent data leaks, said third-quarter net income was $6.4 million, or 14 cents a share, compared to $8.3 million, or 18 cents a share in the year-ago quarter.

Excluding acquisition-related and other charges, net income fell 3% to $10.9 million, or 24 cents a share, from $11.3 million, or 25 cents a share, a year ago. Analysts polled by Thomson Financial were expecting earnings of 22 cents a share.

The decline in net income stemmed from charges related to its acquisition of data leak prevention company Port Authority in January and a shift in its distribution model.

Revenue rose 10% to $50.4 million, compared to $45.7 million a year ago. Analysts were expecting revenue of $50.5 million. Third-quarter revenue is net of approximately $950,000 in marketing payments and rebates to channel partners.

Websense said it will not offer quarterly guidance beginning with fiscal year 2008 and will update its annual guidance on a quarterly basis.

"Quarterly variations are difficult to predict and not the best way to manage the business," Dudley Mendenhall, chief financial officer of Websense told analysts on a conference call.

The company's $416 million acquisition of SurfControl, which closed Oct. 3, has also made it difficult to predict its short-term financial outlook with accuracy, said Websense. Prior to the acquisition, UK-based SurfControl reported its results following International Financial Reporting Standards as opposed to the Generally Accepted Accounting Principles (GAAP) used in the U.S.

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Websense said it will convert SurfControl's historical results to GAAP, a process which it said could cause some variability in its quarterly results going forward.

"With SurfControl coming on board, it is difficult to be precise in our expectations and we have found that the market is not very forgiving if you are not precise enough," said Mendenhall.

Shares of Websense were up 37 cents, or 2%, to $18.70 in recent after-hours trading.

Net billings in the quarter decreased 2% to $52.2 million. Websense billings were below the previously guided range of $56 to $59 million, primarily due to increased competition from SurfControl in North America--something that Websense says should not matter going forward.

"SurfControl didn't have the discounting discipline that we did," says Mendenhall. "They weren't sure if they would be employed after Oct. 4 so they pursued a very aggressive selling policy. That undisciplined pricing now goes away."

Websense also reiterated that it is on track to achieve cost savings of $10 million this quarter and $60 million in 2008 as a result of the Websense-SurfControl merger. Websense places to reduce 400 employees across both organizations over the next 15 months, and in turn hire about 100 employees, many of whom it says will be deployed in "lower cost locations."

At the end of the third quarter, Websense reported total deferred revenue at the end of $219.3 million. Combined third quarter net billings for Websense and SurfControl were $79.1 million.

For the fourth quarter, Websense expects revenue, excluding charges, in the range of $76 million to $79 million. Net billings for the quarter is expected to range from $92 million to $95 million.

Analysts polled by Thomson Financial are expecting revenue of $65.88 million including all charges.

Excluding charges, it guided earnings in the range of 20 cents to 23 cents a share, lower than analysts' estimates of 24 cents a share.

For fiscal 2008, Websense said it expects revenue, including all charges, in the range of $305 million to $320 million. The company guided earnings in the range of $1.10 to $1.17 a share. Analysts polled by Thomson Financial are expecting earnings of $1.18 a share.

Net billings for the fiscal year is expected to range from $330 million to $345 million.