FILE Filenet

Company Achieves 19% Software Revenue Growth COSTA MESA, Calif., July 26 /PRNewswire-FirstCall/ -- FileNet Corporation (NASDAQ:FILE), the leading provider of Enterprise Content and Business Process Management solutions, today announced financial results for its second quarter ended June 30, 2006. (Logo: http://www.newscom.com/cgi-bin/prnh/20000207/FILENETLOGO ) Total revenues for the second quarter of 2006 were $117.1 million compared to total revenues of $104.6 million for the same period in 2005. Software revenues for the second quarter of 2006 were $48.3 million compared to $40.6 million for the same period in 2005. Net income was $11.1 million in the second quarter of 2006 and includes equity-based compensation expense, net of tax, of $3.4 million. Net income for the second quarter of 2005 was $8.7 million and includes equity-based compensation expense for non-vested stock grants, net of tax, of $0.3 million. Earnings per basic and diluted share were $0.26 for the second quarter of 2006 and include all equity-based compensation expense (for stock options and non-vested shares) of $0.07 per share. This compares to earnings per basic and diluted share of $0.21, for the second quarter of 2005. Net income prior to 2006 did not include employee equity-based compensation expense for stock options, but did include compensation expense for non-vested shares. In addition to GAAP results, FileNet is reporting net income and net income per share excluding equity-based compensation expense, referred to respectively as "non-GAAP net income" and "non-GAAP net income per share." A further discussion of these non-GAAP financial measures and reconciliations to comparable GAAP measures for the three months ended June 30, 2006 and 2005 appear in the GAAP to Non-GAAP reconciliation found below. Non-GAAP net income for the second quarter of 2006 was $14.5 million, or $0.33 per diluted share. Non-GAAP net income for the second quarter of 2005 was $9.0 million, or $0.21 per diluted share. As of June 30, 2006, FileNet had cash and investments of $451.8 million, compared to $392.0 million at December 31, 2005. The company has no long-term debt. "Our solid performance in the quarter -- including record revenues and strong growth in non-GAAP operating income -- was driven by global demand for our FileNet P8 offering," said Lee Roberts, chairman and CEO of FileNet. "Looking forward, we remain focused on capitalizing and delivering on our long-term strategy of expanded market leadership." Quarterly Conference Call with Management -- July 26, 2006 Lee Roberts, Chairman and Chief Executive Officer, and Sam Auriemma, Chief Financial Officer, will host a conference call for investors at 7:00 a.m. pacific time today. The call and presentation will be broadcast live over the Internet. To listen to the event via the Internet, please follow the instructions that are available on the investor relations' section of FileNet's Web site at http://www.filenet.com/. A replay of the Web cast will be available for an extended period of time. Alternatively, to listen to the call live, dial (800) 591.6930. The conference call ID number for the call is 18036823. A replay of the call will be available from approximately 9:00 a.m. PT on July 26 through midnight PT on August 2. To listen to the replay, dial (888) 286-8010. The conference call ID number for the replay is 44818267. Use of Non-GAAP Financial Measures In our earnings release, conference call, slide presentation or webcast, we may use or discuss non-GAAP financial measures as defined by SEC Regulation G. These non-GAAP measures exclude charges for equity-based compensation on a pre-tax and after tax basis. The GAAP financial measure is most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure are included in this press release after the condensed consolidated financial statements. Equity-based compensation expense relates primarily to restricted stock, restricted stock units (collectively called "non-vested shares") and stock options issued by FileNet. Equity-based compensation expense is a non-cash expense that varies in amount from period to period and is affected by market forces that are difficult to predict and are not within the control of management, such as the price of our common stock. We utilize certain non-GAAP financial measures to evaluate our performance. FileNet believes the presentation of non-GAAP net income and non-GAAP net income per share provides important supplemental information to investors in order to assess FileNet's financial performance. Management believes that availability of these non-GAAP measures will assist investors with comparing and contrasting FileNet's financial performance with its performance in prior periods and with comparing and contrasting FileNet's performance with other companies in its industry, many of which management believes use similar non-GAAP measures to supplement their financial results. Non-GAAP net income and non-GAAP net income per share are not calculated in accordance with GAAP, and should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Non-GAAP financial measures have limitations in that they do not reflect all of the costs associated with the operations of FileNet's business as determined in accordance with GAAP. As a result, you should not consider these measures in isolation or as a substitute for analysis of FileNet's results as reported under GAAP. FileNet expects to continue to incur expenses similar to the non-GAAP adjustments described above and exclusion of these items from its non-GAAP net income should not be construed as an inference that these costs are unusual, infrequent or non-recurring. About FileNet FileNet Corp. offers enterprise software and services that help customers make better decisions, faster. A leader and innovator in Enterprise Content Management (ECM), Business Process Management (BPM) and Compliance solutions, FileNet simplifies critical and everyday decision-making processes giving organizations a competitive advantage. Since the company's founding in 1982, more than 4,300 organizations -- including more than three quarters of the FORTUNE 100 -- have taken advantage of FileNet solutions for help in managing their mission-critical content and processes. For more information, visit the FileNet Website at http://www.filenet.com/. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This release contains forward-looking statements that are based on our current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by us. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will" and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. Important factors that may cause such a difference for FileNet include, but are not limited to, the volume of our sales and pricing concessions on volume sales; our ability to specify, develop or acquire, complete, introduce, market, distribute and gain market acceptance for new products and technologies in a timely manner; the mix of products and services sold by us; the timing, rescheduling or cancellation of significant customer orders; the loss of a key customer; our ability to control expenses; announcements of technological innovations, new products or product enhancements by the company or its competitors; the emerging nature of the Enterprise Content Management market; key management changes; changes in joint marketing and development programs; developments relating to patents or other intellectual property rights or disputes; changing relationships with customers, distributors, suppliers and strategic partners; potential contractual or employment issues; our ability to integrate acquired businesses; and general conditions in the worldwide economy and the software/technology sector and other factors. Our Annual Report on Form 10-K, recent Quarterly Reports on Form 10-Q, recent Current Reports on Forms 8-K and other Securities and Exchange Commission filings discuss some of the important risk factors that may affect our business, results of operations and financial condition. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Note to editors: FileNet and ValueNet are registered trademarks of FileNet Corporation. All other company or product names referenced in this release may be trademarks or registered trademarks of their respective owners. Investor Contact: Greg Witter, Director, Investor Relations FileNet Corporation Phone: 714-327-3405 Email: FILENET CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Quarter Ended June 30, Six Months Ended June 30, 2006 2005 2006 2005 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue: Software $48,266 $40,636 $93,119 $79,087 Service 68,863 64,003 132,866 125,569 Total revenue 117,129 104,639 225,985 204,656 Cost of revenue: Cost of software revenue 3,585 2,719 7,093 5,089 Cost of service revenue 25,233 22,310 49,285 43,220 Total cost of revenue 28,818 25,029 56,378 48,309 Gross profit 88,311 79,610 169,607 156,347 Operating expenses: Sales and marketing 45,618 40,718 87,881 78,900 Research and development 21,295 18,759 43,007 37,389 General and administrative 9,854 8,202 19,746 17,428 Total operating expenses 76,767 67,679 150,634 133,717 Operating income 11,544 11,931 18,973 22,630 Other income, net 3,980 2,295 7,573 4,322 Income before income taxes 15,524 14,226 26,546 26,952 Provision for income taxes 4,427 5,518 7,844 9,972 Net income $11,097 $8,708 $18,702 $16,980 Earnings per share: Basic $0.26 $0.21 $0.45 $0.42 Diluted $0.26 $0.21 $0.43 $0.40 Weighted average shares outstanding: Basic 41,927 40,651 41,821 40,506 Diluted 43,262 42,156 43,136 41,931 Note: Certain reclassifications have been made to prior-years' balances to conform to the current year's presentation. FILENET CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) June 30, December 31, 2006 2005 (Unaudited) (Unaudited) ASSETS Current assets: Cash and cash equivalents $302,863 $204,915 Short-term investments 147,508 178,923 Accounts receivable, net 50,355 58,559 Prepaid expenses and other assets 15,361 14,677 Deferred income taxes 1,960 1,960 Total current assets 518,047 459,034 Property, net 22,948 21,007 Long-term investments 1,460 8,154 Goodwill 32,733 31,530 Intangible assets, net 8,508 10,133 Deferred income taxes 40,841 41,022 Other assets 3,462 3,464 Total assets $627,999 $574,344 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $11,146 $14,893 Customer deposits/advances 8,541 8,874 Accrued compensation and benefits 30,771 39,133 Unearned maintenance revenue 68,712 45,092 Other accrued liabilities 23,997 19,291 Total current liabilities 143,167 127,283 Unearned maintenance revenue 4,310 5,651 Total liabilities 147,477 132,934 Stockholders' equity 480,522 441,410 Total liabilities and stockholders' equity $627,999 $574,344 Reconciliation of Non-GAAP Financial Measures to Comparable U.S. GAAP Measures (Unaudited) The following table reconciles non-GAAP financial measures used in this release to the comparable GAAP measure for the respective periods (in thousands, except for per share information): FILENET CORPORATION (In thousands, except per share data) Quarter Ended June 30, 2006 2005 (Unaudited) (Unaudited) Net income reconciliation Net income (GAAP) $11,097 $8,708 Equity-based compensation expense 4,710 413 Income tax effect of Non-GAAP Adjustment (1,343) (160) Net income (Non-GAAP) $14,464 $8,961 Diluted net income per share reconciliation Diluted net income per share (GAAP) $0.26 $0.21 Equity-based compensation expense 0.10 (0.00) Income tax effect of Non-GAAP Adjustment (0.03) (0.00) Diluted net income per share (Non-GAAP) $0.33 $0.21 Shares used in calculation of diluted net income per share (GAAP) Diluted 43,262 42,156 FileNet adopted Statement of Financial Accounting Standard No.123 revised 2004 (SFAS 123R), "Share-based Payment," on January 1, 2006, electing to follow the modified prospective application. Net income prior to 2006 did not include employee equity-based compensation expense for stock options. http://www.newscom.com/cgi-bin/prnh/20000207/FILENETLOGO http://photoarchive.ap.org/ DATASOURCE: FileNet Corporation CONTACT: Greg Witter, Director, Investor Relations of FileNet Corporation, +1-714-327-3405, Web site: http://www.filenet.com/

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