ISSX Internet Security Systems

Internet Security Systems, Inc. (ISS) (NASDAQ: ISSX), the worldwide leader in preemptive, enterprise security, today announced financial results for the second quarter ended June 30, 2006. Additionally, the Company is providing its Business Outlook for the third quarter ending September 30, 2006 and updating its Business Outlook for the full year 2006. Second Quarter Revenues Revenues were $82,712,000 for the second quarter of 2006, a five percent increase compared with second quarter 2005 revenues of $79,100,000. GAAP Earnings Reported net income under generally accepted accounting principles (GAAP) for the second quarter of 2006 was $6,220,000, or $0.14 per diluted share, compared to $8,261,000, or $0.18 per diluted share, in the second quarter of 2005. Non-GAAP Earnings Non-GAAP net income for all periods in 2006 and 2005 excludes the after-tax impact of (i) non-cash amortization of intangibles related to acquisitions; and (ii) stock-based compensation expense associated with the expensing of stock options in accordance with FAS 123(R) and restricted stock expense. Non-GAAP net income for the second quarter of 2006 was $9,695,000, or $0.22 per diluted share, compared to $9,706,000, or $0.21 per diluted share, in the second quarter of 2005. "I am very pleased with the strong demand patterns for our new Proventia solutions, which delivered solid growth this quarter. Additionally, I am proud to note that our Proventia Intrusion Prevention solutions grew 23 percent annually, while our Proventia Unified Threat Management solutions revenue grew 55 percent annually," said Tom Noonan, president and CEO of Internet Security Systems. "In addition to again meeting our earnings expectations, we continued to deliver on our Protection On-Demand strategy with new technology development and innovation that significantly advances our vision of providing customers of all markets and sizes with a dramatically simpler and more effective IT protection solution." Business Outlook The following Business Outlook is based on current expectations. The statements in this Business Outlook are forward-looking, and actual results may differ materially. These statements do not reflect the potential impact of any mergers, acquisitions or other business combinations that may be completed after the date of this press release. During the quarter, corporate representatives of ISS may reiterate the company's published Business Outlook during private meetings with investors, investment analysts, the media and others. At the same time, ISS will keep its most current earnings release and any subsequent press releases containing the then current Business Outlook publicly available on its Web site at www.iss.net. Prior to the start of the ISS quiet period for the third quarter of 2006, the public can continue to rely on the Business Outlook set forth in this press release as being ISS' current expectations on matters covered, unless ISS publishes a notice stating otherwise. During the quiet period, ISS and its corporate representatives will not comment concerning the previously published Business Outlook and ISS disclaims any obligation to update the Business Outlook. During the quiet period, the company's press releases and filings with the SEC on Forms 10-K and 10-Q should be considered historical, speaking as of prior to the quiet period only and not subject to update by the company. The ISS quiet period at the end of the third quarter is expected to run from September 15, 2006 until financial results are released in October 2006. This Business Outlook assumes that the enterprise spending environment remains consistent with ISS' experience in the second quarter 2006. This Business Outlook also assumes that the competitive landscape will not change significantly during 2006, recognizing that there will continue to be competitive alternatives to our product offerings. For the year ending December 31, 2006, ISS currently expects to achieve revenues in the range of $355,000,000 to $360,000,000. GAAP net income is expected to be in the range of $0.67 to $0.72 per diluted share. Non-GAAP net income is expected to be in the range of $0.95 to $1.00 per diluted share. For the quarter ending September 30, 2006, ISS currently expects to achieve revenues in the range of $90,000,000 to $92,000,000. GAAP net income is expected to be in the range of $0.16 to $0.18 per diluted share. Non-GAAP net income is expected to be in the range of $0.23 to $0.25 per diluted share. Non-GAAP net income excludes: (i) non-cash amortization of intangibles related to acquisitions (net of taxes), estimated to be $500,000 for the quarter ending September 30, 2006 and $3,000,000 for the year ending December 31, 2006; and (ii) compensation expense (net of taxes) associated with the expensing of stock options in accordance with FAS 123(R) and restricted stock expenses, estimated to be approximately $2,500,000 or $0.06 per diluted share for the quarter ending September 30, 2006 and approximately $9,500,000 or $0.21 per diluted share for the year ending December 31, 2006. Non-GAAP financial measures used in this press release are reconciled to the appropriate GAAP measures in the historical reconciliation table following the Consolidated Statements of Operations and in the Business Outlook Reconciliation included with this press release. Reconciliation information can also be found in the Form 8-K filed by ISS today with the Securities and Exchange Commission and available through the ISS Web site at www.iss.net or the Securities and Exchange Commission Web site at www.sec.gov. Earnings Conference Call The Company's conference call regarding this press release is being held Monday, July 31, 2006 at 4:30 p.m. Eastern Time and can be accessed as follows: DATE/TIME: Monday, July 31, 2006 at 4:30 p.m. ET DIAL IN: Domestic 800-665-0430 International +1-913-312-1300 Pass code 6641537 A live Webcast of this conference call will be available at www.iss.net and the archived Webcast will remain accessible on the ISS Web site for one year. An audio rebroadcast of the teleconference will be available until August 8, 2006. REBROADCAST DIAL IN: Domestic 888-203-1112 International +1-719-457-0820 Pass code 6641537 Additional investor information can be accessed on the ISS Web site or by contacting the Investor Relations department at +1-404-236-4053. About Internet Security Systems, Inc. Internet Security Systems, Inc. (ISS) is the trusted security advisor to thousands of the world's leading businesses and governments, providing preemptive protection for networks, desktops and servers. An established leader in security since 1994, the ISS Proventia(R) integrated security platform automatically protects against both known and unknown threats, keeping networks up and running and shielding customers from online attacks before they impact business assets. ISS products and services are based on the proactive security intelligence of its X-Force(R) research and development team - the unequivocal world authority in vulnerability and threat research. The ISS product line is also complemented by comprehensive Managed Security Services and Professional Security Services. For more information, visit the Internet Security Systems Web site at www.iss.net or call 800-776-2362. Forward-Looking Statements This press release, other than historical information, includes forward-looking statements made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Some of these forward-looking statements appear in our Business Outlook - specifically, our revenue and GAAP and non-GAAP net income estimates for the third quarter and full year 2006. The risks and uncertainties which could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following: the level of demand for ISS products; customer budgets; the volume and timing of orders and deliveries; the mix of products sold and whether revenue is recognized upon sale or deferred to subsequent periods; product and price competition; risks concerning the rapid change of technology; ISS' ability to develop new and enhanced products; disruption from introducing new products; acceptance of new and enhanced products by customers; new regulations requiring changes to products and the availability of compliant products in a timely manner; reliance on contract manufacturers to produce ISS appliance products; availability of component parts of appliance products; ISS' ability to accurately forecast and produce demanded quantities of its appliance products and models; reliance on distribution channels through which ISS products are sold; ISS' ability to integrate acquisitions or investments; ISS' ability to attract and retain key personnel; changes in accounting policies, standards, guidelines or principles that may be adopted by regulatory agencies or the Financial Accounting Standards Board (including without limitation the impact of expensing stock options); the assertion of infringement claims with respect to ISS intellectual property; foreign currency exchange rates; and general economic factors. These risks and others are discussed in ISS' periodic filings with the Securities and Exchange Commission, including the ISS 2005 Annual Report on Form 10-K. These filings can be obtained either by contacting ISS Investor Relations or through the ISS Web site at www.iss.net or the Securities and Exchange Commission's Web site at www.sec.gov. Non-GAAP Financial Measures This press release and the accompanying supplementary financial information presents operating income, income before income taxes, net income, operating margin and net income per dilutive share measures that exclude the effect of non-cash acquisition related expenses and stock-based compensation expense relating to FAS 123(R). ISS management and industry analysts often evaluate ISS' operating performance using these measures. These non-GAAP financial measures are also used by management to conduct business operations such as: developing budgets, managing expenditures, evaluating internal performance and calculating incentive compensation. In addition, ISS believes these non-GAAP financial measures facilitate management's internal comparisons to its competitors' operating results, and the software industry in general. ISS believes that its presentation of these non-GAAP measures provides useful information to investors as a measure of operating performance basic to its ongoing operations, which is more comparable from period to period without the charges related to occasional acquisition activity and non-cash stock-based compensation expense. Additionally, ISS believes these non-GAAP measures provide useful information to investors so they can evaluate ISS' operating results in the same manner as management and industry analysts, if they so choose. This non-GAAP financial information, provided as additional information for investors, is not in accordance with generally accepted accounting principles and may be different from similarly named non-GAAP financial measures used by other companies. Non-GAAP financial measures should not be used as a substitute for, or considered superior to, measures of financial performance prepared in accordance with generally accepted accounting principles. Internet Security Systems is a trademark and X-Force and Proventia are registered trademarks of Internet Security Systems, Inc. -0- *T INTERNET SECURITY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except per share amounts) (unaudited) Three months ended June 30, ---------------- 2006 2005 ------- ------- Revenues: Product licenses and sales $33,447 $33,613 Subscriptions 43,358 39,852 Professional services 5,907 5,635 ------- ------- 82,712 79,100 Costs and expenses: Cost of revenues: Product licenses and sales 7,996 6,152 Amortization of acquired technology 1,501 1,756 Subscriptions and professional services 14,472 13,167 ------- ------- Total cost of revenues 23,969 21,075 Research and development 12,406 10,985 Sales and marketing 30,033 27,537 General and administrative 8,350 7,302 Amortization of other intangibles 42 42 ------- ------- 74,800 66,941 Operating income 7,912 12,159 Interest income 1,828 1,253 Other income (expense), net 142 (405) ------- ------- Income before income taxes 9,882 13,007 Provision for income taxes 3,662 4,746 ------- ------- Net income $ 6,220 $ 8,261 ======= ======= Basic net income per share of Common Stock $ 0.14 $ 0.18 ======= ======= Diluted net income per share of Common Stock $ 0.14 $ 0.18 ======= ======= Weighted average shares: Basic 44,035 45,243 ======= ======= Diluted 44,762 47,178 ======= ======= Reconciliation of GAAP to Non-GAAP financial information for the three months ended June 30, 2006 and June 30, 2005: Three months ended June 30, ---------------- 2006 2005 ------- ------- Operating income - GAAP $ 7,912 $12,159 Add back stock-based compensation in cost of product licenses and sales expense 27 - Add back stock-based compensation in cost of subscription and professional services expense 478 33 Add back stock-based compensation in research and development expense 979 57 Add back stock-based compensation in sales and marketing expense 1,244 178 Add back stock-based compensation in general and administrative expense 1,250 212 Add back amortization of acquired technology and other intangibles 1,543 1,798 ------- ------- Non-GAAP operating income $13,433 $14,437 Other income, net 1,970 848 ------- ------- Non-GAAP income before income taxes 15,403 15,285 Provision for income taxes 5,708 5,579 ------- ------- Non-GAAP net income $ 9,695 $ 9,706 ======= ======= Non-GAAP diluted net income per share of Common Stock 0.22 0.21 ======= ======= Non-GAAP operating margin 16% 18% ======= ======= *T -0- *T INTERNET SECURITY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except per share amounts) (unaudited) Six months ended June 30, ------------------ 2006 2005 -------- -------- Revenues: Product licenses and sales $ 66,136 $ 65,883 Subscriptions 86,056 78,690 Professional services 11,281 11,319 -------- -------- 163,473 155,892 Costs and expenses: Cost of revenues: Product licenses and sales 14,804 12,537 Amortization of acquired technology 3,221 3,542 Subscriptions and professional services 28,021 26,325 -------- -------- Total cost of revenues 46,046 42,404 Research and development 25,100 21,276 Sales and marketing 58,127 53,646 General and administrative 16,659 14,646 Amortization of other intangibles 82 86 -------- -------- 146,014 132,058 Operating income 17,459 23,834 Interest income 3,795 2,312 Other income (expense), net (177) (881) -------- -------- Income before income taxes 21,077 25,265 Provision for income taxes 7,807 9,159 -------- -------- Net income $ 13,270 $ 16,106 ======== ======== Basic net income per share of Common Stock $ 0.30 $ 0.36 ======== ======== Diluted net income per share of Common Stock $ 0.29 $ 0.34 ======== ======== Weighted average shares: Basic 44,285 45,284 ======== ======== Diluted 45,260 47,314 ======== ======== Reconciliation of GAAP to Non-GAAP financial information for the six months ended June 30, 2006 and June 30, 2005: Six months ended June 30, ------------------ 2006 2005 -------- -------- Operating income - GAAP $ 17,459 $ 23,834 Add back stock-based compensation in cost of product licenses and sales expense 41 - Add back stock-based compensation in cost of subscription and professional services expense 854 66 Add back stock-based compensation in research and development expense 1,853 114 Add back stock-based compensation in sales and marketing expense 2,288 328 Add back stock-based compensation in general and administrative expense 2,277 545 Add back amortization of acquired technology and other intangibles 3,303 3,628 -------- -------- Non-GAAP operating income $ 28,075 $ 28,515 Other income, net 3,618 1,431 -------- -------- Non-GAAP income before income taxes 31,693 29,946 Provision for income taxes 11,740 10,855 -------- -------- Non-GAAP net income $ 19,953 $ 19,091 ======== ======== Non-GAAP diluted net income per share of Common Stock 0.44 0.40 ======== ======== Non-GAAP operating margin 17% 18% ======== ======== *T -0- *T INTERNET SECURITY SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (amounts in thousands, except share and per share amounts) June 30, Dec. 31, 2006 2005 --------- --------- ASSETS (unaudited)(audited) Current assets: Cash and cash equivalents $ 177,122 $ 238,893 Marketable securities 42,681 - Accounts receivable, less allowance for doubtful accounts of $4,130, and $3,574 respectively 78,950 87,769 Inventory 6,321 2,852 Prepaid expenses and other current assets 13,080 9,656 --------- --------- Total current assets 318,154 339,170 Property and equipment: Computer equipment and software 72,279 60,365 Office furniture and equipment 18,191 17,797 Leasehold improvements 21,083 20,948 --------- --------- 111,553 99,110 Less accumulated depreciation 75,027 67,754 --------- --------- 36,526 31,356 Restricted cash and marketable securities 9,200 8,600 Goodwill, less accumulated amortization of $27,381 221,439 220,224 Other intangible assets, less accumulated amortization of $31,189 and $27,490 in 2006 and 2005, respectively 8,122 10,913 Other assets 8,209 8,381 --------- --------- Total assets $ 601,650 $ 618,644 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 11,580 $ 11,261 Accrued expenses 26,164 35,019 Deferred revenues 76,803 74,577 --------- --------- Total current liabilities 114,547 120,857 Long-term deferred revenues 8,697 7,067 Other non-current liabilities 195 202 Minority interest 4,813 4,378 Stockholders' equity: Preferred stock; $.001 par value; 20,000,000 shares authorized, none issued or outstanding - - Common stock; $.001 par value; 120,000,000 shares authorized, 52,872,000 and 52,204,000 shares issued in 2006 and 2005, respectively 53 52 Additional paid-in-capital 535,027 524,105 Deferred compensation - (1,830) Accumulated other comprehensive income 4,084 1,058 Retained earnings 100,359 87,089 Treasury stock, at cost (9,080,000 and 7,129,000 shares in 2006 and 2005, respectively) (166,125) (124,334) --------- --------- Total stockholders' equity 473,398 486,140 --------- --------- Total liabilities and stockholders' equity $ 601,650 $ 618,644 ========= ========= *T -0- *T CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) (unaudited) Six months ended June 30, 2006 2005 -------- -------- Operating activities Net income $ 13,270 $ 16,106 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 7,017 5,355 Amortization of intangibles 3,303 3,628 Stock-based compensation expense 7,313 1,053 Income tax benefit from exercise of stock options 480 945 Accretion of discount on marketable securities 31 (562) Minority interest 572 61 Gain on issuance of subsidiary stock (63) (134) Changes in assets and liabilities, excluding the effects of acquisitions: Accounts receivable 10,460 7,192 Inventory (3,429) (1,409) Prepaid expenses and other assets (2,854) 2,752 Accounts payable and accrued expenses (9,852) 3,206 Deferred revenues 2,334 (3,977) -------- -------- Net cash provided by operating activities 28,582 34,216 Investing activities Acquisitions, net of cash received - (764) Purchases of marketable securities (48,581) (56,923) Net proceeds from maturity of marketable securities 7,749 60,136 Net proceeds from sales of marketable securities - 29,750 (Addition to) release of cash equivalents in restricted cash and marketable securities (2,480) - Purchases of property and equipment (12,052) (2,612) Issuance of (dividends from) subsidiary stock (74) 357 -------- -------- Net cash provided by (used in) investing activities (55,438) 29,944 Financing activities Proceeds from exercise of stock options 4,450 4,800 Proceeds from issuance of common stock - 732 Purchases of treasury stock (41,791) (18,349) Excess tax benefits from stock option exercises 510 - -------- -------- Net cash provided by (used in) financing activities (36,831) (12,817) Foreign currency impact on cash 1,916 (3,427) -------- -------- Net increase (decrease) in cash and cash equivalents (61,771) 47,916 Cash and cash equivalents at beginning of period 238,893 140,148 -------- -------- Cash and cash equivalents at end of period $177,122 $188,064 ======== ======== *T -0- *T Business Outlook Reconciliation This table does not reflect the potential impact of any mergers, acquisitions or other business combinations that may be completed after the date of this release. Q3 2006 Range Annual 2006 Range -------------------------------------------------- Low end Upper end Low end Upper end -------------------------------------------------- Expected revenues $90,000,000 $92,000,000 $355,000,000 $360,000,000 ================================================= Expected net income per diluted share $ 0.16 $ 0.18 $ 0.67 $ 0.72 Add back per share impact of amortization of intangibles and stock based compensation expense $ 0.07 $ 0.07 $ 0.28 $ 0.28 ------------------------------------------------- Expected non-GAAP net income per diluted share $ 0.23 $ 0.25 $ 0.95 $ 1.00 ================================================= *T