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| Internet Security Systems Reports Third Quarter Results and Business Outlook; Revenues Increased 14 Percent; Non-GAAP EPS up 44 Percent; Company Announces Next CFO under Succession Plan |
ATLANTA--(BUSINESS WIRE)--Oct. 25, 2005--Internet Security Systems, Inc. (ISS) (NASDAQ: ISSX), a leading global provider of preemptive enterprise security solutions, today announced financial results for the third quarter ended September 30, 2005. ISS also provided its Business Outlook for the fourth quarter and 2005, and announced ISS' next chief financial officer, Raghavan Rajaji, in connection with its succession plan for Rich Macchia announced in May 2005. Third Quarter Revenues Revenues were $82,845,000 for the third quarter of 2005, a 14 percent increase compared with third quarter 2004 revenues of $72,733,000. GAAP Earnings Reported net income under generally accepted accounting principles (GAAP) for the third quarter of 2005 was $9,792,000, or $0.21 per diluted share, compared to reported net income of $6,411,000, or $0.14 per diluted share, in the third quarter of 2004. Non-GAAP Earnings Non-GAAP net income for all periods in 2005 and 2004 excludes the after-tax impact of non-cash acquisition expense for amortization of intangibles and acquisition related compensation charges for unvested stock options. Non-GAAP net income for the third quarter of 2005 was $10,907,000, or $0.23 per diluted share, compared to $7,537,000, or $0.16 per diluted share, in the third quarter of 2004. "Third quarter marked ISS' seventh consecutive quarter of double-digit, organic revenue growth, demonstrating consistency in our ability to execute on our unique, preemptive approach to security," said Tom Noonan, chairman, president and CEO of Internet Security Systems. "Over the last quarter, ISS increased its enterprise market share, providing us with a solid base for expanding upon the comprehensive, integrated security technologies and services we are able to offer our customers. As we continue to innovate and bring new offerings to market over the next several quarters, ISS intends to meet and exceed the security needs of a wide range of organizations." 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, ISS' corporate representatives 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 ISS' quiet period for the fourth quarter of 2005, 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. During the quiet period, the company's press releases and filings with the SEC should be considered historical, speaking as of prior to the quiet period only and not subject to update by the company. ISS' quiet period at the end of the fourth quarter is expected to run from December 15, 2005 until financial results are released in 2006. This Business Outlook assumes that the enterprise spending environment remains stable and the competitive landscape will not change significantly, recognizing that there will continue to be competitive alternatives to our product offerings. In providing this guidance, we have assumed that foreign exchange for the euro and the yen compared to the dollar remains stable at current rates. For the quarter ending December 31, 2005, ISS currently expects to achieve revenues in the range of $88,000,000 to $92,000,000. GAAP net income is expected to be in the range of $0.23 to $0.25 per diluted share. Non-GAAP net income is expected to be in the range of $0.25 to $0.27 per diluted share. Assuming achievement of fourth quarter expectations, ISS anticipates revenues for the year ending December 31, 2005 in the range of $327,000,000 to $331,000,000. GAAP net income is expected to be in the range of $0.78 to $0.80 per diluted share. Non-GAAP net income is expected to be in the range of $0.87 to $0.89 per diluted share. Non-GAAP net income excludes non-cash acquisition related charges, consisting of amortization of intangibles and compensation charges for unvested stock options and the tax effect of these adjustments, estimated to be $1,150,000 for the quarter ending December 31, 2005 and $4,600,000 for the year ending December 31, 2005. Non-GAAP financial measures used in this press release are reconciled to the appropriate GAAP measures in the schedule following the Consolidated Statements of Operations and in the Business Outlook Reconciliation schedule included with this press release. This information can also be found in ISS' Form 8-K filed today with the Securities and Exchange Commission and available through ISS' Web site at www.iss.net or the Securities and Exchange Commission Web site at www.sec.gov. CFO Succession Plan Internet Security Systems also announced today that Raghavan Rajaji is joining the company in November as senior vice president of finance & administration and chief financial officer. The addition of Mr. Rajaji fulfills the succession plan, announced in May 2005, for our current chief financial officer, Rich Macchia. Mr. Macchia will remain with ISS in a full-time capacity through the end of 2005, and will continue transitional services into 2006. "We are pleased to have obtained a CFO of Raj's caliber," said Tom Noonan, chairman, president and CEO of Internet Security Systems. "He is a seasoned chief financial officer with exceptional finance and administration experience." Mr. Rajaji joins ISS from Manugistics Group, Inc. (NASDAQ: MANU), where he was executive vice president and chief financial officer since 1999. Manugistics provides supply chain, demand and revenue management software products and services worldwide. Mr. Rajaji's prior experience includes more than 18 years at Occidental Chemical Company, a $5 billion subsidiary of Occidental Petroleum Corporation, where he was senior vice president and chief financial officer. Mr. Rajaji has an undergraduate degree from the University of Calcutta, India and a master's degree in business, with an emphasis in finance, from Virginia Tech in Blacksburg, VA. He is a Certified Public Accountant. Earnings Conference Call The Company's conference call regarding this press release is being held Tuesday, October 25, 2005 at 4:30 p.m. Eastern Time and can be accessed as follows:
DATE/TIME: Tuesday, October 25, 2005 at 4:30 p.m. ET
DIAL IN: Domestic 800-289-0726
International +1-913-981-5545
Pass code 7480703
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 through November 3, 2005.
REBROADCAST DIAL IN: Domestic 888-203-1112
International +1-719-457-0820
Pass code 7480703
Additional investor information can be accessed on the Internet Security Systems Web site or by contacting the Investor Relations department at +1-404-236-4053. About Internet Security Systems, Inc. Internet Security Systems is the trusted expert to global enterprises and world governments, providing products and services that protect against Internet threats. An established world leader in security since 1994, ISS delivers proven cost efficiencies and reduces regulatory and business risk across the enterprise for customers worldwide. ISS products and services are based on the proactive security intelligence conducted by ISS' X-Force(R) research and development team - the unequivocal world authority in vulnerability and threat research. Headquartered in Atlanta, Internet Security Systems has additional operations throughout the Americas, Asia, Australia, Europe and the Middle East. 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 income estimates for the fourth quarter and full year 2005. 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; the mix of products sold and whether revenue is recognized upon sale or deferred to subsequent periods; product and price competition; ISS' ability to develop and timely introduce new and enhanced products; acceptance of new and enhanced products by customers; ISS' ability to accurately forecast and produce demanded quantities of its appliance products and models; ISS' ability to integrate acquisitions or investments; ISS' ability to attract and retain key personnel; reliance on distribution channels through which ISS' products are sold; reliance on contract manufacturers to produce ISS appliance products; availability of component parts of appliance products; ISS' ability to produce products that successfully operate in complex environments and avoid serious product errors and defects; changes in accounting policies, standards, guidelines or principles that may be adopted by regulatory agencies or the Financial Accounting Standards Board; the assertion of infringement claims with respect to ISS' intellectual property; foreign currency exchange rates; risks concerning the rapid change of technology; and general economic factors. These risks and others are discussed in ISS' periodic filings with the Securities and Exchange Commission, including ISS' 2004 Annual Report on Form 10-K. These filings can be obtained either by contacting ISS Investor Relations or through ISS' Web site at www.iss.net or the Securities and Exchange Commission's Web site at www.sec.gov. Non-GAAP Financial Measures ISS believes that non-GAAP income measures, which exclude the after-tax effect of non-cash acquisition related expenses, are additional meaningful measures of operating performance. ISS believes that its presentation of non-GAAP income 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. ISS uses non-GAAP net income measures to evaluate its internal performance, including as a basis for calculating incentive compensation. Non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and may be different from 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 is a registered trademark of Internet Security Systems, Inc.
INTERNET SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
(unaudited)
Three months ended
September 30,
--------------------
2005 2004
--------------------
Revenues:
Product licenses and sales $ 37,164 $ 31,241
Subscriptions 40,713 35,819
Professional services 4,968 5,673
--------------------
82,845 72,733
Costs and expenses:
Cost of revenues:
Product licenses and sales 7,386 6,463
Amortization of acquired technology 1,731 1,732
Subscriptions and professional services 13,274 12,278
--------------------
Total cost of revenues 22,391 20,473
Research and development 11,406 10,740
Sales and marketing 27,659 24,653
General and administrative 7,339 7,173
Amortization and write-off of other intangibles
& stock based compensation 41 59
--------------------
68,836 63,098
Operating income 14,009 9,635
Interest income 1,565 699
Other income (expense), net (58) (152)
Gain on issuance of subsidiary stock 52 38
--------------------
Income before income taxes 15,568 10,220
Provision for income taxes 5,776 3,809
--------------------
Net income $ 9,792 $ 6,411
====================
Basic net income per share of Common Stock $ 0.22 $ 0.14
--------------------
Diluted net income per share of Common Stock $ 0.21 $ 0.14
====================
Weighted average shares and equivalent shares:
Basic 44,915 46,267
====================
Diluted 47,336 47,225
====================
INTERNET SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
(unaudited)
Nine months ended
September 30,
--------------------
2005 2004
--------------------
Revenues:
Product licenses and sales $103,047 $ 88,877
Subscriptions 119,403 102,928
Professional services 16,287 17,532
--------------------
238,737 209,337
Costs and expenses:
Cost of revenues:
Product licenses and sales 19,923 16,312
Amortization of acquired technology 5,273 5,072
Subscriptions and professional services 39,599 36,497
--------------------
Total cost of revenues 64,795 57,881
Research and development 32,682 32,644
Sales and marketing 81,305 73,123
General and administrative 21,985 19,766
Amortization and write-off of other intangibles
& stock based compensation 127 337
--------------------
200,894 183,751
Operating income 37,843 25,586
Interest income 3,877 1,691
Other income (expense), net (1,073) (581)
Gain on issuance of subsidiary stock 186 278
--------------------
Income before income taxes 40,833 26,974
Provision for income taxes 14,935 9,883
--------------------
Net income $ 25,898 $ 17,091
====================
Basic net income per share of Common Stock $ 0.57 $ 0.36
--------------------
Diluted net income per share of Common Stock $ 0.55 $ 0.35
====================
Weighted average shares and equivalent shares:
Basic 45,080 47,460
====================
Diluted 47,365 48,650
====================
INTERNET SECURITY SYSTEMS, INC.
SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS--Non-GAAP
(amounts in thousands, except per share amounts)
(unaudited)
Three months ended
September 30,
--------------------
2005 2004
--------------------
Revenues:
Product licenses and sales $ 37,164 $ 31,241
Subscriptions 40,713 35,819
Professional services 4,968 5,673
--------------------
82,845 72,733
Costs and expenses:
Cost of revenues:
Product licenses and sales 7,386 6,463
Subscriptions and professional services 13,274 12,278
--------------------
Total cost of revenues 20,660 18,741
Research and development 11,406 10,740
Sales and marketing 27,659 24,653
General and administrative 7,339 7,173
--------------------
67,064 61,307
Operating income 15,781 11,426
Other income (expense), net 1,559 585
--------------------
Income before income taxes 17,340 12,011
Provision for income taxes 6,433 4,474
--------------------
Net income $ 10,907 $ 7,537
====================
--------------------
Diluted net income per share of Common Stock $ 0.23 $ 0.16
====================
Reconciliation of GAAP to Non-GAAP financial information for the three
months ended September 30, 2005 and September 30, 2004:
Three months ended
September 30,
--------------------
2005 2004
--------------------
Operating income - GAAP $ 14,009 $ 9,635
Add back amortization of intangibles and stock
based compensation expense 1,772 1,791
--------------------
Non-GAAP operating income 15,781 11,426
Other income, net 1,559 585
--------------------
Non-GAAP income before income taxes 17,340 12,011
Provision for income taxes 6,433 4,474
--------------------
Non-GAAP net income $ 10,907 $ 7,537
====================
Non-GAAP operating margin 19% 16%
====================
INTERNET SECURITY SYSTEMS, INC.
SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS--Non-GAAP
(amounts in thousands, except per share amounts)
(unaudited)
Nine months ended
September 30,
--------------------
2005 2004
--------------------
Revenues:
Product licenses and sales $103,047 $ 88,877
Subscriptions 119,403 102,928
Professional services 16,287 17,532
--------------------
238,737 209,337
Costs and expenses:
Cost of revenues:
Product licenses and sales 19,923 16,312
Subscriptions and professional services 39,599 36,497
--------------------
Total cost of revenues 59,522 52,809
Research and development 32,682 32,644
Sales and marketing 81,305 73,123
General and administrative 21,985 19,766
--------------------
195,494 178,342
Operating income 43,243 30,995
Other income (expense), net 2,990 1,388
--------------------
Income before income taxes 46,233 32,383
Provision for income taxes 16,910 11,859
--------------------
Net income $ 29,323 $ 20,524
====================
--------------------
Diluted net income per share of Common Stock $ 0.62 $ 0.42
====================
Reconciliation of GAAP to Non-GAAP financial information for the nine
months ended September 30, 2005 and September 30, 2004:
Nine months ended
September 30,
--------------------
2005 2004
--------------------
Operating income - GAAP $ 37,843 $ 25,586
Add back amortization of intangibles and stock
based compensation expense 5,400 5,409
--------------------
Non-GAAP operating income 43,243 30,995
Other income, net 2,990 1,388
--------------------
Non-GAAP income before income taxes 46,233 32,383
Provision for income taxes 16,910 11,859
--------------------
Non-GAAP net income $ 29,323 $ 20,524
====================
Non-GAAP operating margin 18% 15%
====================
INTERNET SECURITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share amounts)
Sept. 30, Dec. 31,
2005 2004
----------------------
ASSETS (unaudited) (audited)
Current assets:
Cash and cash equivalents $ 207,565 $ 140,148
Marketable securities 10,963 70,901
Accounts receivable, less allowance for
doubtful accounts of $3,279, and $3,099,
respectively 79,559 75,353
Inventory 4,076 2,506
Prepaid expenses and other current assets 12,060 12,728
----------------------
Total current assets 314,223 301,636
Property and equipment:
Computer equipment and software 56,709 52,412
Office furniture and equipment 17,904 18,091
Leasehold improvements 20,992 21,098
----------------------
95,605 91,601
Less accumulated depreciation 64,944 57,161
----------------------
30,661 34,440
Restricted cash and marketable securities 10,300 10,300
Goodwill, less accumulated amortization of
$27,381 221,594 224,065
Other intangible assets, less accumulated
amortization of $25,834 and $20,951,
respectively 12,831 19,763
Other assets 7,201 8,698
----------------------
Total assets $ 596,810 $ 598,902
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,658 $ 6,911
Accrued expenses 33,600 25,238
Deferred revenues 69,689 70,246
----------------------
Total current liabilities 108,947 102,395
Long-term deferred revenues 6,660 8,432
Other non-current liabilities 5,392 6,495
Commitment and contingencies
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, 51,409,000 and 50,574,000
shares issued in 2005 and 2004, respectively 51 51
Additional paid-in-capital 509,854 499,534
Deferred compensation (1,864) (3,197)
Accumulated other comprehensive income 3,179 11,041
Retained earnings 74,442 48,544
Treasury stock, at cost (6,511,000 and
4,871,000 shares, respectively) (109,851) (74,393)
----------------------
Total stockholders' equity 475,811 481,580
----------------------
Total liabilities and stockholders' equity $ 596,810 $ 598,902
======================
INTERNET SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
Nine months ended
September 30,
2005 2004
--------------------
Operating activities
Net income $ 25,898 $ 17,091
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,783 11,866
Amortization of intangibles and stock based
compensation 5,400 5,409
Accretion of discount on marketable securities (868) 31
Deferred compensation expense 1,538 1,467
Minority interest 23 537
Income tax benefit from exercise of stock
options 1,740 7,385
Gain on issuance of subsidiary stock (186) (367)
Changes in assets and liabilities, excluding the
effects of acquisitions:
Accounts receivable (4,206) 829
Inventory (1,570) (474)
Prepaid expenses and other assets 1,885 (3,166)
Accounts payable and accrued expenses 6,070 (1,964)
Deferred revenues (2,329) 5,035
--------------------
Net cash provided by operating activities 41,178 43,679
Investing activities
Acquisitions, net of cash received (764) (34,022)
Purchases of marketable securities (64,180) (64,465)
Net proceeds from maturity of marketable
securities 95,236 44,205
Net proceeds from sales of marketable securities 29,750 -
Purchases of property and equipment (4,004) (11,227)
Net proceeds from issuance of subsidiary stock 438 433
--------------------
Net cash provided by (used in) investing
activities 56,476 (65,076)
Financing activities
Proceeds from exercise of stock options 7,637 1,936
Proceeds from employee stock purchase plan 732 1,417
Purchases of treasury stock (35,458) (49,557)
--------------------
Net cash provided by (used in) financing
activities (27,089) (46,204)
Foreign currency impact on cash (3,148) (2,194)
--------------------
Net increase (decrease) in cash and cash
equivalents 67,417 (69,795)
Cash and cash equivalents at beginning of period 140,148 184,551
--------------------
Cash and cash equivalents at end of period $207,565 $114,756
====================
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.
Q4 2005 Range Annual 2005 Range
--------------------------------------------------
Low end Upper end Low end Upper end
--------------------------------------------------
Expected revenues $88,000,000 $92,000,000 $327,000,000 $331,000,000
==================================================
Expected net income
per diluted share $0.23 $0.25 $0.78 $0.80
Add back per share
impact of
amortization of
intangibles and
stock based
compensation
expense $0.02 $0.02 $0.09 $0.09
--------------------------------------------------
Expected non-GAAP
net income per
diluted share $0.25 $0.27 $0.87 $0.89
==================================================
CONTACT: Internet Security Systems, Atlanta SOURCE: Internet Security Systems |
| "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this press release regarding Internet Security Systems's business which are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's Annual Report or Form 10-K for the most recently ended fiscal year. |