WITS Witness Systems (MM)

Witness Systems (NASDAQ: WITS): -- Achieves record revenue for eighth consecutive quarter -- Demand for Impact 360 packages doubles -- Increases cash and deferred revenue to record levels Witness Systems (NASDAQ: WITS), a leading global provider of workforce optimization software and services, today announced financial results for the first quarter of 2006. Under generally accepted accounting principles (GAAP), first quarter revenue was a record $51.5 million, and net income was $0.06 per share. Software license revenue, excluding hardware, was $18.3 million in the quarter, an increase of 21 percent from $15.1 million in the first quarter of 2005. Adjusted results of operations are presented in the following section. "Market acceptance of our Impact 360(TM) packages continues to accelerate, making up nearly 50 percent of our license revenue this quarter," said Dave Gould, CEO for Witness Systems. "We're now capitalizing on our investments in an integrated workforce optimization platform and service delivery capability, which began about 18 months ago. Coupled with the transition to VoIP, the trend towards packaged workforce optimization solutions is driving strong growth." Recent surveys conducted by Witness Systems point to a significant acceleration in its customers' plans to adopt workforce optimization (WFO) and VoIP initiatives. When asked if they would prefer to purchase their WFO solutions from a single supplier or from multiple point system vendors, 71 percent of customers now say they would prefer a single vendor, compared to 52 percent just six months ago. Further, 79 percent of the Witness Systems customers sampled said they have either already begun implementing VoIP or plan to within the next two years, up from 67 percent six months ago. Commented Gould, "IP telephony has clearly arrived, and our customers are looking for us to help deploy in this new environment - both in the contact center and the broader enterprise. We continue to demonstrate market and technology leadership in this exciting area, with a growing customer list and broad partner validation. " Adjusted Results of Operations Adjusted first quarter revenue was a record $50.2 million, a 22 percent increase from adjusted revenue for the first quarter of 2005. Adjusted earnings were $0.19 per share, compared to $0.13 per share in the same quarter a year ago. The company's internal reporting and performance measurement programs are established on a basis that excludes certain non-cash (such as amortization of intangibles and stock-based compensation expense) and acquisition-related charges that are included in GAAP earnings. Hardware sales, which Witness Systems considers incidental to the company's core business, are excluded from adjusted revenue, and revenue from maintenance contracts acquired in business combinations is based on their contract, not fair value. Adjusted earnings also reflect a consistent pro-forma tax expense of 36 percent on pre-tax income. The company believes these adjusted (non-GAAP) results provide more meaningful information regarding those aspects of current operating performance that can be effectively managed and consequently has developed its internal reporting and compensation systems using these measures. The reporting of these non-GAAP financial measures facilitates investors' understanding of the company's historical operating trends, provides a basis for more relevant comparisons to other companies in the industry, and enables investors to evaluate the company's operating performance in a manner consistent with the company's internal basis of measurement. Adjusted results from operations are considered supplemental information and are not intended to be a substitute for the financial results reported under GAAP. Specifically, the adjustments and their impact on reported GAAP revenue and earnings per share are as follows: -0- *T Three Months Three Months Ended Ended March 31, 2006 March 31, 2005 --------------- ---------------- Revenue EPS Revenue EPS -------- ------ -------- ------- (in thousands, except per share data) GAAP results $51,466 $0.06 $41,159 ($0.36) Difference between contract value and fair value of Blue Pumpkin maintenance 270 0.01 1,183 0.05 Exclusion of hardware sales (1,575) 0.00 (1,301) 0.00 Amortization of intangible assets 0.10 $0.13 Acquired in-process research and development charges 0.00 0.34 Merger related costs 0.02 0.06 FAS 123(R) stock compensation expense 0.09 0.00 Difference between income taxes and pro forma tax expense at 36% (0.09) (0.08) Difference in net income per share as result of using diluted vs basic shares 0.00 (0.01) ------ -------- ------- Adjusted results (non-GAAP) $50,161 $0.19 $41,041 $0.13 ======== ====== ======== ======= *T Financial Outlook "We are pleased with the results of the first quarter, which were in line with our expectations," said William Evans, CFO for Witness Systems. "We continued to achieve consistent top line growth, and we saw marked improvement in cash flow, with our cash and investment balances growing to $156 million and deferred revenue increasing by over $10 million during the quarter." For the second quarter of 2006, the company currently expects to achieve adjusted revenue in the range of $51.5 to $52.5 million and non-GAAP adjusted earnings of $0.20 to $0.21 per share. For the 2006 year, the company is increasing its adjusted earnings guidance to a range of $0.82 to $0.84 per share while maintaining its annual revenue guidance at $210 to $213 million. Adjusted revenue excludes hardware revenue but includes the full contract value of maintenance contracts. Adjusted earnings for 2006 excludes the impact of stock-based compensation, in-process R&D, merger costs and amortization of intangibles arising from acquisitions, but includes a pro forma tax expense of 36 percent. The company expects that these additional expenses will result in GAAP net income per share in the range of $0.11 to $0.12 in the second quarter and $0.46 to $0.48 per share for the year. With the inclusion of hardware sales, Witness Systems currently expects annual revenue on a GAAP basis to be in the range of $214 to $220 million. Earnings Announcement Conference Call Details Witness Systems will conduct a live broadcast of the company's quarterly conference call that will be available online at www.streetevents.com or www.witness.com beginning at 5 p.m. ET on Wednesday, April 26, 2006. The online replay will be available at approximately 7 p.m. ET. About Witness Systems Witness Systems (NASDAQ: WITS) is a leading global provider of workforce optimization software and services. The company's Impact 360(TM) solution - which plays a strategic role in the customer interaction centers of Global 2000 and small- and medium-sized businesses (SMBs) worldwide - is also deployed in IP telephony and back office environments, and throughout the extended enterprise, including branch offices. Witness Systems' software is comprised of quality monitoring, compliance, high-volume and IP telephony recording solutions, as well as workforce management, actionable learning and performance management. The company's solutions enable organizations to optimize their people, processes and technology throughout the enterprise. Witness Systems' customers benefit from an integrated business consulting, implementation and training methodology that supports a rapid deployment, enabling them to drive revenue, reduce operational costs, and achieve greater customer retention and loyalty. For additional information about Witness Systems, visit www.witness.com. Cautionary Note Regarding Forward-looking Statements: Information in this release that involves Witness Systems' expectations, plans, intentions or strategies regarding the future are forward-looking statements that are not facts and involve a number of risks and uncertainties. They are identified by words such as "anticipates," "expects," "intends," "plans," "believes," "estimates," and similar expressions. These statements are based upon information available to Witness Systems as of the date of this release, and the company assumes no obligation to update any such forward-looking statement. Forward-looking statements believed true when made may ultimately prove to be incorrect. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and may cause actual results to differ materially from our current expectations. Some of the factors that could cause actual future results to differ materially from current expectations include fluctuations in customer demand and the timing of orders; the company's ability to manage its growth; the risk of new product introductions and customer acceptance of new products; the rapid technological change which characterizes the company's markets; the risks associated with international sales as the company expands its markets, including the risks associated with foreign currency fluctuations; the ability of the company to complete and integrate successfully any acquisitions or investments it may make; and the ability of the company to compete successfully in the future, as well as other risks identified under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the company's Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission. Witness, Impact 360, Improve Everything and the Witness logo are the trademarks (registered or otherwise) of Witness Systems, Inc. protected by laws of the U.S. and other countries. All other trademarks mentioned in this document are the property of their respective owners. -0- *T WITNESS SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited, dollars in thousands) March 31, Dec. 31, 2006 2005 ------------ ---------- Cash and cash equivalents $85,510 $111,751 Short-term investments $70,996 14,886 Accounts receivable, net 43,525 40,218 Other current assets 7,191 5,462 ------------ ---------- Total current assets 207,222 172,317 Property and equipment, net 8,306 7,796 Intangible assets, net 32,658 36,389 Goodwill 41,096 40,697 Other assets 3,505 4,387 ------------ ---------- Total assets $292,787 $261,586 ============ ========== Accounts payable and accrued liabilities $33,583 $25,686 Deferred revenue 34,158 23,778 ------------ ---------- Total current liabilities 67,741 49,464 Deferred income tax liabilities 675 743 Other long-term liabilities 5,993 4,409 ------------ ---------- Total liabilities 74,409 54,616 ------------ ---------- Total stockholders' equity 218,378 206,970 ------------ ---------- Total liabilities and stockholders' equity $292,787 $261,586 ============ ========== *T -0- *T WITNESS SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, dollars in thousands, except per share data) Three Months Ended March 31, ----------------- 2006 2005 -------- -------- Revenue: Product $19,839 $16,368 Services 31,627 24,791 -------- -------- Total revenue 51,466 41,159 Cost of revenue: Product 4,578 4,332 Services 11,745 9,525 -------- -------- Total cost of revenue 16,323 13,857 -------- -------- Gross profit 35,143 27,302 Operating expenses: Selling, general and administrative 25,129 19,913 Research and development 7,956 6,195 Merger related costs 740 1,659 Acquired in-process research and development charges - 9,000 -------- -------- Total operating expenses 33,825 36,767 -------- -------- Operating income (loss) 1,318 (9,465) Interest and other income, net 1,271 138 -------- -------- Income (loss) before provision for income taxes 2,589 (9,327) Provision for income taxes 412 33 -------- -------- Net income (loss) $2,177 ($9,360) ======== ======== Net income (loss) per share $0.06 ($0.36) ======== ======== Shares used in computing net income (loss) per share 36,648 26,261 ======== ======== --------------------------- Included above are the following expenses: Amortization of intangibles by category: Cost of revenue $2,264 $2,072 Selling, general and administrative 1,620 1,211 -------- -------- $3,884 $3,283 ======== ======== Stock-based compensation by category: Cost of revenue 191 - Selling, general and administrative 2,536 - Research and development 306 - -------- -------- $3,033 - (1) ======== ======== (1) The company adopted FAS123(R) on January 1, 2006. Stock-based compensation on a pro-forma basis in the first quarter of 2005 was $2,863. *T