WITS Witness Systems (MM)

Witness Systems (NASDAQ: WITS) -- Achieves record revenue for ninth consecutive quarter -- Drives nearly two-thirds of sales through Impact 360 solution -- 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 second quarter of 2006. Under generally accepted accounting principles (GAAP), second quarter revenue was a record $54.8 million, and net income was $0.13 per share. Software license revenue, excluding hardware, was $19.2 million in the quarter, up from $17.0 million in the second quarter of 2005. Adjusted results of operations are presented in the following section. Year-to-date, GAAP revenue was $106.3 million, compared to $87.3 million in the first half of 2005. Earnings per share for the first six months of 2006 were $0.19 per share compared to a net loss of ($0.33) per share in 2005. The GAAP loss in 2005 was attributable to the acquisition of Blue Pumpkin Software during the first quarter of that year. "We are pleased to again report record revenue and strong profitability," said Dave Gould, CEO of Witness Systems. "Our Impact 360(TM) packages continued to be well received in the market, accounting for two-thirds of our sales in the second quarter. We now have the second major release of our integrated workforce optimization solution installed at customer sites, further widening our competitive advantage." "Once again, we've demonstrated clear leadership in the VoIP market through strong unit growth and widespread industry validation. We've now sold more than 1,700 sites, representing growth of more than 60 percent during the past year," added Gould. "On the OEM front, Nortel is in-process with a global roll-out of our now generally available recording offerings. British Telecom also selected us and will OEM our recording systems, which opens a new market for us in trading floors. Further, we've gone into production with the largest Avaya CMAPI recording installation in the world, and we announced surpassing our 1000th implementation milestone on the Cisco platform." Adjusted Results of Operations Adjusted revenue in the second quarter was a record $52.1 million, up from $45.6 million in the second quarter of 2005. Adjusted earnings were $0.21 per share, compared to $0.16 per share in the same quarter a year ago. Year-to-date, adjusted revenue grew to $102.2 million, up from $86.6 million during the first half of 2005. Adjusted earnings were $0.39 per share for the first half of 2006, compared to $0.29 per share during the same period last year. The company's internal reporting and performance measurement programs are established based on adjusted results of operations, which exclude certain non-cash items (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 Six Months Ended Ended June 30, 2006 June 30, 2006 ------------------------------------ Revenue EPS Revenue EPS -------- ------- ----------- ------- (in thousands, (in thousands, except per share except per share data) data) GAAP results $54,828 $ 0.13 $ 106,294 $ 0.19 Difference between contract value and fair value of Blue Pumpkin maintenance 84 0.00 354 0.01 Exclusion of hardware sales (2,852) 0.00 (4,427) 0.00 Amortization of intangible assets 0.09 0.19 Merger related costs 0.00 0.02 FAS 123R stock compensation expense 0.09 0.18 Difference between income taxes and pro forma tax expense at 36% (0.10) (0.20) -------- ------- ----------- ------- Adjusted results (non-GAAP) $52,060 $ 0.21 $ 102,221 $ 0.39 ======== ======= =========== ======= *T Financial Outlook "Witness Systems had a solid second quarter with record revenue and strong cash flows," said Bill Evans, CFO of Witness Systems. "We continued to grow our business and improve our profit performance with our strategic focus on higher-value software packages and services, as well as with our emphasis on execution and global integration. Our performance underscores the strength of our global business model across a balanced portfolio of software and services." For the third quarter of 2006, the company expects to achieve adjusted revenue in the range of $52 to $53 million and non-GAAP adjusted earnings of $0.21 to $0.22 per share. For the full year, the company expects to achieve adjusted revenue of $211 to $213 million and adjusted earnings in the range of $0.83 to $0.85 per share. 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 $0.13 to $0.14 in the third quarter and $0.47 to $0.49 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 $218 to $222 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 Thursday, July 27, 2006. The online replay will be available at approximately 7 p.m. ET. About Witness Systems Witness Systems (NASDAQ: WITS) is the worldwide leader in software and services that help businesses capture customer intelligence and optimize their workforce performance. The company's Impact 360(TM) solution unifies quality monitoring, compliance and IP recording, workforce management, performance management and e-learning. Primarily deployed in contact centers - as well as the remote, branch and back offices of global organizations - the workforce optimization solution captures, analyzes and enables users to share and act on cross-functional information across the enterprise. With Impact 360, organizations can improve interactions and the underlying back-office processes that enhance the customer experience and build customer loyalty. For more information, visit us at 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 and its Form 10-Q for the quarter ended March 31, 2006, 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) June 30, December 31, 2006 2005 ------------ ------------ Cash and cash equivalents $ 93,261 $ 111,751 Short-term investments $ 70,054 14,886 Accounts receivable, net 46,944 40,218 Other current assets 7,127 5,462 ------------ ------------ Total current assets 217,386 172,317 Property and equipment, net 9,459 7,796 Intangible assets, net 29,994 36,389 Goodwill 41,094 40,697 Other assets 4,858 4,387 ------------ ------------ Total assets $ 302,791 $ 261,586 ============ ============ Accounts payable and accrued liabilities $ 28,689 $ 25,686 Deferred revenue 35,923 23,778 ------------ ------------ Total current liabilities 64,612 49,464 Deferred income tax liabilities 620 743 Other long-term liabilities 5,235 4,409 ------------ ------------ Total liabilities 70,467 54,616 ------------ ------------ Total stockholders' equity 232,324 206,970 ------------ ------------ Total liabilities and stockholders' equity $ 302,791 $ 261,586 ============ ============ *T -0- *T WITNESS SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, dollars in thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------- 2006 2005 2006 2005 --------- -------- --------- --------- Revenue: Product $ 22,063 $18,918 $ 41,902 $ 35,286 Services 32,765 27,253 64,392 52,044 --------- -------- --------- --------- Total revenue 54,828 46,171 106,294 87,330 Cost of revenue: Product 5,209 4,928 9,787 9,260 Services 12,786 10,784 24,531 20,309 --------- -------- --------- --------- Total cost of revenue 17,995 15,712 34,318 29,569 --------- -------- --------- --------- Gross profit 36,833 30,459 71,976 57,761 Operating expenses: Selling, general and administrative 25,045 21,505 50,174 41,418 Research and development 8,069 6,892 16,025 13,087 Merger related costs 131 925 871 2,584 Acquired in-process research and development charges - - - 9,000 --------- -------- --------- --------- Total operating expenses 33,245 29,322 67,070 66,089 --------- -------- --------- --------- Operating income (loss) 3,588 1,137 4,906 (8,328) Interest and other income, net 1,472 56 2,743 194 --------- -------- --------- --------- Income (loss) before provision for income taxes 5,060 1,193 7,649 (8,134) Provision for income taxes 357 617 769 650 --------- -------- --------- --------- Net income (loss) $ 4,703 $ 576 $ 6,880 ($8,784) ========= ======== ========= ========= Net income (loss) per share $ 0.13 $ 0.02 $ 0.19 ($0.33) ========= ======== ========= ========= Shares used in computing net income (loss) per share 36,776 29,676 36,712 26,669 ========= ======== ========= ========= Included above are the following expenses: Amortization of intangibles by category: Cost of revenue $ 1,483 $ 2,384 $ 3,747 $ 4,456 Selling, general and administrative 1,541 1,574 3,161 2,785 --------- -------- --------- --------- $ 3,024 $ 3,958 $ 6,908 $ 7,241 ========= ======== ========= ========= Stock-based compensation by category: Cost of services revenue 749 - 940 - Selling, general and administrative 1,934 - 4,470 - Research and development 584 - 890 - --------- -------- --------- --------- $ 3,267 - (1) $ 6,300 - (1) ========= ======== ========= ========= (1) The company adopted FAS123(R) on January 1, 2006. Stock-based compensation on a pro-forma basis in the second quarter of 2005 and for the six months ended June 30, 2005 was $3,385, and $6,248, respectively. (2) A reconciliation of these results of operations, presented on the basis of generally accepted accounting principles, to adjusted results of operations is presented in the Investors section on the Company's website, www.witness.com. *T