Exhibit 99.1
Internet Security Systems Reports Second Quarter Results;
Also Updating 2006 Business Outlook
ATLANTA--(BUSINESS WIRE)--July 31, 2006--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.
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%
======= =======
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%
======== ========
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
========= =========
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
======== ========
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
=================================================
CONTACT: Internet Security Systems
Media Contact:
Angela Frechette, 404-236-3197
afrechette@iss.net
or
Investor/Financial Analyst Contact:
Ed Eiland, 404-236-4053
eeiland@iss.net