Internet Security Systems Reports First Quarter Results

By | April 26, 2006

Internet Security Systems, Inc. (ISS) (NASDAQ: ISSX), the worldwide leader in pre-emptive, enterprise security, today announced financial results for the first quarter ended March 31, 2006. Additionally, the Company is providing its business outlook for the second quarter ending June 30, 2006 and updating its business outlook for the full 2006 year.

First Quarter Revenues

Revenues were $80,761,000 for the first quarter of 2006, a 5% increase compared with first quarter 2005 revenues of $76,792,000.

GAAP Earnings

Reported net income under generally accepted accounting principles (GAAP) for the first quarter of 2006 was $7,050,000, or $0.15 per diluted share, compared to $7,845,000, or $0.16 per diluted share, in the first 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 acquisition expense for amortisation of intangibles; 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 first quarter of 2006 was $10,259,000, or $0.22 per diluted share, compared to $9,383,000, or $0.20 per diluted share, in the first quarter of 2005.

“Our first quarter financial results show the new products, particularly the Proventia Intrusion Prevention System, driving increased revenue, appealing to new customers, gaining market share, and performing well in the industry,” said Thomas Noonan, president and CEO of Internet Security Systems. “In general, the financial results reflect the movement away from legacy products toward the platform model, which we strongly believe is the future of security. Our integrated platform approach allows customers to leverage synergies between complementary technologies, thereby obtaining more comprehensive, intelligent protection.”

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 second 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. 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. ISS’ quiet period at the end of the second quarter is expected to run from June 15, 2006 until financial results are released in July 2006.

This business outlook assumes that the enterprise spending environment remains consistent with ISS’ experience in the first 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 $358,000,000 to $368,000,000. GAAP net income is expected to be in the range of $0.66 to $0.72 per diluted share. Non-GAAP net income is expected to be in the range of $0.94 to $1.00 per diluted share.

For the quarter ending June 30, 2006, ISS currently expects to achieve revenues in the range of $84,000,000 to $87,000,000. GAAP net income is expected to be in the range of $0.13 to $0.15 per diluted share. Non-GAAP net income is expected to be in the range of $0.21 to $0.23 per diluted share.

Non-GAAP net income excludes: (i) non-cash acquisition related charges (net of taxes), for amortization of intangibles, estimated to be $1,000,000 for the quarter ending June 30, 2006 and $3,300,000 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 $2,600,000 or $0.06 per diluted share for the quarter ending June 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 tables contained in the Consolidated Statements of Operations and the Business Outlook Reconciliation included with this press release. Reconciliation 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.

Earnings Conference Call

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 May 2, 2006.

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