Tumbleweed Reports Results for Third Quarter 2007

Tumbleweed Communications Corp. (Nasdaq:TMWD), the industry’s leading pure play messaging and content security vendor, today reported financial results for its third quarter ended September 30, 2007. Revenue was $14.1 million for the quarter ended September 30, 2007, compared to $15.1 million for the same period last year. Product revenue for the third quarter of 2007 was $5.6 million, compared to $7.3 million in the third quarter of 2006. Service revenue for the third quarter of 2007 was $8.3 million, compared to $7.5 million in the third quarter of 2006. Revenue from the license of intellectual property was $191,000 in the third quarter of 2007, compared to $357,000 in the third quarter of 2006. Non-GAAP net loss for the third quarter of 2007 was $1.5 million, or $(0.03) per share, compared to non-GAAP net income of $172,000, or $0.00 per share, in the third quarter of 2006. Non-GAAP results exclude stock-based compensation expense and intangible asset amortization expense of $1.6 million for the third quarter of 2007 and $1.5 million for the third quarter of 2006. On a GAAP basis, net loss for the third quarter of 2007 was $3.1 million, or $(0.06) per share, compared to a net loss of $1.4 million, or $(0.03) per share, for the third quarter of 2006. A reconciliation of GAAP and non-GAAP results is presented in the tables below. Cash and cash equivalents were $27.0 million at September 30, 2007 compared to $30.5 million at December 31, 2006. For the first nine months of 2007, Tumbleweed reported revenue of $43.2 million, compared to $45.3 million for the first nine months of 2006. Non-GAAP net loss for the first nine months of 2007 was $3.1 million, or $(0.06) per share, compared to non-GAAP net income of $2.5 million, or $0.05 per share, for the first nine months of 2006. Non-GAAP results exclude stock-based compensation expense and intangible asset amortization expense of $4.6 million for the first nine months of 2007, and $5.8 million for the first nine months of 2006, respectively. On a GAAP basis, the net loss for the first nine months of 2007 was $7.7 million, or $(0.15), compared to a net loss of $3.4 million, or $(0.07) in the first nine months of 2006. "Although this quarter’s financial performance was below our expectations, we delivered growth in our core messaging and content security business, and continued to expand our relationships with leading channel partners,” said James P. Scullion, Chief Executive Officer of Tumbleweed. "While our Validation Authority product continued to contribute to our results it was at a significantly lower level than a year ago.” "We‘re in the process of transforming the company, and we still have a lot to do, but we’ve made progress against the goals we set at the beginning of the year: moving to a channel distribution model, extending our international reach, and streamlining our product development processes,” continued Scullion. "These are the right objectives to ensure Tumbleweed’s future growth and success, and we remain focused on executing against them. I’m confident that the investments and improvements we are implementing will deliver success going forward.” Recent Highlights Tumbleweed’s core messaging security product orders grew 15% for the quarter ended September 30, 2007 compared to the same period last year. Tumbleweed’s messaging security products include award winning solutions to manage, protect and deliver information so enterprises can more productively utilize the Internet for mission-critical communications. Tumbleweed’s channel program delivered 34% of orders for the nine months ended September 30, 2007. In North America, Tumbleweed’s partners includes leading resellers in the retail, manufacturing, energy, transportation and education sectors such as Fishnet Security, Midwave Corporation, Cadre, Accudata Systems, ESI Information Technologies Inc., and Choice Solutions. Internationally, Tumbleweed’s partners include leading providers in India, China, Australia, Japan, Malaysia, Singapore, Russia, France, Germany, UK, Mexico and Brazil. Tumbleweed offered several significant enhancements to SecureTransport, the company’s Managed File Transfer solution. SecureTransport Version 4.7 capabilities include improved account management functions, new notification and monitoring, high availability clustering, faster throughput performance and increased storage capacity. Additionally, refined installation and configuration features expedite integration and migration, thus reducing overall cost of ownership. Tumbleweed was granted its 27th U.S. utility patent for "Dynamic Message Filtering," a method and system of dynamically filtering incoming messages. The company’s patent portfolio broadly covers secure communication over Internet standards. Financial Outlook Fourth Quarter of 2007: Tumbleweed has implemented a cost reduction program following a review of its business operations, reducing both expenses and headcount by approximately 10% each. Tumbleweed currently expects total revenue for the fourth quarter of 2007 to be between $13.0 million and $14.5 million. The revenue projections reflect a lower expected contribution from the Validation Authority product which contributed approximately 40% of revenue in the fourth quarter of 2006. Non-GAAP results are expected to range from $(0.03) to $(0.05) per share. Non-GAAP results exclude expected costs for stock-based compensation expense and intangible asset amortization expense of a combined $(0.03) per share for the fourth quarter of 2007. The fourth quarter of 2007 projections include an estimated expense of approximately $(0.02) related to the cost reduction program. GAAP results are expected to range from $(0.06) to $(0.08) per share. Per share amounts are based on an estimated 51.2 million shares outstanding. Conference Call Information Tumbleweed management will host a conference call on Thursday, October 25, 2007 at 2:00 p.m. PDT (5:00 p.m. EDT) to discuss the third quarter 2007 results. The call can be accessed by dialing (800) 240-7305 and giving the company name, "Tumbleweed." Participants are asked to call the assigned number approximately 10 minutes before the conference call begins. A replay of the conference call will be available after 5:00 p.m. PDT on October 25, 2007 through November 8, 2007 by dialing (800) 405-2236 and entering pass code 11098819#. The conference call and supplemental financial information will also be available on the investor relations portion of the Tumbleweed website. Safe Harbor Statement Except for the historical information contained herein, the matters discussed in this press release may constitute forward-looking statements that could cause actual results to differ materially from those currently expected, particularly with respect to Tumbleweed’s financial outlook for the fourth quarter of 2007 (including estimated revenue, loss and loss per share on both a GAAP and a non-GAAP basis), as well as Tumbleweed’s beliefs about the transformation of the company, its strategy, and its future growth and success. In some cases, forward-looking statements can be identified by terminology such as "may,” "will,” "should,” "potential,” "continue,” "expects,” "anticipates,” "intends,” "plans,” "believes,” "estimates,” and similar expressions. For further cautions about the risks of investing in Tumbleweed, we refer you to the documents Tumbleweed files from time to time with the Securities and Exchange Commission, particularly Tumbleweed's Form 10-K filed March 14, 2007, Form 10-Q filed August 7, 2007, and such filings for the periods referred to above, to be filed subsequently. Tumbleweed assumes no obligation to update information contained in this press release. Although this release may remain available on Tumbleweed's website or elsewhere, its continued availability does not indicate that Tumbleweed is reaffirming or confirming any of the information contained herein as of a later date. Non-GAAP Information The non-GAAP financial information included in this press release is not prepared in accordance with GAAP as it excludes amortization of intangible assets and stock-based compensation expense. Management believes that the presentation of non-GAAP information may provide useful information to investors because Tumbleweed has historically provided this information and understands that some investors consider it useful in evaluating Tumbleweed's expenses. Management also uses this non-GAAP information, along with GAAP information, in evaluating Tumbleweed's expenses and comparing Tumbleweed’s performance with that of its competitors. The non-GAAP results should not be considered a substitute for financial information presented in accordance with generally accepted accounting principles, and may be different from non-GAAP measures used by other companies. About Tumbleweed Tumbleweed Communications Corp. (NASDAQ:TMWD), the industry's leading pure play messaging and content security vendor, provides world-class innovative solutions for organizations of all sizes. Organizations rely on Tumbleweed's solutions to securely manage their Internet communications, spanning email management to file transfers. Tumbleweed has more than 2,900 customers worldwide, representing industries such as Finance, Healthcare, and the U.S. Government. The world's most security conscious organizations rely upon Tumbleweed technology including Bank of America Securities, JP Morgan Chase & Co., the U.S. Food and Drug Administration, and the U.S. Department of Defense. Our award-winning products build on fourteen years of R&D and 27 security patents in the U.S. alone - many of which are licensed by other security vendors. More information can be found at www.tumbleweed.com. Tumbleweed is a registered trademark of Tumbleweed Communications Corp. in the United States and/or other countries. All other trademarks are the property of their respective owners. Tumbleweed Communications Corp. Condensed Consolidated Balance Sheets September 30, 2007 (in 000s)   9/30/2007 12/31/2006 ASSETS (unaudited) (audited)   CURRENT ASSETS Cash and cash equivalents $ 27,046 $ 30,511 Accounts receivable, net 12,196 12,506 Other current assets   2,520     1,938   TOTAL CURRENT ASSETS   41,762     44,955     Goodwill 48,074 48,074 Intangible assets, net 505 1,470 Property and equipment, net 2,038 1,820 Other assets   355     612   TOTAL ASSETS $ 92,734   $ 96,931     LIABILITIES & EQUITY CURRENT LIABILITIES Accounts payable $ 1,727 $ 1,808 Accrued liabilities 6,280 7,522 Accrued merger-related and other costs - 97 Deferred revenue   20,259     20,003   TOTAL CURRENT LIABILITIES   28,266     29,430   LONG TERM LIABILITIES Deferred revenue, excluding current portion 4,463 4,728 Other long term liabilities   32     63   TOTAL LONG TERM LIABILITIES   4,495     4,791   TOTAL LIABILITIES   32,761     34,221   STOCKHOLDERS' EQUITY Common stock 52 51 Additional paid-in capital 364,259 359,238 Treasury stock (796 ) (796 ) Accumulated other comprehensive loss 75 29 Accumulated deficit   (303,617 )   (295,812 ) TOTAL STOCKHOLDERS' EQUITY   59,973     62,710   TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 92,734   $ 96,931   Tumbleweed Communications Corp. Condensed Consolidated Statements of Operations September 30, 2007 (in 000s, except per share data)         Three Months Ended Nine Months Ended September 30, September 30, (unaudited) (unaudited)   2007     2006     2007     2006   REVENUES Product revenue $ 5,554 $ 7,273 $ 16,572 $ 19,952 Service revenue 8,305 7,469 25,300 22,067 Intellectual property revenue   191     357     1,323     3,281   NET REVENUE   14,050     15,099     43,195     45,300   COST OF REVENUE Cost of product revenue (1) 1,158 1,531 4,221 3,224 Provision for excess inventory - - 164 - Cost of service revenue (1) 1,890 1,704 5,719 4,849 Amortization of intangible assets   234     234     702     1,233   GROSS PROFIT 10,768 11,630 32,389 35,994 OPERATING EXPENSES Research and development (1) 3,816 3,783 11,570 11,003 Sales and marketing (1) 7,806 6,937 21,733 19,986 General and administrative (1) 2,545 2,365 7,549 8,314 Amortization of intangible assets   39     204     266     837   TOTAL OPERATING EXPENSES   14,206     13,289     41,118     40,140   OPERATING LOSS (3,438 ) (1,659 ) (8,729 ) (4,146 ) Other income, net   322     278     1,042     843   NET LOSS BEFORE TAXES (3,116 ) (1,381 ) (7,687 ) (3,303 ) Provision for (benefit from) income taxes   (33 )   (7 )   1     59   NET LOSS $ (3,083 ) $ (1,374 ) $ (7,688 ) $ (3,362 )   BASIC AND DILUTED NET LOSS PER SHARE $ (0.06 ) $ (0.03 ) $ (0.15 ) $ (0.07 )   RECONCILIATION TO NON-GAAP NET INCOME (LOSS) NET LOSS $ (3,083 ) $ (1,374 ) $ (7,688 ) $ (3,362 ) Stock-based compensation expense 1,316 1,108 3,616 3,765 Amortization of intangible assets   273     438     968     2,070   NON-GAAP NET INCOME (LOSS) $ (1,494 ) $ 172   $ (3,104 ) $ 2,473     NON-GAAP BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ (0.03 ) $ 0.00   $ (0.06 ) $ 0.05     WEIGHTED AVERAGE SHARES: BASIC 51,092 50,111 50,996 49,905 DILUTED 51,092 50,111 50,996 49,905     (1) Stock-based compensation expense is classified as follows:   Cost of product revenue $ - $ 2 $ - $ 6 Cost of service revenue 40 33 105 106 Research and development 200 442 760 969 Sales and marketing 502 144 1,041 500 General and administrative   574     487     1,710     2,184   $ 1,316   $ 1,108   $ 3,616   $ 3,765