WatchGuard Reports First Quarter 2006 Results

WatchGuard reported net revenue of $18.6 million for the firstquarter of 2006, compared to $19.2 million in the previous quarter,and $16.6 million in the first quarter of 2005. Product revenue was$10.9 million in the first quarter of 2006, compared to $11.6 millionin the previous quarter, and $9.1 million in the first quarter of2005. Service revenue was $7.7 million for the first quarter of 2006,compared to $7.6 million in the previous quarter, and $7.5 million inthe first quarter of last year. Reflecting increased sales ofWatchGuard subscription services during the first quarter, deferredrevenue increased from $20.4 million at December 31, 2005, to $22.5million at March 31, 2006.

Product revenue for the first quarter of 2005 was affected byWatchGuard's transition to a sell-through revenue recognition modelduring the quarter in the U.S., Australia, and New Zealand. WatchGuardestimates the transition to a sell-through model in these regionsreduced product revenues by approximately $2.0 million for the firstquarter of 2005, not including changes in customer buying patternsupon conversion to a sell-through model.

WatchGuard reported a net loss of $4.1 million, or $0.12 pershare, in the first quarter of 2006, compared to a net loss of $1.3million, or $0.04 per share, in the previous quarter, and a net lossof $3.9 million, or $0.12 per share, in the first quarter of 2005.Excluding amortization of acquisition-related costs, non-cashstock-based compensation, and restructuring charges, WatchGuardreported a non-GAAP net loss of $2.8 million, or $0.08 per share, inthe first quarter of 2006, compared to a non-GAAP net loss of $1.7million, or $0.05 per share, in the previous quarter, and a non-GAAPnet loss of $3.7 million, or $0.11 per share, in the first quarter of2005. The reconciliation of WatchGuard's GAAP operating results toWatchGuard's non-GAAP operating results for the quarters ended March31, 2006, December 31, 2005, and March 31, 2005, are set forth at theend of this release.

WatchGuard ended the first quarter of 2006 with $75.4 million incash and securities, of which $2.4 million is restricted cash underthe terms of certain real estate lease agreements. Cash and securitieswere down $2.4 million from the $77.8 million on hand at December 31,2005.

"Although WatchGuard did not experience product revenue growthduring the first quarter of 2006, we are pleased with the growth inour deferred revenue and we expect to launch several new UTMappliances for small- to medium-sized enterprises in the secondquarter," said Ed Borey, Chief Executive Officer of WatchGuard. "Wehave been working on converging both our product and softwareplatforms for the past 18 months and the results of these efforts arenow coming to fruition. We believe these key new products and serviceswill provide the engine to drive the Company toward sustainable growthand profitability."

Webcast Information

An Internet broadcast and replay of WatchGuard's conference calldiscussing its first quarter of 2006 results (2:00 PM Pacific/5:00 PMEastern) will be available on May 8, 2006, at www.watchguard.com under"Investor Relations." Investors may access the live conference call bycalling (800) 638-4817 (U.S. and Canada) and (617) 614-3943(International). The conference call ID number is 16419354.

About WatchGuard Technologies, Inc.

WatchGuard provides network security. The company's Firebox Xfamily of upgradeable appliances delivers the performance,functionality and security strength to meet the needs of organizationsof any size. WatchGuard's Intelligent Layered Security protectsagainst emerging threats and provides the platform to integrateadditional services offered by the company. All WatchGuard productsinclude a LiveSecurity Service subscription for vulnerability alerts,software updates, expert security instruction, as well asindividualized and self-help customer care. WatchGuard isheadquartered in Seattle, Washington, with offices throughout Europeand Asia. For more information, please visit www.watchguard.com.

Certain statements in this press release, including statementsabout our ability to grow revenues, reach and maintain profitabilityand improve our results of operations, statements about expected newproducts, services, features or functionality and other statementsabout our plans, objectives, intentions, and expectations are"forward-looking statements" within the meaning of the SecuritiesExchange Act of 1934, as amended. Forward-looking statements are basedon the opinions and estimates of management at the time the statementsare made and are subject to known and unknown risks and uncertaintiesand inaccurate assumptions that could cause actual results to differmaterially from those expected or implied by the forward-lookingstatements. Our actual results could differ materially from thoseanticipated in the forward-looking statements for many reasons,including the risk that we will be unable to grow our revenues asexpected or at all, the risk that we will be unable to reach ormaintain profitability, the risk that our future operating resultswill fall below expectations, the risk that expected new products,services, features or functionality are not available when expected orat all and the other risks described under "Risk Factors" in ourannual report on Form 10-K for the year ended December 31, 2005, andin our Securities and Exchange Commission filings from time to time.Readers are cautioned not to place undue reliance upon theseforward-looking statements, which speak only as of the date of thisrelease.

WatchGuard, Firebox and LiveSecurity are either registeredtrademarks or trademarks of WatchGuard Technologies, Inc. in theUnited States and/or other countries. All other trademarks are theproperty of their respective owners.

WATCHGUARD TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data and percentages)
unaudited

Three Months Ended
--------------------------
March December March
31, 31, 31,
2006 2005 2005
-------- -------- --------
Revenues:
Product $10,873 $11,606 $9,131
Service 7,717 7,598 7,484
-------- -------- --------
Total revenues 18,590 19,204 16,615
-------- -------- --------
Cost of revenues:
Product (1) 4,568 4,462 4,083
Service (1) 1,704 1,365 1,471
-------- -------- --------
Total cost of revenues 6,272 5,827 5,554
-------- -------- --------
Gross margin 12,318 13,377 11,061
-------- -------- --------
Gross margin percent 66.3% 69.7% 66.6%
Operating expenses:
Sales and marketing (1) 7,101 6,151 7,946
Research and development (1) 5,433 4,814 4,443
General and administrative (1) 4,327 3,936 2,756
Amortization of other intangible assets 243 244 244
Restructuring charges - 165 -
-------- -------- --------
Total operating expenses 17,104 15,310 15,389
-------- -------- --------
Operating loss (4,786) (1,933) (4,328)
Interest and other income, net 720 678 452
-------- -------- --------
Loss before income taxes (4,066) (1,255) (3,876)
Income tax provision 18 21 42
-------- -------- --------
Net loss $(4,084) $(1,276) $(3,918)
======== ======== ========

Basic and diluted net loss per share $(0.12) $(0.04) $(0.12)
======== ======== ========

Shares used in calculation of basic and
diluted net loss per share 34,282 34,187 33,717
======== ======== ========

(1) Includes stock-based compensation as follows:

Cost of revenues:
Product $ 8 $ (7) $ -
Service 35 (40) -
Sales and marketing 235 (206) -
Research and development 252 (342) -
General and administrative 541 (241) -
------- ------ ---
Total $1,071 $(836) $ -
======= ====== ===

WATCHGUARD TECHNOLOGIES, INC.
RECONCILIATION OF GAAP NET LOSS TO NON-GAAP NET LOSS
(In thousands)
unaudited

Three Months Ended
--------------------------
March December March
31, 31, 31,
2006 2005 2005
-------- -----------------

GAAP net loss $(4,084) $(1,276) $(3,918)
Adjustments to reconcile GAAP net loss to
non-GAAP net loss:
Stock-based compensation 1,071 (836) -
Amortization of other intangible assets 243 244 244
Restructuring charges - 165 -
-------- -------- --------
Non-GAAP net loss $(2,770) $(1,703) $(3,674)
-------- -------- --------

Non-GAAP basic and diluted net loss per
share $(0.08) $(0.05) $(0.11)
======== ======== ========
Shares used in calculation of basic and
diluted non-GAAP net loss per share 34,282 34,187 33,717
======== ======== ========

Use of Non-GAAP Financial Information

To supplement our consolidated financial statements presented on a
GAAP basis, WatchGuard uses a non-GAAP measure of net loss (including
on a per share basis), which is adjusted to exclude certain costs and
expenses. WatchGuard believes this non-GAAP measure is useful to
enhance an overall understanding of our past financial performance and
also our prospects for the future. This adjustment to our GAAP net
loss is presented with the intent of providing both management and
investors a more complete understanding of WatchGuard's underlying
operational results and trends and our marketplace performance. For
example, this non-GAAP measure is an indication of our baseline
performance before other charges that are considered by management to
be nonrecurring and otherwise outside of our core operating results.
This adjusted non-GAAP measure is among the primary indicators
management uses as a basis for planning and forecasting of future
periods. Non-GAAP results exclude the following items.

STOCK-BASED COMPENSATION. Non-GAAP net loss excludes stock-based
compensation expenses, which consist primarily of expenses for stock
options, restricted stock awards and purchases of common stock under
our Employee Stock Purchase Plan. WatchGuard began recording
stock-based compensation expenses under SFAS 123-R in the first
quarter of 2006. Prior to 2006, WatchGuard's stock-based compensation
expenses resulted primarily from the variable accounting treatment of
certain stock options issued to employees and directors, restricted
stock issued to directors and officers, stock options granted to
consultants and certain restricted common stock and common stock
subject to repurchase issued in connection with the RapidStream, Inc.
acquisition. WatchGuard excludes stock-based compensation expenses
from its non-GAAP financial measures primarily because these costs are
non-cash expenses with no current effect on cash or the future uses of
cash. WatchGuard does not consider these expenses as part of its
ongoing operating results when assessing the performance of the
Company. For these reasons, management believes that exclusion of
stock-based compensation expense may be important to an understanding
of WatchGuard's ongoing operational performance.

AMORTIZATION OF OTHER INTANGIBLE ASSETS. Non-GAAP net loss also
excludes amortization of other intangible assets arising from
WatchGuard's acquisition of RapidStream in April 2002. These non-cash
charges represent a non-cash expense that has no effect on current or
future period cash flows or operations of the Company. The
amortization expense results from WatchGuard's acquisition of
RapidStream in April 2002, a non-recurring event outside of the course
of WatchGuard's normal business operations. Due to the nonrecurring
nature of this event, management believes that exclusion of the
related amortization charges may be important to an understanding of
WatchGuard's ongoing operational performance.

RESTRUCTURING CHARGES. Finally, non-GAAP net loss excludes
restructuring charges resulting from our restructuring plans initiated
in 2001 and 2002. Again, these charges represent a non-recurring,
non-cash expense that has no effect on current or future period cash
flows or operations. These restructuring charges resulted from the
Company's restructuring plan initiated in 2001, in an effort to
streamline operations and reduce operating costs, and an unrelated
restructuring in 2002, to eliminate redundancies and excess headcount
resulting from the acquisition of RapidStream. Due to the nonrecurring
nature of these events, management believes that exclusion of the
related restructuring charges may be important to an understanding of
WatchGuard's ongoing operational performance.

Management believes that presentation of non-GAAP net loss
provides an additional tool for investors to evaluate ongoing
operating results and trends. The presentation of this additional
information is not meant to be considered in isolation or as a
substitute for operating results prepared in accordance with generally
accepted accounting principles in the United States. Investors are
encouraged to review the reconciliation of non-GAAP net loss to the
GAAP net loss, as presented herein.

WATCHGUARD TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

December
March 31, 31,
2006 2005
----------- ---------
(unaudited)

ASSETS

Current assets:
Cash and cash equivalents $18,235 $20,390
Short-term available-for-sale investments 49,891 54,379
Trade accounts receivable, net 5,432 4,883
Inventories, net 4,054 4,093
Prepaid expenses and other 2,569 2,442
Short-term restricted cash 600 1,200
----------- ---------
Total current assets 80,781 87,387
Property and equipment, net 5,794 6,197
Long-term restricted cash 1,800 1,800
Long-term available-for-sale investments 4,863 -
Goodwill 66,605 66,605
Other intangibles, net, and other non-current
assets 1,554 1,735
----------- ---------
Total assets $161,397 $163,724
=========== =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $2,814 $4,654
Accrued expenses and other liabilities 6,919 6,985
Short-term accrued restructuring costs 1,060 1,119
Short-term deferred revenues 19,814 18,278
----------- ---------
Total current liabilities 30,607 31,036

Long-term deferred rent 1,223 1,302
Long-term accrued restructuring costs 2,577 2,756
Long-term deferred revenues 2,725 2,163
----------- ---------
Total liabilities 37,132 37,257

Total stockholders' equity 124,265 126,467
----------- ---------
Total liabilities and stockholders' equity $161,397 $163,724
=========== =========

WATCHGUARD TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
unaudited

Three Months
Ended
-----------------
March March
31, 31,
2006 2005
-------- --------

Operating activities:
Net loss $(4,084) $(3,918)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash expenses:
Depreciation and amortization of property and
equipment 678 656
Amortization of other intangible assets 243 244
Stock-based compensation 1,071 -
Changes in operating assets and liabilities:
Trade accounts receivable, net (549) 494
Inventories, net 39 (1,655)
Prepaid expenses and other current assets (127) (190)
Other assets (63) 17
Accounts payable (1,840) (291)
Accrued expenses, other liabilities and deferred
rent (145) 1,902
Accrued restructuring costs (238) (315)
Deferred revenues 2,098 (320)
-------- --------
Net cash used in operating activities (2,917) (3,376)
-------- --------

Investing activities:
Purchases of property and equipment (274) (67)
Proceeds from maturities of marketable securities 16,206 26,647
Purchases of marketable securities (16,507) (20,143)
-------- --------
Net cash provided by (used in) investing activities (575) 6,437
-------- --------

Financing activities:
Proceeds from stock option exercises and issuances
of common stock under the employee stock purchase
plan 737 346
Change in restricted cash 600 -
-------- --------
Net cash provided by financing activities 1,337 346
-------- --------

Net increase (decrease) in cash and cash equivalents (2,155) 3,407
Cash and cash equivalents at beginning of period 20,390 4,660
-------- --------
Cash and cash equivalents at end of period $18,235 $8,067
======== ========

Supplemental disclosure of cash flow information:
Cash paid for income taxes $19 $78
======== ========