PFWD Phase Forward (MM)

Phase Forward Incorporated (NASDAQ: PFWD) today announced its financial results for the second quarter of 2010.

For the second quarter of 2010, GAAP revenues were $58.6 million, a 12% increase from $52.5 million in the second quarter of 2009. GAAP income from operations was $2.8 million for the second quarter of 2010, compared to $3.1 million in the second quarter of 2009. GAAP net income for the period was $1.6 million, or $0.04 per diluted share, compared to GAAP net income of $2.2 million, or $0.05 per diluted share, in the second quarter of 2009.

Non-GAAP revenues were $58.9 million for the second quarter of 2010, which excludes a $266,000 purchase accounting adjustment to record deferred revenues and backlog assumed in acquisitions at fair value. Non-GAAP income from operations was $7.9 million, compared to $8.6 million in the prior year period and representing a non-GAAP operating margin of 13%. Non-GAAP net income for the period was $4.8 million, or $0.11 per diluted share, compared to $5.6 million, or $0.13 per diluted share, in the second quarter of 2009.

The attached table presents a reconciliation of GAAP to non-GAAP revenues, income from operations and net income and net income per share applicable to common stockholders for the three and six months ended June 30, 2009 and 2010. Non-GAAP results exclude the impact of stock-based compensation expense, amortization of intangible assets, the effects of purchase accounting adjustments to record deferred revenues and backlog assumed in acquisitions at fair value.

Total cash, cash equivalents and investments were $136.5 million at the end of the second quarter, an increase of $6.8 million from $129.7 million at the end of the prior quarter. Total deferred revenues were $104.5 million at the end of the quarter, compared to $110.4 million at the end of the prior quarter and $91.1 million at the end of the second quarter of 2009.

Phase Forward will not be hosting a conference call in conjunction with these results.

About Phase Forward

Phase Forward is a provider of integrated data management solutions for clinical trials and drug safety. Additional information about Phase Forward is available at www.phaseforward.com.

Cautionary Statement

Certain statements made in this press release that are not based on historical information are forward-looking statements which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. This press release contains express or implied forward-looking statements relating to, among other things, Phase Forward's expectations and assumptions concerning management's forecast of financial performance, the performance of Phase Forward's products and services, future business and operations plans of Phase Forward's customers, the ability of Phase Forward's customers to realize benefits from the use of Phase Forward's products and services, possible acquisitions, integration of acquired businesses, and management's plans, objectives and strategies. These statements are neither promises nor guarantees, but are subject to a variety of risks and uncertainties, many of which are beyond Phase Forward's control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. In particular, the risks and uncertainties include, among other things, changes in our customers' industries; our ability to convince prospective customers to adopt our solutions; competition and changes in competition during future periods; changing customer requirements; governmental regulation; our ability to maintain or increase profitability; fluctuations in our operating results; long sales and implementation cycles; our dependence on a limited number of customers or suppliers; product performance; third party service interruptions or delays; technology failures; our ability to maintain customer relationships and contracts; our ability to retain and hire skilled personnel; our ability to protect our intellectual property rights; product liability or intellectual property infringement claims brought against us; acquisitions; our ability to manage our rapid growth; our ability to obtain capital when desired on favorable terms; and the volatility of the market price of our common stock. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Phase Forward undertakes no obligation to update or revise the information contained in this press release, whether as a result of new information, future events or circumstances or otherwise. For additional disclosure regarding these and other risks faced by Phase Forward, see the disclosure contained in Phase Forward's public filings with the Securities and Exchange Commission including, without limitation, its most recent Annual Report on Form 10-K and its most recent Quarterly Report on Form 10-Q.

Non-GAAP Financial Information

Phase Forward provides non-GAAP revenues, income from operations, net income, and net income per share applicable to common stockholders data as additional information for its operating results. These measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. Phase Forward's management believes these non-GAAP measures are useful to investors because this supplemental information facilitates comparisons to prior periods. Management uses these non-GAAP measures to evaluate its financial results, develop budgets and manage expenditures. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to the comparable GAAP results, which are attached to this press release.

        Phase Forward Incorporated Condensed Consolidated Statements of Income (unaudited) (in thousands, except per share amounts)     Three Months Ended June 30, Six Months Ended June 30,   2009   2010     2009   2010     Revenues: License $ 14,695 $ 15,382 $ 28,811 $ 30,523 Service 37,806 43,211 72,506 85,270         Total revenues 52,501 58,593 101,317 115,793 Costs of revenues: License(2) 785 574 1,351 1,140 Service(1), (2) 21,245 25,283 41,144 50,999         Total cost of revenues 22,030 25,857 42,495 52,139 Gross margin: License 13,910 14,808 27,460 29,383 Service 16,561 17,928 31,362 34,271         Total gross margin   30,471   32,736     58,822   63,654     Operating expenses: Sales and marketing(1), (2) 8,216 9,154 15,422 18,140 Research and development(1) 9,425 10,031 17,605 19,729 General and administrative(1), (2) 9,715 10,774 17,519 19,958         Total operating expenses   27,356   29,959     50,546   57,827     Income from operations 3,115 2,777 8,276 5,827 Other income (expense): Interest income 502 276 1,142 592 Other, net 56 (385 ) 465 (569 )         Total other (expense)   558   (109 )   1,607   23     Income before provision for income taxes 3,673 2,668 9,883 5,850 Provision for income taxes 1,446 1,046 3,578 2,295         Net income $ 2,227 $ 1,622   $ 6,305 $ 3,555     Net income per share applicable to common stockholders: Basic $ 0.05 $ 0.04   $ 0.15 $ 0.09     Diluted $ 0.05 $ 0.04   $ 0.14 $ 0.08     Weighted average number of common shares used in net income per share calculations: Basic   42,623   42,505     42,527   40,826     Diluted   44,298   44,374     44,190   42,647     (1) Amounts include stock-based compensation expense, as follows: Costs of service revenues $ 489 $ 584 $ 965 $ 1,220 Sales and marketing 462 387 877 855 Research and development 705 999 1,326 2,035 General and administrative 1,969 1,365 3,026 2,726         Total stock-based compensation expense $ 3,625 $ 3,335   $ 6,194 $ 6,836     (2) Amounts include amortization of intangible assets, as follows: Costs of license revenues $ 194 $ 237 $ 349 $ 474 Costs of service revenues 260 448 521 895 Sales and marketing 354 739 674 1,479 Research and development - 28 - 28 General and administrative 28 26 53 52         Total amortization of intangible assets $ 836 $ 1,478   $ 1,597 $ 2,928        

Phase Forward Incorporated

Reconciliation of GAAP Revenues, GAAP Income From Operations and GAAP Net Income to

Non-GAAP Revenues, Non-GAAP Income From Operations and Non-GAAP Net Income (unaudited) (in thousands, except per share amounts)       Three Months Ended June 30, Six Months Ended June 30,   2009   2010   2009   2010 TOTAL REVENUES: GAAP total revenues $ 52,501 $ 58,593 $ 101,317 $ 115,793 Deferred revenues and backlog adjustments related to acquisitions (1) 968 266 1,596 562         Non-GAAP total revenues $ 53,469 $ 58,859 $ 102,913 $ 116,355   INCOME FROM OPERATIONS: GAAP income from operations $ 3,115 $ 2,777 $ 8,276 $ 5,827 Stock-based compensation expense 3,625 3,335 6,194 6,836 Amortization of intangible assets 836 1,478 1,597 2,928 Deferred revenues and backlog adjustments related to acquisitions (1) 968 266 1,596 562 Restructuring 86 - 86 -         Non-GAAP income from operations $ 8,630 $ 7,856 $ 17,749 $ 16,153   NET INCOME: GAAP net income $ 2,227 $ 1,622 $ 6,305 $ 3,555 Stock-based compensation expense, net of tax 2,199 2,062 3,952 4,286 Amortization of intangible assets, net of tax 507 914 1,019 1,839 Deferred revenues and backlog adjustments related acquisitions, net of tax (1) 587 164 1,018 348 Restructuring, net of tax 52 - 55 -         Non-GAAP net income $ 5,572 $ 4,762 $ 12,349 $ 10,028       GAAP net income per share applicable to common stockholders: Diluted $ 0.05 $ 0.04 $ 0.14 $ 0.08   Non-GAAP net income per share applicable to common stockholders: Diluted $ 0.13 $ 0.11 $ 0.28 $ 0.24

(1) Fair value adjustments to deferred revenues and backlog. Purchase accounting requires that deferred revenue assumed in an acquisition be recorded and subsequently recognized at its fair value as of the time of the acquisition. Consequently, we do not recognize the full amount of these deferred revenues and backlog. We add back non-GAAP revenues associated with deferred revenues and backlog that were excluded as a result of purchase accounting adjustments, as we believe that this provides information about the operating impact of the acquired business in a manner consistent with the revenue recognition for our pre-existing products and services.

        Phase Forward Incorporated Condensed Consolidated Balance Sheets (unaudited) (in thousands, except per share amounts)       December 31, June 30,   2009     2010     Assets Current assets: Cash and cash equivalents $ 41,862 $ 58,704 Short-term investments 67,241 77,844 Securities settlement agreement 4,345 - Accounts receivable, net of allowance of $781 and $755, respectively 56,034 43,450 Deferred income taxes 9,521 9,521 Other current assets 14,694 15,426     Total current assets   193,697     204,945         Property and equipment, net 52,840 50,325

Intangible assets, net of accumulated amortization of $7,332 and $10,259, respectively

41,661 38,734 Goodwill 59,027 59,027 Deferred income taxes 5,465 5,465 Restricted cash 962 982 Long-term investments 26,439 - Other long-term assets 9,865 9,880     Total assets $ 389,956   $ 369,358     Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 5,909 $ 3,728 Accrued expenses and other current liabilities 28,006 21,664 Deferred revenues 85,896 91,203     Total current liabilities   119,811     116,595       Deferred rent, net of current portion 2,115 2,862 Deferred revenues, net of current portion 12,478 13,271 Other long-term liabilities 10,224 9,885     Total liabilities   144,628     142,613     Stockholders' equity: Preferred stock, $0.01 par value: Authorized-----5,000 shares Issued-----0 shares - - Common stock, $0.01 par value: Authorized-----100,000 shares Issued----- 43,577 and 43,838 shares, respectively 436 439 Additional paid-in capital 296,572 301,673 Treasury stock, 980 and 2,915 shares at cost, respectively (14,147 ) (40,111 ) Accumulated other comprehensive income (loss) 71 (1,207 ) Accumulated deficit (37,604 ) (34,049 )     Total stockholders' equity   245,328     226,745     Total liabilities and stockholders' equity $ 389,956   $ 369,358             Phase Forward Incorporated Condensed Consolidated Statements of Cash Flows (unaudited) (in thousands)     Six Months Ended June 30,   2009     2010     Operating activities Net income $ 6,305 $ 3,555 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,699 11,701 Stock-based compensation expense 6,194 6,836 Amortization of leasehold incentive obligation (396 ) (483 ) Provision for allowance for doubtful accounts 174 25 Deferred income taxes 2,240 - Amortization of discounts or premiums on investments 100 (148 ) Change in fair value of investments (464 ) (4,430 ) Change in fair value of securities settlement agreement (14 ) 4,345 Changes in assets and liabilities: Accounts receivable 518 12,771 Other assets (1,725 ) (1,397 ) Accounts payable (2,923 ) (2,150 ) Accrued expenses (5,325 ) (6,095 ) Deferred revenue 1,642 5,933 Deferred rent 1,175 747     Net cash provided by operating activities   15,200     31,210     Investing activities Decrease (increase) in restricted cash 500 (20 ) Proceeds from maturities of short-term and long-term investments 19,389 60,365 Purchase of short-term and long-term investments (47,069 ) (39,846 ) Purchase of property and equipment (11,467 ) (5,834 ) Cash paid for acquisitions, net of cash (13,629 ) -     Net cash (used in) provided by investing activities   (52,276 )   14,665     Financing activities Proceeds from issuance of common stock 1,482 606 Withholding taxes in connection with vesting of restricted stock awards (1,718 ) (2,337 ) Purchase of treasury stock - (25,964 )     Net cash used in financing activities   (236 )   (27,695 )   Effect of exchange rate changes on cash and cash equivalents   483     (1,338 )   Net increase in cash and cash equivalents (36,829 ) 16,842 Cash and cash equivalents at beginning of period 131,550 41,862     Cash and cash equivalents at end of period 94,721 58,704 Short-term and long-term investments at end of period 73,959 77,844     Total cash, cash equivalents and short-term and long-term investments at end of period $ 168,680   $ 136,548