思杰系統 (CTXS) 2002 Q2 法說會逐字稿

Good afternoon. My name is Molly and I will be your conference facilitator today. At this time I would like to welcome everyone to the Citrix Systems second quarter 2002 earnings conference call with our host Mr. Mark Simpleton president and CEO and Mr. Jeff Lilly, manager of investor relations. All lines have been placed on mute to prevent any background noise. As a reminder this call is being recorded. Thank you. Mr. Lilly you may begin your conference.

Thank you, Molly. Good afternoon and thank you to everyone for joining us for our second quarter 2002 earnings conference call. Participating in the call today are Mark Templeton, our president and Chief Executive Officer and David [Urbany], acting Chief Financial Officer and vice-president corporate controller. For those of you with access to the internet, this call is being webcast with a virtual slide presentation at www.Citrix.com/investors. This slide presentation itself will be posted to our website shortly after the call is completed. A replay of this call and webcast will be available through Wednesday, July 24th, 2002 as we get started please note that certain comments made during the call may be characterized as forward-looking statements made pursuant to the safe harbor provisions of section 21 (E) of the securities and exchange act of 1934. The statements involve a number of factors that could you cause actual results to differ materially. Including risks associated with the company's business including the risks and uncertainties involving the company's products, including their development and distribution, economic and competitive factors and the company's key strategic relationships. Additional information concerning these factors is highlighted in the slide presentation earnings press release and the company filings with the SEC. Copies of these SEC filings are available from the SEC or the company's investor relations website. Now, I would like to introduce Mark Templeton, president and Chief Executive Officer of Citrix systems.

Thanks, Jeff. And thanks to everyone for joining the call to hear or final results from Q2. Our second quarter was reflected over all IT spending. With positive and front segments and softness in others. Some segments. And customer sales weakness in package products was almost completely offset by the increase in electronics licensing. Other end customers sales from software prescription and technical services was up roughly 5 percent over Q1. So, total sales to end customers during Q2 was relatively flat to Q1. As we indicated in our preliminary results last week, weakness in package product purchases prompted distributors to reorder less from us and reduce their onhand inventory. This impacted our results substantially as we posted revenue of 117 million for the quarter. Down 17 percent from Q1 and down 20 percent from Q2 last year. Adjusted net income was approximately 13 and a half million. On expenses that were down roughly three percent from the first quarter. Adjust the EPS was 7 cents compared to 16 cents in Q1. These financial results are in line with the preliminary estimates we provided you on July 8th. Going forward we're taking a balance the approach, managing expenses as appropriate and pro actively taking steps to improve or market leadership provision. (Inaudible) times like these, and I can assure that we're not hunkered down, we're playing to win. At the same time, we're bringing expense rates down even further over the course of Q3 and Q4. We'll accomplish this by better targeting our marketing program by gaining (inaudible) market fish cease and through the 10 percent work force reduction we announced last week. These decisions are bringing out spending in line with the end customer sales we've seen and expects to see over the next few quarters. Our balance sheet continues to be in great shape. We have a strong cash position and positive cash flow from operations. Deferred revenue, high (inaudible) receivables and growth in shareholder equity. This gives us the financial foundation to weather market uncertainties and to be proactive about the future. To draw revenue, we're creating finally tailored go-to-market programs that will serve the specific needs of our primary customer segment. And the business partners that serve them. As you know, we're drawing the business top more directly address the needs of three kinds of customers. The small media customer, the middle market large scale customer, and government and education customers. As we move through the second half of 2002, we're taking action on all these front in concert with current market realities and with solid opportunity we have to build great software for business access. Next, our acting CFO, Dave urban any, will discuss our financial results and then I'll be back to further discuss Q2, the actions we're taking in the second half, and our outlook. After that, we'll be available for some Q and A. Dave.

Thank you, Mark, and good afternoon. In my comments I will discuss the performance in the second quarter and discuss its effects on our income statement, balance sheet and cash flow statements. I should note that all numbers discussed are adjusted to exclude the effect of amortization in tangible assets and the writeoff of end process R and D related to prior business combinations. Total revenue for the quarter was 117.5 million. In line with projections we made last week. Again, this came in below our expectations due to the soft market experienced and that Mark discussed previously. It was offset by revenues from licensing and subscription advantage renewals. By region, international revenue is approximately 55 percent of our business and the US accounted for approximately 45 percent. I would like to remind you as in the past, the 4.2 million dollars of Microsoft royalty is attributed to the US region. This will be the last time we'll report this royalty. Total operating expenses excluding amortization intangibles was 99.8 million dollars. These expenses were three percent down from last quarter but up from last year. Our operating margin for the second quarter was about 11 percent. This is well below expected levels which hope to correct in the future. Other income is 573,000 reflective of the current rate environment. (Inaudible) translation currency losses and writeoff of certain private equity investments. We booked no taxes for the quarter consistent with our anticipated effective tax rate of the full year of about 15 percent. This change is due to lower sales projections and increase relative international profits. As we've said in the past, our international tax rate is significantly lower than the US rate such that the changing mix will affect a consolidate tax rate. Adjusted net income was 13.5 million or 7 cents a share. Again, consistent with our preliminary results. This calculation is based on a weighted average fully diluted common shares outstanding of 181.3 million shares. Total cash investment was 719.3 million at the end of the quarter. This was an increase of about 18 million. Net accounts receivable balance was about 69.7 million which would yield a DS about that 533. The slight increase is DSO is driven by sales profile within the quarter by month. The specifically in electronic license deals which typically close in the last month. Quarter. Deferred product and services revenue increase the sequentially 8 million dollars to 88 million dollars. This increase is about the same as last quarter, again due to a higher renewal rate to subscription advantage agreements. As Mark mentioned previously, cash flow for the quarter was strong at 33 million dollars. Exceeding that of last quarter which is about 28 million dollars. The principle difference was a collection in the accounts receivable. In connection with our share repurchase program, during the second quarter we purchased approximately 3.8 million shares of stock ruling from an acceleration of a prepaid program which has been discussed in the prior 10-Qs and a cash outlay of 12 million dollars to purchase shares from (inaudible) first quarter. We intend to resume our repurchase activities soon. There is currently 186 million dollars remaining in the company's current share repurchase program. Now, let me turn it back to Mark.

Thanks, Dave. Next I would like to highlight a few areas of our Q2 business. As we've mentioned earlier, electronic licensing showed really good growth, up 12 percent sequentially and up 28 percent over Q2 up last year. We believe this trend reflects the focus we've had own accounts quarter backing through our enterprise relationship managers. Within licensing relationship the mix between corporate and enterprise license programs remains consistent from previous quarters, split about 50-50. And initial license orders were once again roughly two-thirds of the mix. This is positive as it shows the ongoing strength of the reorders ruling from agreements signed in prior quarters. Clearly, the trends we saw in Q2 around larger partners and customers were encouraging. We did see further weakness in our package business which was down roughly 9 percent sequentially. We continue to believe that almost all this impact is due to the economic environment. Historically, packaged product software is used for smaller customers and doctors of medicine. Anecdotally, some resellers, have indicated that due to budget constraints, some customers are operating to terminal services without meta-frame on their initial implementation. Resellers have also indicated this would prevent future opportunities as they believe most customers would likely add meta-frame at a later date. We view the built-in terminal services features of Windows 2000 server was a great way for first time customers to see the basic advantages of server based computing, a way for the primary market to grow more organically. When customers try terminal services it creates a future opportunity for Citrix. It is definitely value, with shorter sales cycles and larger initial implementation. So, the more you pay for terminal services the more you'll find a business need for meta-frame. We had some great customer wins in Q2. More large wins that we've ever seen in a single quarter. In fact, we had five deals that ranged from about $750 to 1 and a half million dollars. 3 of them were for 10,000 concurrent users or more. The largest win was in Canada with one of the biggest retail banks in the country. Unfortunately, we can't disclose the name of the customer but it was a very significant win as we partnered with Microsoft and IBM Global Services to update the bank's infrastructure which serves over 1,000 locations. Another great win was with delta airlines as they expanded their usage of meta-frame XP to deploy SAP, Microsoft office, and a number of customs applications. This was significant as we now have over 5,000 concurrent users in delta with a more strategic position in their IT infrastructure. On the international front, we filed a major agreement with SK Telecom. A very large teleco based in Korea, formerly known as SK Group. This agreement runs over 3 and a half years and covers up to 50,000 concurrent users. The initial order was substantial and will allow us to provide wider access to lotus notes, Microsoft Office, SAT, and their CLN systems. For this gives you flavor for the kind of middle market and large firms that are moving forward even in this economy. To optimize their IT environment. To better manage their computing costs, and to gain competitive advantage. Over time, we work to expand our relationship with Microsoft in technical sales and strategic areas. We're pleased with the excellent growth in the relationship during Q2. We work jointly on some of our larger customer wins. We were named at the highest level of partnership, global gold service product. Meta-frame XP received all the server based Windows certification. And we signed an agreement that continues our access to Windows based server code. We continue to be committed to the Windows platform. Today, and into the dot-net future, across our access portal and application server product line. Q2 was a big quarter for our product development team. We introduced and delivered two important components of the virtual workplace. Meta-frame XP feature release 2, and the (inaudible) access portal. Customer reaction to SR 2 has been great so far. And we expect the new features to inspire a lot of customers to accelerate their plan to migrate from meta-frame 1.8 to meta-frame XP. Feature release 2 allows IT to provide secure access over the internet without additional VPN software. It has strengthened management tools that help to scale out server forms. And it provides user to user collaboration that increases the convenience of sharing documents in real time. Just to name a few of the features. We also created a lot of excitement customers partners and industry analysts with a launch of the world's first access portal server, in fuse elite. Over the last year development testing and management of InfuseElite has been split between our Florida and Maryland facilities. Leveraging the resources on both ends. As part of imposing our operating efficiency in conjunction with the work force reduction, we've decided to cease product development in Columbia, Maryland and come solidly remaining development to our Fort Lauderdale center. InfuseElite focuses on doing a few things extremely well. Secure, personalized information access. Great leverage with meta-frame XP. Very short implementation time. Great (inaudible) web form accessability. Solution partnerships that include e-room, documentum, scale media, bantoo, to name a few. And an industry leading price point. It's simple the best price performance portal server for secure personalized access. And with meta-frame it's even more powerful. Early adoption looked promises as you may have seen in our InfuseElite announcements this morning. One of these early customers is featured in the release. In fact, they did a major presentation at a recent i-forum customer conference in Europe and I would like to show I some of their charts. Often it's a great example of a customer leveraging all our access software products. You may not know awesome, a 25 billion dollar company with 125,000 employees. Awesome. If you ever had been on a TGV superfast train in Europe or Asia, this is just one of their many products. Become a corporate utility that will improve IT services and reduces computing costs by 10 percent annually. So their users, they offer a very flexible service for work productivity from anywhere with access to the widest range of applications and information. The IT services team is global in scope. Has 1400 of its own staff and provides services to 60,000 users in 15 countries. Their internal billing for 350 million Euros last year and their expense charter is to reduce computing costs by 10 percent annually. In short, they're able to run IT just like a cable entertainment provider does. They have built an access platform that lets them publish a list of services they offer. Which allows subscribers to him choose services that can be activated securely and efficiently for quick availability. Afterwards they're able to monitor and manage the service quality, measure each subscriber's usage and (inaudible) billing on a departmental basis. This is the service based approach that IT organizations everywhere are looking to achieve. Their IT services include Office, ERP and custom applications. They provide access to service bulletins, overhaul manuals, technical manuals, engineering drawing libraries and product information. They can offer task base the access to spare parts information. Sales orders and change requests. All centrally managed at a single point and securely accessed from anywhere through a web browser. So the InfuseElite access portal acts very much like the cable television on screen guide. Giving secure single point access to subscribed services on demand services, and new service offerings. With meta-frame's XT, XML, web services and web parts behind the scenes, providing virtual connections to applications and content from a very wide set of information systems. So, you are wondering about what are the net results. Well, first, they get reduced manageable support for the IT team and worldwide personalized access to their subscribers. They're getting a very easy and powerful way to integrate Windows and web content in the same place. And, most amazing of all, they did the entire project, including some custom XML and web form work in under four weeks. This is the simplicity and power of InfuseElite. And the kind of virtual workplace access solution we can now offer. This story is just being understood by our business partners and by our customers. It's an exciting opportunity. InfuseElite is just now coming to market through a approximately 700 fast track resale partners and this number is growing. It's early and we're still looking to establish a pipeline which is building. To understand sales cycles look very similar to meta-frame so far. To establish best practices for valuation. And to forecast safe-on predictable close ratios. So, there's a lot of excitement in the InfuseElite business. But it will take a lot more than that to drive revenue. As I mentioned earlier, we are directing our business to more directly the needs of three kinds of customers. The small media customer, the middle market and large scale customer, and the government and education customer. This requires more finally tailored, go-to-market programs that will serve the specific needs of each of these customers and the business partners that serve them. Over the next two quarters, we'll be introducing the elements of a go-to-market program that are really designed to help better meet customer needs. To improve selling incentives for productive business partners. And open up new market opportunities for the Citrix ecosystem. As the first step we'll be taking three core actions. First, we'll - we're modeling the selling incentives for Citrix solutions network partners that will lure them for driving more transactions, especially with small and medium customers. Secondly, we'll be pruning our CSN memberships by cropping nonproductive members and turning our resources and focus toward those that provide solid services (inaudible) services and consulting services. And thirdly, we'll be launching an open style licensing program to replace our COPE licensing. That will allow first the doctors to start with a new license. That will increase their satisfaction and that will better align them with industry best practices. We'll be implementing these changes over the course of Q3 and into Q4. Our strategy is to exit 2002 with an improved go-to-market structure really geared for these customer segments that represent our growth opportunities. Given these internal and external factors, we expect Q2 (inaudible) to continue over the next few quarters until overall business confidence improves. Those trends are growth in electronic licensing revenue, solid subscription revenue and packaged product sales. We expect third quarter reported revenue to be lightly below our second quarter at 110 to 115 million. With lower expenses, as previously discussed, and a projected tax rate of 15 percent, earnings per share will be in the range of 6 to 9 cents in Q3. This excludes amortization of intangibles and charges related to the work force reduction. Barring a significantly positive change in IT spending, we are expect Q4 to also follow this trend with revenues expected to be 115 to 120 million and EPS to be 11 to 13 cent range. This will put our full year at 485 to 495 million in revenue. Operating margin at 16 to 18 percent. And EPS at 40 to 45 cents. This is consistent with the guidance we provided you last week. So, we've discussed a wide range of topics today. Here are the key things we'd like to you take away. First, end customer demand for our product and services was approximately flat for the first quarter. Secondly, the release of in fuss elite gives our customers another key building block for virtualizing their IT services, giving them closer than ever to a completely virtual workplace. Thirdly, to strengthen or package product business and do to continue the growth of our etch-licensing we're pro actively implementing improvements in our global market model. Fourth, we're managing our expenses down in line with revenues. And fifth, our strong balance sheet is helping us manage well in this environment, allowing us to be in a relatively stronger position when overall markets improve. We're confident in our value to customers and our business model. In spite of the overall IT environment. We're staying positive, proactive and focused. I would like to reiterate something we said three months ago. Customer and market leadership. These are the critical areas where we must continue to focus our forward energy. We're more certain than ever the opportunity is there. Even with this, we're not underestimating the management challenge facing us. The challenge is navigate through the most treacherous IT market we've ever seen. We're making investments in the business, but prudently. We're taking the long view, focused on growth while managing the bottom line appropriately. Now we would like to open it up for questions. Thank you.

At this time, I would like to remind everyone in order to ask a question, please press star and then the #1 on your telephone key pad now. We'll pause for just a moment to compile the Q and A roster. Your first question comes from Sarah Mattson.

Hi, guys. A couple of questions. First, if you can strip out the Microsoft royalties, international revenues what we accounted for about 57 percent of the total. As reroll typically a fairly weak quarter in Europe seasonally, can you discuss the dynamics that give you confidence you can actually maintains organic revenues into the September period?

Sarah, this is Mark. So, we've actually in our European revenue haven't seen that kind of radical seasonality in the third quarter typically. And it's definitely in Europe a more back-end loaded quarter. But a lot of deals are already in the works. August is a pretty low month. And our ERNs are much more mature in that kind of business, is much further long and I think we get a lot of momentum off of that in the third quarter.

You expect that that to maintain a hold instead through this period or are you (inaudible) as you look into the September quarter, are you seeing any change that would suggest any additional weakness? Or you feel good about your prospects there?

Not at this time, Sarah. I think that the mix between the GOs, etcetera, is all built into our revenue guidance and expectations.

Okay. And then one quick one on the tax rate. Can you maybe explain a little bit about how the effective tax rate is work, what the rate - I know you get 15 percent for the September period. Is that going to hold for next year as well?

When you say next year, you mean '03.

Yes, sir.

No. We don't expect the tax rate to remain at 15 percent for '03. Again it will depend on how strong the business environment is. Again, just to reiterate, the tax rate that we see in the international business is around 6 percent while the rate we see for US business is closer to 38 percent. So you can see there's a dramatic shift depending on how the sales shift. And the 15 percent that we reported or expect will be appropriate for the third quarter and the fourth quarter as we set it now.

Okay. Thanks very much.

Your next question comes from Robert Stinson of Bank of America.

Can you guys, maybe, reconcile for me, I'm trying to get to the workoff in the inventory on the package app. Are you guys assuming a flat number and from Q2 to Q3, what's making up the difference of that inventory work to get to a flat number?

Bob, this is Mark. So, built into our guidance around reported revenue is obviously some additional workoff of inventories we expect as a result of some of the moves we're making in the go-to-market agenda that I discussed in my prepared comments. And really, it will involve some changes in the mix between 2 tier and one tier distribution and it will cause some additional reductions in distributor inventory because some of those fund rates will actually shift to one tier run rates.

You got to get a mixed shift towards the quarterback program to make up the inventory adjustment.

Bob, it's not really the quarterback program, it's really to actually, frankly, drive more e-licensing. So the notion of producing an open style licensing program really is a notion where where the open licensing really starts basically at the entry level. It's all E license. There's no shrink wrap, there's no inventory anywhere. It really indicators to the kinds of - the way that certain types of customers, especially middle market and large scale customers, like to buy their first adoptions. And frankly it's the way that small and medium sized customers like to bay when they get a little bit more committed to a product. So this will have an impact on distribution inventories and we're trying to anticipate that as we go into the second half of the year.

Okay. One more quick question. Can you guys give a sense of when you think InfuseElite is going to be a material number that you're going to give us a breakdown on. Is that going to be an '03 events.

I sure hope so. I sure hope it's an '03 event. I tried to spend enough time on in fuss elite on the prepared comments.

I was wondering. We should take a percentage of time you spent on Infuse and add that to the revenue forecast? (LAUGHTER).

Well, I'm trying to make sure everyone understands what access portal is, what a customer does with it. And shows some real - a real implementation. As I said in my comments and I've said to all of you many times, there's tremendous amount of excitement and love, the channel is ramping up. All this is really good. But the fact remains that it's a brand new product introduced at a time when customers everywhere are looking for discretionary things to not do before yeah. The question I really am curious, as we give you're looking at '03, how much incremental revenues are we expecting from Infuse or is that all up side to what's out there? If the meta-frame business is flipping, it made up by Infuse or Infuse just all grave have I to the kind of what you guys are thinking.

I think it's a mix of contributing and some upside. Really based upon mostly the state of IT spending.

Okay. Thank you.

Your next question comes from John [Rizuto] of CSFB.

Hi fellas. Can, Mark, can you go through the open licensing program. One of the third points. A little bit more detail again for me and how that's going to work.

Well, if you're familiar with Microsoft open licensing program, which has been highly successful for them, over the past few years since they browse the I will, we're really modeling ourselves that way and trying to make some of the - some improvements that we'd like to introduce into our own program. So there are a few key points here. So, first of all, most electronic licensing that companies do that are outside this sort of in connection are contract dates that have a commitment to them. In terms of volumes or in time. An open licensing program in contrast to that is transactional rather than a commitment style of licensing. So the customer asked for 200 users they can get 200 users. As opposed to having to commit to much larger quantities. Secondly, open licensing is all electronic, there's no package product. So it's a lot simpler for customers to buy. Because it's a click-through license agreement. They don't have to involve their lawyers, etcetera. And many even large companies don't allow their IT organizations to buy small quantities of product in any other way. Those are sort of key ideas and we're working with our distribution partners because certain part of our open licensing product will flow through our two-tier partners and other parts will flow through our 1-tier partners.

Got you. Just for clarification, all of your InfuseElite deployment are electronic only, there is no package for InfuseElite; is that true.

That's effectively true. So obviously we do produce media, not all the software is downloaded. 01: But think of it as billed to order and so, even where a distributor is involved because they're handling the transaction with a reseller, they handle the invoicing, the paper etcetera and they take the credit risk. And we drop ship to the reseller. The good news is on that model, we end up knowing the specks, who the customer is, and so if we need to contact the customer, or work with the partner more closely, the customer, we have that visibility and you don't have a sell-in channel built in, distributor channel inventory build.

Okay. And, Mark, on a subscription for your FR 2 feature release 2, that comes with the subscription I'm assuming.

Yes. A 12 month subscription is included with all of our products today.

Okay. Now, a feature release 2, is there a way you can quantify for us how many people are adopting that who will have to incrementally buy it as opposed to those who are just going to get it free for their subscription as part of their subscription program

I really can't for you, John.

Okay.

Certainly not - we might be able to give you some estimates, follow-up call or something.

Typically, what we see, I mean, answer it a different way. Typically what we see when we add feature releases and we've - we look at the revenue that comes from customers of that either subscription advantage that has expired or they've never owned it, it's pretty much a steady flow. We never see a spike in revenue from a feature release introduction. Maybe that helps. But I do think, based upon customers I've talked to, I've participated in a number of customer meetings since we release the FR 2, a number of them are saying for he is the user to user collaboration or some of the management capabilities, some of the performance things we did, and especially the Citrix secure Gateway that's part of FR 2, I see a more and more saying, you know, I'm going to my great my 1.8 systems over.

Okay.

That's good news.

One final question. If you characterize, would you like to break out the services revenue portion of your total revenue?

Yes. We can. Hang on just a second, Dave. Dave will give it to you.

That was about 11 million dollars for the quarter.

11 million. Was that down, up?

Up from last quarter.

Slightly up, okay.

Thanks, John.

Your next question comes from Mike (inaudible) with (inaudible).

Steve (inaudible) sitting in for Mike today. Just a couple of questions. First, regarding E-licensing, this quarter was 45 persons, last quarter was 30 percent. That's a pretty big jump. Is there any more specific guidance you can provide as to what percentage of the mix that will be in the third quarter?

Steve, so you - it is a huge jump. In a typical quarter, just a second. Dave will give it to you.

That was about 11 million dollars for the quarter.

Was that down up,

Slightly up from last quarter.

Okay. Thanks.

Your next question comes from Mike (inaudible).

Steve (inaudible) sitting in for Mike today. Just a couple of questions. First regarding E-licensing this was 45 percent, last quarter was 30 percent. That's a pretty big jump. Is there any more specific guidance you can provide as to what percentage of the mix that will be in the third quarter.

Steve, so you - it is a huge jump. And in a typical quarter where the sales in and sales out, if you will, on shrink wrap is balanced, then the mix is more normalized between E-license and packaged product on a reported basis. But because we had the distributors working down their inventories, the mix that we give you is all based on reported revenue and how that packaged product is recorded in our reported revenues. So, to give you a sense for that, it would be closer to 38 percent when you look at end customer demand. If you take all the inventory calculations out, our electronic licensing business would have gone from about 30 percent in the first quarter to 38 percent of the mix, if you look at it that way.

Okay. And aggregate terms, if we look back a couple of quarters, there was - if my memory is correct, a large spike in E-licensing in the fourth quarter, is that something you would expect, that type of seasonality in this year.

Well, normally, that is the case for - most software companies. Frankly, we did not see it in Q4 of '01. In fact, from Q3, Q3, Q4 to Q1, E licensing in dollars were pretty flat. Transaction rates increased so some of the deal sizes actually on average went down. As commercial looked to buy quantities more in line with their needs. Immediate needs. So, I don't - I really can't predict what will happen in Q4 of this year. We're kind of feeling like this is not - this is going to be another year where there won't be big budget flushes at the end the year.

But I guess there's two forces at work here. The one force being the inventory correction. The distributors wanting to hold that inventory. And then also, your new open license program and selling program. That should drive E-license as well, correct?

Yeah. But you asked - well, okay. So, absolutely. When you start to factor in the mix shift that we're actually driving now, okay? In conjunction with where we want to talk take the business right at the target customer segments, absolutely. My comments on more normalized basis. If you looked at it that way.

Okay.

Okay. Because you could see a big spike but if it's just moving revenue from a packaged product, let's say sales out, to end customers, to an open license revenue, great. And they - it may actually be even more profitable for us. But it's not about sort of Q4 spikes in revenue based upon budget flushes.

Okay. And is there a ballpark number you can put on the inventory correction that occurred in the quarter and how much you would expect is still -

UNKNOWN SPEAKER:. Really, these inventories are managed by our distributors and obviously we stay in touch with them. We have a team that is responsible for working directly with distributors. But it's not a staff stat, metric, that we provide. I would expect that going forward just depending upon how the final decisions come through on open licensing and what partners are eligible for what pieces of these programs, etcetera, that will really drive the distributor inventory reductions going forward. But we don't do that kind of reduction, into our guidance, just to reiterate that. we built that kind of reduction into our guidance, just to reiterate that.

Your next question comes from Jason Craft of A.G. Edwards.

Hey, guys. Two quick questions, most of them have been answered. I got the metric on the three deals that were 10,000 users. I'm using last quarter as kind of the benchmark here. Anyway you can give the number of deals that were 2500 users?

From this quarter, Jason?

Yes.

I can give you an estimate. Not a set of metrics we normally provide but it's not a big deal. So, what we've seen in recent quarters is more bar bell type look to these charts as you get more on the top end and thinner in the middle and then more at the bottom end. So actually, well, here's the answer. Of the top 10 deals, nine were greater than 3500 users. And the bottom one was under 2500.

Okay. And then on the ERNs, anyway you can give some color to how many are fully productive now if the level you guys are currently at, probably near 90 is going to stay the same the rest of the year. And then if you could kind of highlight what their current quote is, either on an aggregate sales dollar amount or other than a (inaudible) basis.

So, an average ERN quote taste about 3 million. It will vary by market. But it won't vary widely. Secondly, how ramped up are they? That's really hard to answer in terms of an aggregate. I would have to say they're probably working toward the 50 percent ramped up sort of stage at this point. And honestly, as we see more in terms of into the future pipeline development etcetera, we'll be looking maybe late this year to be adding to that ERM force to again work with some of the larger partners we're developing relationships with and the larger customers and so forth.

Did any of the - with the 10 - with the 10 percent work force reduction, did any of the ERNs or field sales reps get touched in that yet or any plan to.

Well, the easier thing with sales organization in this regard is that this is a constant process with this type of employee. Because they're on quotas and they have the performances, their performance. It's what makes being a sales guy so tough. And so joyous when you're successful. And so we constantly prune and tune that group. And we've had of those that we hired last year, we have already turned over a few based upon performance.

Thanks.

Your next question comes from Chris Gavin of J.P. Morgan.

Thanks. Mark, most of the questions about the quarter have been asked. I wanted to September quarter guidance. And the revenue guidance is 110, 215 million. Over the last few quarters, where we started the quarter, there were certainly a thought that the number would be a whole lot higher, and then the turned out that you guys came up short. I'm just wondering if at this time you guys employed a much stricter set of parameters to come up with that 110 and - 110 to 115. If you could talk through how you came up with that. Because, the trend does look like the business is deteriorating and I'm wondering why September should be flat and not slightly down. Thanks.

Well, for the guidance, Chris, is flat to slightly down. So I'm not sure what you meant by your last comment. That is our guidance, flat to slightly down from this quarter. The basis for that a quarter that will probably look a lot like Q2 with perhaps maybe fewer smaller reductions in distributor inventories. But if I remind you, when I take you back to earlier in the year, we saw in the fourth quarter, some package product softness in the US. Made us a little conservative in January or so we thought we were conservative in January in our outlook. And frankly if you ever had told me that the package product end customer demand would slow down as fast as it has, I would have told you you were nuts. Based upon that outlook, we had a view where package product would be pretty flat for the year. And instead, and that's what we built our Q1 and into Q2 guidance around. And that turned out that weakness in the fourth quarter actually turned out to be, instead of a phenomenon, turned out to be a trend. And so, now, in our guidance and in our forecast, etcetera, we're looking at this more like a trend. And that's what's reflected in our guidance. And in that trend, as I said on the prepared comments, it incorporates some of the proactive changes we're going to make in the programs before going to market.

Okay. In that September quarter number, there's no InfuseElite expectation?

Yes, InfuseElite expectation. As John asked the question earlier, the number is not zero. How big can that number be and how fast can it get there? I think that's where we're trying to be very cautious because in fact we don't understand yet the sales cycles, we don't understand what the first adoption looks like versus an expansion adoption. Some of those kind of characteristics that you really need to provide some good forecasting. And then, another piece that I should have mentioned a little earlier on the guidance is, remember this quarter at 117 million there's about 4.2 million in Microsoft revenue in there. And so, we're looking at, if you take that out, you're going to look more like a quarter that's in the 112 to 113 million range for Q2 and that is pretty consistent with the flat, slightly down guidance that we've given.

Yeah. I guess that's what I'm trying to understand. If I just take your guidance in the middle to flat quarter, it seems like the June quarter business conditions got progressively worse. And I'm just trying to understand if you are making the call that you don't see that continuing through the September quarter? Actually we've seen the bottom?

>>UNKNOWN SPEAKER:. I guess we know that - the big swing factor here is packaged product. And the inventory changes that will go along with the demand pattern that we see as well's how our go-to-market programs impact that. I think that's the big swing factor. We certainly tried to reflect that in our guidance and we tried to be pretty conservative in putting all those numbers together. But, everybody's crystal ball is in the repair shop right now. And it's pretty tough.

Okay. All right. Thank you.

Okay.

Your next question comes from Scott Kessler of Standard and Poor's.

Involved the layoff. Can you provide any more detail on exactly where you're going to be looking to lighten up? I've heard, for example, that a substantial number of the former Sequoia employees are going to be laid off for example. If you could talk a little ability about that. And during the guidance update call, there was a reference made to 2003. And I think the comment was something like, if 2003 kind of shapes up as we expect the second half to - we're looking for flat growth. I guess I wanted to give you the opportunity to comment on that reference.

Okay. All right. Scott, we'll work back from that. That was what you said was in response to a question we were asked. We have not provided any formal guidance for 2003 yet. Obviously, an incredibly tough call when we're looking to Q3 and Q4 ask trying to figure out where - what the tea leaves are telling us. Knowing no more than we know, or no more than anyone knows, at this point, we're expecting a pretty flat year. Elite could present some upside as I said to John [Rizuto], the revenue is not zero it's in our expectations for the year. It could be a grower for next year depending on the overall environment and certainly the overall environment would impact positively or negatively meta-frame and any other new things we would be introducing between now and then. So the way you probably should take it, pretty flat. I can't see a scenario personally that has the world getting a whole lot better before the second half of next year. And that's sued bring far out to where I don't know how to factor that in. But that pretty flat and that InfuseElite would be some up side to that kind of guidance. But again, we haven't formally given anything there yet. Regarding the work force reduction, yeah. I'll cover that. So, we are actually in the process of informing impacted employees. We've started today. We'll finish by the end of business on Monday. The mix is about 75 percent in the US, about 25 percent international. It covers all parts of the company. All organizations. Approximately 100 pole in the Columbia operation have been impacted. And the Columbia operation will be much more of a sales and marketing regional sales and marketing center, especially focused on the federal market. And we are offering some relocations but about 100 people have been impacted in Columbia.

So what percentage of that, I'm sorry, what percentage is that of the total people who are there now?

It's approximately 80 percent.

Okay. Thanks a lot.

Okay.

Your next question comes from (inaudible) of First Albany.

Terminal services is a teaser for companies that in turn become prospects for you guys and that technical technology doesn't scale or as manageable as meta-frame is. Can I give us some color on the historic customers have my graded and their pace. Can I give us some indication of what your channel partners and end commercial are saying about the prospective rate that they might convert from terminal service toss meta-frame product going forward.

Tough question because we actually do not track a migration from a terminal services only implementation to meta-frame on top of that. We have anecdotal information and basically all the anecdotal information leads to the same conclusion, the larger the installation, the more likely the meta-frame value add makes business sense for that installation. So we don't have any stats to offer in that area. In fact I think it's a pretty difficult area to track because it is a feature of the Windows 2000 server itself of itself trying to is late how much customers are using that feature of the product in the first place is your starting point of difficulty and then it probably gets tougher from there.

In that case then, can you give us some sense of whether the assumptions that you've laid out for Q3 and Q4 include some expectation that these folks who are using terminal services, the 3 version that comes with the server, in the revenue assumptions that you have.

Yeah. Now that's a fair question. Because we have no metrics and have not quantified this, there are no assumptions about any migration from plain terminal services into the meta-frame world.

Thank you.

All right. You're welcome.

There are no further questions at this time.

All right. Well, thank you very much. We'll wrap it up here. We think we're on the right track here. Making some really prudent business decisions given the present economic environment. At the same time we got to be cognizant of the strong leadership position we've established in this market. It's a market that we have actually built. Despite the impact of spending on IT departments. Overall, we remain quite confident in our business, confident in how we're managing in a very challenging environment and confident in the direction we're going. Thank you. And have a very good evening.

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