Gen Digital Inc (GEN) 2002 Q2 法說會逐字稿

Good day everyone and welcome to the Precise Software Solutions second quarter 2002 earnings conference call. Today's call is being recorded and will be replayed today beginning at 8:00PM EST and will be available through Monday July 29th at mid night eastern. The rebroadcast dial-in number is area code 719-457-0820 and you'll be asked for a confirmation code, that number is 633-473, the same as the conference call. Again that dial-in number is area code 719-457-0820 with the confirmation code of 633-473. With us today is the Chief Executive Officer, Mr.Shimon Alon and the Chief Financial Officer and Chief Operating Officer, Mr. Benjamin Nye. At this time, for opening remarks, I will turn the call over to Mr. Benjamin Nye. Please go ahead sir.

Okay thank you Josh. Good afternoon everyone and welcome to our second quarter conference call. Today we will discuss certain matters that may include forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We use words like expect, anticipate, estimate, believe, may, will, should, and similar expressions to indicate forward-looking statements. These forward-looking statements are based on our current intent, beliefs, and expectations. These statements are not guarantees of future performances and are subject to certain risks and uncertainties that are difficult to predict and which could cause actual results to differ materially from the forward-looking statements. These risks include risks identified on annual report on Form 10-K and our other filings made from time to time with the SEC. Now, I would like to turn the call over to Shimon.

Thank you Ben. Good afternoon everyone and thank you for joining our conference call. This was one of the most important quarters in the history of the company and I am pleased to report that this was also the best quarter ever. The revenue for the second quarter grew 43 percent year-over-year to 18.2 million dollars and 7 percent sequentially. This was our 19th consecutive quarter of revenue growth and 6th consecutive quarter of performa income with a record of 1.8 million dollars. Compared to all companies, which claim to be in the application performance management, Precise is the fastest growing company. We are the only one who continue to grow license revenue both year-over-year and sequentially. This means that we are rapidly gaining market share. We are sure that underscore besides leadership in our industry. Before I continue to show more insight to our exciting quarter, I would like to thank to those who has contributed to Precise's success.

First our nearly 400 U.S. customer who joined our vision and invested in our technology in record numbers to improve the performance of their business applications. Our although 5500 existing customers who continued to benefit and extend their investment in out solutions with a strong repeat business of 55 percent. I would like to thank our growing number of all the 430 dedicated employees worldwide who work very hard to satisfy our customer in each and every capacity and contribute to the success of this side across all region and all area of business worldwide. And thanks to our strategic partners, who have adopted additional Precise product and created new opportunities for us. And of course our investors for their continued confidence and support. Thank you. As you know, we have fairly very large and attractive market. In fact IVC recently claimed that the Performance Management Software Industry on UNIX and NT platform will reach 1.4 billion dollars in 2002 and will continue to grow at the rate of 15.4 percent to 2.4 billion dollars by 2006. This market is so big because organizations have an immediate need to improve the performance of those business applications and Precise provides the most effective solution for this market.

The market for application performance management crosses every major or vertical industry. Based on my frequent interaction with customers, I can tell you that the success of financial services for example relies heavily on interactive customer communication, streamlining cost received and reducing cost and business services company depends significantly on the performance of their computers relations system to survive in competitive markets. Telecommunication companies are facing increasing cost for customer acquisition and retention, and are highly focused on customer service application for their success and the manufacturing where ERP/CRM and Logistic Chain Managements Applications are mostly critical, their performance significantly affects cost and competitiveness. Companies in all these industries and many others buy from Precise today because we save them money by optimizing their business system, maximizing productivity, and helping them to achieve their business objective and this is what drives the success of Precise Application Performance Management Solution.

Ladies and gentleman, it is about time we take few minutes to set the record straight about what Application Performance Management is and is not. Collecting superficial system information is not Application Performance Management. You cannot manage what you cannot measure. If you view is narrow to see only one or some of the deals you are not an application for management solution. Inability to correlate symptom to who is cause of the problem is not an Application Performance Management. And if you cannot monitor and correlate every transaction at any time, in any environment all the way from the URL to the SQL, you are not an Application Performance Management solution. We firmly believe that Precise is the only company that focus on the application, measure the performance, and provides management. We have organizations to proactively improve the performance of the different business applications all the way from the end user to the storage across the entire infrastructure. We are the only company that can correlate symptoms to and had to resolve any performance issue immediately because we are the only company who can collect and correlate genuine application performance information all the way from URL to SQL and beyond, and because we are the only company with unique ability to help our customers to automatically detect and correct application performance problems. And this is ladies and gentleman is what Application Performance Management really is. Precise I 3 is the most comprehensive Application Performance Management solution in the industry. Most of our revenue today comes from our I 3 solution which is the guiding force behind the 27 deals over $100,000 dollars and contributed to the increase in average selling price, which reached a new record of $76,000 dollars this quarter. Revenues across all products increased this quarter with a record in license revenue led by Precise Usage and Precise In-depth for J2EE. Our solution for the Java based application gained a lot of traction this quarter and was sold to both production, deployment and development establishing Precise as the leading solution for Java Application Performance management and the story gets even better. We launched many innovative new product and all three of them have generated revenue this quarter beside In-depth for Microsoft SQL Server which was jointly developed with Microsoft is the only product with sub-second data collection in the production environment immediately following the introduction of, we received overwhelming feedback from Microsoft and customers which is the of this exciting new offering. With the launch of Precise-Lightpoint for Hitachi data systems we are now suppose three leading storage vendors EMC, HP and now Hitachi and more to come. And with the introduction of the Precise In-depth we have extended the reach of our I 3 solution for our web based business transaction to the last mile to the actual end users of business activity. Our 55 percent credit sales proves that our customers are satisfied that they are realizing their return on their on their investments and now they are standardizing their Application Performance Management from Precise. That is why who interviewed these customers concluded, and I quote that Precise products are the best of the hotly contested market and it takes a surprisingly short time to required to achieve return on investments mere weeks in some cases. The idc channel remains very strategic to Precise. We are very pleased that we generated revenue this quarter from HP. This quarter as we told you, we talk of some targeted account together with HP. We successfully achieved our goals generating revenue and winning number of referenceble accounts, which would help to provide us additional source of visibility for the third quarter. 31 employees drove our success this quarter all these people are highly motivated extremely talented and focus on serving our customer need. Our direct sales force which grew to 130 quarter carrying people worldwide and productivity this quarter. Before I ask Ben to present more in-depth results on second quarter, I would like to share with you that based on our second quarter results and the coming momentum our guidance for the year will remain the same. And now it gives me the great pleasure to ask Ben Nye our young CFO and restless COO to show more financial information on this quarter. Ben...

Okay. Thank you Shimon. Second quarter revenues totaled a record $18.2 million dollars; up 43 percent year-over-year and 7 percent sequentially making it our 19th consecutive quarter of record revenue. More importantly, we generated a record 13.2 million in license revenues, a sequential increase of 6.4 percent. In addition, we recorded our fourth consecutive increase in pro forma operating income totaling $856,000 dollars, worth 3 cents for fully diluted share. This represents a 27 percent increase sequentially over the $672,000 dollars we posted last quarter. Pro forma net income totaled $1.8 million dollars or 6 cents per fully diluted share for the quarter. The business mix this quarter was once again led by license revenues accounting for 72 percent of total revenues with 28 percent in services. For the quarter, license revenues were up 32 percent year-over-year and 6.4 quarter-over-quarter. Services, which include both our growing professional services group as well as our maintenance contracts, were up 85 percent year-over-year and 7 percent quarter-over-quarter. Channel revenues were again led by the North American Channel, which accounted for 41 percent of total revenues as compared to 38 percent in the prior quarter. The international channel posted another solid quarter representing 20 percent on total company revenues, which were down slightly from 23 percent in Q1. Services reached a new high totaling 28 percent of revenues up from 27 percent in Q1 and while our strategic channel, which grew in absolute dollars was down one percent at 11 percent of total revenues versus 12 percent last quarter.

Now let's turn to the key business metrics. Across our direct and indirect channels, besides continued emphasis on selling I3 of full application performance management solution, as a result, during the quarter, we closed 27 transactions worth more than a $100,000 dollars up from 21 deals of similar size completed last quarter. Of these deals 23 will work more than a $150,000 dollars and 19 will work more than $200,000 dollars each, both of the later two categories represent new record levels for Precise. Based on worldwide direct sales results that excludes 10 loans of our historic central sales our average transaction size reached a new record $76,000 dollars up from the $69,000 dollars recorded last quarter and continued its upward trend from $58,000 in the second quarter of last year. The increasing customer adoption of our I3 performance solution is the primary driver of this increasing transaction size. Repeat continue s to be one of our most important revenue drivers. Our repeat business remains strong in the second quarter amounting to 55 percent of total non-arrear and license sales which is up slightly from the 54 percent we recorded for all of 2001, but down sequentially from 58 percent as a result of adding more new customers this quarter. This important metric serves as the strong endorsement of the high return on investment our customers achieve from using our solutions to enhance the performance of their business application.

Now lets focus on the rest of the P&L. Gross profits for the second quarter was 16.8 million dollars up 5 percent over the 15.9 posted last quarter and 40 percent over the 12 million posted in Q2 of last year. Our gross margins for the second quarter was 92 percent down one percent point from the previous quarter. The increase in services coming from both maintenance renewals and our growing professional services offering are the principle reasons for the change in our gross margins. Going forward we continue to project gross margins of roughly 90 percent. Research and development expenses as the percent of revenue rate were 18 percent down from 19 percent recorded last quarter, R&D expenses is totaled $3.2 million dollars versus $3.3 million last quarter. The slight decrease was primarily a result of the devaluation of the new versus the US dollar but the overall R&D headcount continued to grow. We expected out R&D expenses will continue to thrive between 18 and 19 percent of sales.

Sales and marketing expense for the quarter represented 58 percent of total revenues and increase over the last quarters 57 percent but a substantial improvement from the 64 percent recorded during the second quarter of 2001. Total sales and marketing expenses was $10.5 million dollars versus 9.8 million last quarter representing our continued investments in our branding, in our people, in trade shows and seminars all that served to enhance our distribution channels world wide. We expect sales and marketing expenses to decline as a percentage of total revenue as our investments in our sales force and distribution channels continue to ramp. GNA expenses were 12 percent of total revenue this quarter 2.2 million dollars in absolute terms down from the 13 percent recorded in Q1 of 2002. GNA as a percent of sales remain flat year-over-year. On a operating income basis we reported our fourth consecutive quarter of increase in proforma operating income totaling #856,000 dollars in 27 percent improvement over the last quarters $672,000 operating profits and a favorable swing of 1.3 million dollars over the last years operating loss of 432,000 dollars for the same quarter of stock based compensation expense. Amortization of goodwill and intangible assets and in process R&D to reflect the true financial results of our organization.

Our second quarter net income was $830,000 thousand dollars worth 3 cents per diluted share. This compares very favorably to our first quarter 2002 net income of $650,000 dollars or 2 cents per diluted share and a net income of $210,000 or one cent per fully diluted share for the second quarter a year ago. Weighted average shares using these calculations were 30.5 million shares for the second quarter of 2002, 31.7 million for the first quarter of 2002 and 30 million shares for the second quarter of 2001. The company maintained its strong balance sheet with a cash balance of $139.1 million dollars at the end of the second quarter compared with a 141.6 at the end of Q1. Accounts receivable balance at the end of the second quarter was 13.6 million dollars an increase of 2 million dollars from the prior quarter's balance and up from 7.8 million dollars a year ago. DSO's for the first quarter came in at 68 days, which was an increase of 6 days from the 62 days; we posted in the first quarter of 2002. This change results from a higher revenue contribution coming from our direct sales organizations and remains within the range of our 60 to 70 day guidance for DSO's.

Deferred revenue has also increased a million dollar sequentially to 8.9 million dollars this quarter up from 7.9 million last quarter and 4.1 million a year ago. Deferred revenues consist of maintenance contracts and a small balance of undelivered professional services contracts. We continue to build the strength in our overall organization. At the end of the quarter our total head count was 431 people which is up 50 percent compared with the 287 people we had a year ago and up from the 413 people in the prior quarter. More than half our employees work in the sales and marketing functions including roughly a 130 sales people up from a 122 reported last quarter. For the third quarter we expect to achieve revenues of between 18.7 and $19.3 million dollars with the proforma operating income ranging from 0.9 million to 1.2 million and proforma net income in the range of 1.9 to 2.2 million dollars. This forecast assumes 3 to 6 percent sequential revenue growth and 31 to 35 percent year over year.

We will maintain this guidance unless there is a material change in our business. In sum, we had a great second quarter by achieving a high end of our revenue expectations and we continue to improve our profitability. We have substantial financial resources and a fast growing team of exceptionally talented individuals. They are focused on the growth and execution across all aspects of our business. Despite the challenging economic conditions, we continue to see strong customer demand for our performance solutions. We sell truly unique products with exceptionally high returns and margins that produced a large and quantifiable returns on our investment for our roughly 5500 customers that in turns derived our strong repeat sales. I would now like to turn the call back over to Shimon.

Thank you very much Ben. Now I would like to take the next few minutes to sing with you the precise outlook for Q3 and the reminder of 2000. Looking ahead, we will continue to be in the success. Our comprehensive solution and strong worldwide distribution chance. We will continue to drive the growth of our business, leveraging the market demand stay in our competitive position. We will continue to focus on serving the market with our unique Precise IT solution and we plan to announce a new and highly innovative version of these software solution towards the end of the third quarter. This we introduced several unique technologies that help customers to achieve even faster ROI by rapid deployment of application focused solution. The new centralized installation and management. This means ours not them. We will provide software evolution by correlating and interpreting the proprietary performance data. that only Precise IC collect. In the base of all, it is easy to use due to its impressive, highly integrated and context sensitive user interface. Precise's IC is the next generation. It's spinned with inputs from our users to build ourselves the demand to manage application such as SAP, Oracle application, People Soft, Siebel and word based Java applications. Enabling us to expand into other packaged and custom business application. The new Precise I C is a much richer solution that will enable us to accelerate the market growth. As the market for application performance management creates an environment for great opportunity. I'm not surprised, that many companies try to follow Precise into this market. The new IC significantly extends our competitive advantage. Precise IC, the next generation is currently in bigger size and the initial customer feedback is very strong. Though saying it enabled them into soak the with quick and faster signs of resolution and makes the IC more productive. Let me very quickly share with you one customer experience as of many you have received so far. Having used Precise IC, says the customer in a bigger size, I was blown away by the new integrated solution. I can virtually monitor my business processing and when the performance start to slip, I can get the would curves immediately with just few clicks. Precise IC focused on merge ability and deployment shined through and this is one of the third better sites customer court we held. While our Java technology has been rapidly adopted by large of organization , we will complement our solutions with Java experts that will help user to build better infrastructure for most efficient Java, Windows applications. Besides we will continue to strengthen our organization by heading new to leverage more market demands and unique for that software. In conclusion ladies and gentlemen, we are now highly focused on achieving in third quarter our 20 consecutive quarters which translate into 5 years of consecutive revenue growth. This is exciting. With this state, Ben and I will be happy to answer any of your questions.

Thank you Sir. Todays, question and answer session will be conducted electronically. If you like to signal to ask your question, please press star 1 on your touch-tone phone. Once again that is press star 1 to signal for a question. And our first question comes from John Rizzuto with Credit Suisse First Boston.

Hai fellows, pretty good quarter. Ben, if you could just give me the numbers just to be clear what was your full 2002 guidance?

We had said that the range was 77 sorry 76 million dollars in revenue up to I think it was 83 and 4.5-5 in operating numbers, operating income.

Great thanks. Now Ben did you actually give the actual results from the OEM channel this quarter?

What we call the strategic channel John which is obviously you know

Right.

with the fine March players came in at a 11 percent of revenue.

Okay, Now I know you told us that HP, I know you don't break out separately what your each OEM contributor gives to you. You said HP did generate revenue. I know as my was new, the Microsoft and FDK was new, not on I do not want to confuse it to and I am just trying to figure how are they wrapping up, can you qualitatively tell us what you have seen?

We are, well we specifically speak about HP as HP were really focused on circum customers. They are to attack the entire market. We had talked it at the account, lent with EMC both in Europe so it rotates being both in Europe and in the United States and we are very happy with the success we have had so far. We did see revenue this quarter already from the Microsoft SAP Kit or as they call the Microsoft stor age appliance kit as well as from my SAP both are in the growing number, both are in the beginning, as it is the revenues, so you should not see one, you know large license revenues, so it's been visibility of the revenue and with Microsoft we are very pleased to be in the market, as you know now we also have the Microsoft SQL where there is a takesheet we are in the future operating system, our future with Microsoft is very bright.

Right and then there is one more question Ron, you talked about I think in the beginning of the call, you said partners are going to deploy more of your products.

Yes sir.

Now, do you mean OEM partners in this so specifically what products?

Yes. First of all, if you look at the next 6 months, we already start to see EMC adopting the one called open We are definitely a part of the EMC initiative of the auto IS and Wide Sky if you go to the West side you can see the DB tuner is a key component of the initiatives and the industries where EMC tries to be all bent too many platform, the size definitely strategically held them to be open to the many platforms and many storage platforms. On top of it with the introduction of Microsoft SQL solution by Precise, we expect EMC to very soon start to sell their DB tuner for Microsoft SQL. This is the next product. The other thing, which is not bothered by today, all human strategy partner because of certain visibilities is our, I think strong introduction will include into the loud system integrators. We already sold the first one, which is IBM, and global services adopting our solution in the far east to become part of the Global Solution into the performance engagement. I can tell you today without naming the outer integrators that we start to see a very nice success of Globe System Integrals identifying I3 as a key revenue generator for them and a key cost reduction as well and even though today it's not part of our all EM strategic channel, in the next few quarters, we expect it as we will be able to build its ability with it to start to join our OEM strategic channels as well.

Right. Thanks a lot.

Next we will take a question from Jeff Mendelson with .

Congratulations on a good performance in obviously a difficult environment. I just would love to get a little bit more elaboration on a couple of things. One, any changes or perception of change in the compatible landscape, Shimon, I know you kind of told us why everyone else really is not doing the same thing but any changes in the pricing front or things like that ? and then secondly update on the CFO search.

I would say, It was Q2 was, we see less competition than we saw before. The economy is not an easy one, selling in any that has been to the environment is not the easiest one. But the most critical for us, and that's why I'm sitting here and smiling all the time, is when there is a vehicle or in companies customers compare and contrast Precise solution. We are coming ahead of anybody else very, very quickly. We have a competition in marketing messages, it definitely confuses customers, it will confuse investors definitely, but these are the investors customers are using for that and they can see the difference very quickly. We definitely gain some large account for the IT solution again because is heavy. If you look at individual product like the Java, the only Java space and the only database space, I think we see that competition for long time. Over the last four five years we see competition trying to get into databases. We are actually doing very well in the Java, thus, here and there you see some price competition, but it is so different, but they won't be so over the last six or eight quarters. In regard to the CFO's notes, we are, probably say after interviewing many CFO's, we found those that we liked the most, both from the professional view as well as they will fit our management. I think some of them were waiting for this call to hear our results, as we know we are very FD compliance, with our share information before the call, and I believe that formal rings right now for one of them trying to get here before the others will beat him. We are definitely, in the next few weeks going to, we believe, we are going to announce the CFO.

Anyway, any further refinement of the diagnose commentary as it relates to the contribution from strategic partners, if I'm not mistaken, I think the prior comment was in the range of 10 to 15 percent. If you're thinking so long then why didn't you give in with happened with Amdoc, given the seeming improvement at EMC and the ramp up and other relationships?

I will also, firstly, I would comment on diagnose then I will ask Ben to answer. I was really very surprised when announced to see some of the investor reactions to be honest, because in the Q1 call, we told the market that we are anticipating the contributions from the audience for the to go down. We actually took it down, and then slightly took license down to 10 to 15 percent. So, when end of the number it was part of what we told the market and anticipated. And of course, as you can see, it was played off by very strong and excess contribution to Precise.I will ask Ben to speak about the OEM contribution in the second half of the year.

Okay, basically we had an average contribution of 30 percent in 2001 and our guidance revision as Shimon indicated included the changes we foresaw going on an Amdoc perhaps a little bit in advance and not by name, but we obviously took it down to 10 to 15 percent contribution, so that's somewhere between a half and a third of the prior actual results achieved and so Jim I think we've actually addressed that in terms of where we are today and you know looking ahead we'll obviously have to look at you know, sort of a ramp across all five partners but its was nice to see all of them contribute this quarter.

Thank you

Thanks a lot.

Next we'll take a question from Damian Rinaldi with First Albany

Yes, nice job on the quarter, I was wondering, I know you addressed this in the call but I'd like you to elaborate a little bit more on the sales force productivity, particularly in the direct sales areas. Can you give us a sense of, you know, how sales cycles have extended or expanded, can you give us a sense of how quarters have changed and to the extent that some of the hiring that you've done has been in the sales area, can you give us some sense of where those folks stand in terms of their ultimate productivity?

Damian I'm going to try make sure I keep track of all those questions but it could you kind of I forget one I am sure you will remind me. I think the first thing on sales force productivity is really two comments. One is you have in the last year the strategic channel contribution year-over-year declined about 34 percent for it. And all of that has been made up plus more because we continue to grow by the contributions from our direct sales and so if you look at a year ago the strategic channel was 25-26 percent of revenue this quarter it was 11 and meanwhile we took revenues a year ago 12.7 up to 18.2 with the difference all coming from the direct channel contribution. We had very strong contributions; North America which is almost entirely direct except for very small resellers was a 41 percent contributor to revenue this quarter, so again you have a substantial contribution coming from that. Europe and what I call the MEA is actually a 20 percent contributor, again very, very strong contributor. And again principally direct there are some resellers in that number by country but I think if you look at sort of productivity and ramping what we measure internally. Ramping revenue for FTE full time equivalent, we did have quarter-over-quarter favorable improvements there and we plan to continue to make sure that ramp is achieved. If your, next question was I think in terms of hiring we actually did add, we went from a net 122 to 130 equivocating sales people that actually brings us from the start of the year at, I think we started the year at 118 by January and that puts us somewhere around 12 net sales people hired, which we had indicated at the start of year we were going to hire roughly 30 and typically as more balanced towards the second half of the year. So, I think we are right on track in terms of hiring. The best news of the last quarter is some of the folks who joined us literally in the first quarter sold real dollar amounts for us in part because of customer relationships they had, but also because they came from within the industry, they know the space, the products, and are very excited about being part of Precise. So I think if you look at that, that is a very favorable trend. We have not changed core disk in the past year. We continued to add more products but what we are doing is because we are adding more sales people, our territories tend to shrink. I don't think that is going to cause a concern at all for sales people so far because obviously they are very happy with the enormity of the territory they have today plus the fact that we are bringing in new technologies, which really are industry leading and a very nice sale for them to make, so that is really I guess my comment in terms of the productivity. I guess your last question was on the sales cycle itself and here, you know they run the gambit, we have had sales cycles where we are selling into you know active pace that are as short as 2 to 3 weeks, a typical sales cycle I think probably which still runs in a roughly 60 to 90 days cycle.

Okay, could you also, thank you very much Ben. Could you also......

Wait, Damian did I get them all?

Yes you did. . Can you also run through the deal size metrics, how many over 100, how many over 150, how many over 200, and how many over a million which is the usual breakpoint that you share with us.

Sure. I mean we actually had 27 deals over $100,000 dollars and that was studio shy of a record. We actually had 29 in Q4 but again a very strong contribution on the second quarter result with more accounting is the quantity of the numbers within there because you actually had 23 of those were over a $150,000 dollars, 19 were over a $200,000 dollars. Those are real nice metrics in terms of, both of those latter two category being records for us and again one of the other really nice thing this quarter well at 9000 million dollars deals or the mega deals. It was nice that we did not have to have record numbers. We did this all on you know several hundred thousand and middle hundred thousands of dollars deal size. So I think the size deals is good. The other really nice thing this quarter was the continued up into the right trend on average transaction size which was $76,000 dollars, it is a new record for us. But if you compare it to last quarter at $69,000 dollars over a year ago, same quarter was $58,000 dollars. That continues to show that we are able to raise the average transaction size and in this economy the only way you do that, is by bringing more value to the customer and communicating that value properly and principally in the form of return on investments and that is why I think that our solutions not only deploy fast, but they also offer serious return that our customers are finding worthwhile and coming back and buying you know, in increasing numbers but also at higher dollar figures. So that is, that is been another nice trend for us. Did I, did I answer your question?

Yes you did, thanks very much.

You are welcome.

Next we will take a question from Melissa Eisenstat of CIBC.

Hi, thanks very much, congratulations. A question about the rest of the year I know you just gave us guidance then for the third quarter but if you look out at the end of the year, you are saying that you are comfortable with guidance for, on the top line 76 - 83 million and the mid-point of that is let us say 79 - 80 million. It applies a pretty big sequential up checking queue for, I guess the question is, what gives you that confidence. Is it that you see some large deals that could close then, is it that the channels are you knows, building a huge pipeline? What is getting into that number?

Okay, well I guess two things Melissa. One is, that it seems we achieve only the numbers that we are throwing out for Q3 and just to put that in contact historically we are showing 3 - 6 percent sequential for Q3. Last Q3 which was a very difficult Q3, I think the industry was 13 percent sequential actually achieved. So that obviously makes the Q4 number variance, not quite as dramatic. However, if you look at last year Q4 we actually had 19 percent sequential growth coming off the backs of a Q3 at 13 percent. So, again I think there is an organic demand that is pretty strong. I think that it is complemented further though by some of the new products we have. We have a launch on the new I3 that is more tightly integrated, faster to deploy, with auto-discovery and site map and a lot of choice. Very interesting technologies that help the user tune the system actually making recommendations and so forth and we thing that is going to be very well received both in the direct and indirect channels, because it will be more channel friendly being easier to deploy and use. The other thing is that the, take the sequel server product will be an additional revenue head for us and I think now we have covered three of the four top storages platforms as well. So, I think you know, if you look at sort of the capacity we have already onboard in terms of our sales and distribution capabilities there, the products are there and coming stronger and then you look at our historical fact record and you know we feel that we can maintain our guidance as we look at it today. Do you want to add anything Shimon?

Yeah, just to what Melissa said. You are right by saying that the more and larger win. I spend lot of time as you may know with a lot of customers mainly CEO's and other executives. I just came back from your place staying the last few days and Medwell was a very large company. What you, what we see right now is more and more companies that are standardizing the performance management platform on Precise. We see bigger things, we see large opportunities; we see companies who are very excited about us. We can not tell you if the timing will be Q3 or Q4, but definitely we see a very strong momentum which we will execute by renting up our sales people, hiring more sales people and creating very large opportunity from the i 3 and in market there has already start to surprise us positively, in the Microsoft SQL. Introducing our Microsoft SQL product just few weeks ago, we assumed an overwhelming number of request to see the product, to learn about product pricing, more proposals for these products went in any other products since the introduction of the new product. And the third one is being the reference accounts now we have in the java market. I think we created the name and if you start the in java market, the production, deployment and development for application performance, we have a very nice large account, we are now standardizing it on Precise and this is a fast growing market. So, that's where we see the pipeline, that's where we see the closing rate, and that's where we see the dim and therefore in the second half of the year, we believe we will meet the targets we have provided you.

Shimon try to follow up with one question, in terms of SQL server, what are people, what kind of applications are you seeing on the modem/SQL server production applications?

Many. I will start with SCP as one. If you know SCP, migrated a lot of the customers from Oracle database to Microsoft SQL server. And of course a major challenge for this organization is scalability, performance, and what you will call enterprisingly. So, this was the first few application results, where SCP application that immediately, got the spot of the entire IC. We also see people building Java applications and other business applications on Microsoft SQL. We have one customer, who migrated a major migration started from Sybase to Microsoft SQL. As I expect these trend to continue in certain parts of the market, mainly the financial services, given moving from Sybase to Microsoft SQL and they must have a performance management and they will have the only one who can provide this for them.

Okay, that is enough. .

Next we will go to Sarah Mattson with RBC Capital Markets.

My congratulations. First, a follow-up question somebody asked earlier. You discussed some other that your competitors are introducing into the market. I am curious to know if any of these vendors are using pricing pressure or discounting as a means to try to gain some share and relatedly what percentage of your direct deals are actually competitive and has that level changed dramatically, as a attempting to move into that market?

The only area that we see some interesting price gains by this or you can call it, is on the single database product, you know, what used to be called as Precise/SQL and often wanted to show there is a standalone. The tt is that the majority of our revenue today comes from the other products and the standalone Precise/SQL is now below even 70 percent of our total revenue. There are companies whose price attracts the customers with, you know, pricing but the only conduit is the only interest of the customer, is to see just the database. If we don't care about the application, we don't have a JAVA. So, here and then we find one is the only thing he has, if he is interested in database and earlier would mainly see some price pressure, market share but this is the same price pressure we saw when other companies ahead their product, without a sub second collection. Some companies have a database product since 1995 and we are competing with them and forever they come with inferior product at lower price and yet we refuse to go at the rate with which we are going. So, you know in this business we have some competition, we have to wait with it, what we did so well, is building the i3 and rather to compete on price, we compete on value preposition, we compete on providing the lean business needs of the customer and leave everybody behind

Okay, we will move that and just settle in to another question which is, how many, as switch on your new customers, how many of them are buying a single product versus the full i3 Suite and which products are you now typically using to lead into these new customers?

With the new product well, actually the product we are starting, it is amazing to see that the JAVA product has became a very good leading many, many of the Java customers, we came in through the Java product base buying now the entire i3 suite inside the models and so on. So, this is very strong leading product. The other leading product is the Precise/Insight. People are looking to see their application performance and to an end we have been able to coordinate it and attribute it we need to convert URL to SQL is being expressed by many companies. So, we are trying to incise they generally need the database, the storage and many others. The third one and this is where the benefit of our strategic partners. If you think about the over the last few years, sold many . So, they populated many companies with Precise, basically gentabase storage product and now we are leveraging these existing installations to extended it to the entire IC.I think we enjoy, I believe in the majority of our customers today are buying more than a single product most of our sales in the areas of the Precise Application performance management is at bundled solution of two or three and more products being sold together.

Okay very good well then and then lastly on the international side. May be you can talk about any differences you are seeing in that market and as also there is a lot of discussion regarding what's going to happen in Europe over the summer months and we'd like to get your thoughts to that point.

Well I just explained what the few things in Europe . I know if it is summer or not but I have more meetings there than the entire United States. So may be the European stream did take the summer vacations August. I think that notion of summer vacation is true but we were left on a screen and not everybody is leaving below the entire company locating on July, August, and September. Our objective in what we do - very well we now focus execution is to time out execution together with the customer vacation time. And we had lot of meetings with respect to the customer timeouts but here it's again after two or three weeks back some do take it and the key to all success is being able to timeout schedule with those schedule. We believe again that there is lot of opportunities in Europe we are very small Europe; again this is an area that we will continue to grow. Therefore even though we will some slow down in the month of August, we have few of the very large oppurtunity for the company and the summer month will not be a major affect to us.

Do you see asides or partner you should give important in the European arena?

Yes, I again I see the same. When I went there I learned with BHP and HP, Siemens, Sam Sung, IBM included in time with management, and on seeing that the same event in you as integrators looking to our enhanced outline for the customers. There are lots of integrators who compete over there and they know that at the end of the day, they competed on performance because that's what they can provide. I do not that they sell hardware it will all seem if they do self benefit services, what they need is a call back and enable them to manage the performance of the customer businesses. So we only see an increase demand for Precise product by the future integrators in Europe and .

Very good thanks a lot.

And our next question comes from Scott Philips of Merrill Lynch & Co.

Hi congrats on the quarter I wonder if you could provide a little bit of color on the expansion of your relationship with Microsoft and I know that they are aiming at the approximate ships with exchange I wonder If you could and want to be set provide some color to when we are going to see equal revenue contributions from that, what is the strategy going forward on that line? Thanks.

The precise product today I would say more besides technology which address the needs for this as for the for the users management. It is being bundled in the product of Microsoft called SA toolkit means storage appliance kits or software appliance kit, these suppliers software is been provided through the large resellers or the clients such as DELL, Compaq and others. What they are building, they are building server appliances and providing to the end users. So we are sending two Microsoft we are embedding it into the kit therefore being installed by the major server appliance company worldwide. How and what the appliance kit serve is up to the customer you know obligation and so on but if you follow some of the highly senior reports, they basically saying that Microsoft is gaining very strong and will continue to grow in their solution in the storage market. And I can tell you whereever they are going to be, we are going to be, so all the time, we have definite belief in the success of Microsoft, therefore the contributions to precise. On top of it, as we announced before, we also have other relationship with Microsoft in regards to the operating systems and of course jointly developing the Microsoft SQL give us definitely a marketing and awareness opportunity to work together with Microsoft. It is too early to talk about the Microsoft SQL, I can tell you definitely, we are living with Microsoft, I have told you already that they got very exited about it and we believe that there would be other announcements in the next few quarters.

All right, great thank you.

And our last question for the afternoon comes from Jason Manor with Wachovia Securities.

Congratulations guys. Already we have had 12 questions .

You all can opt up to 19 which is the number of questions for the quarter.

Sure enough you know when I see all questions it will be more than asked so, I will wrap it up for what you guys did so, nice job

Thank you.

Thank you.

Okay Ladies and Gentlemen. Thank you very much for your questions. Thank you very much for the time. That is again to same of customers who definitely for thanks to all those who were on the call today for the hard working and dedication. We are doing much to approval to sticking with you the again makes . The next 2 weeks, we are going to in New York, Philadelphia, Boston, Niapolis, San Fransisco and Los Angeles. We are going to sell with you and provide you a preview of the I3 the next generation. If you got to see it with your and say wow you are invited. You are also will Precise users who would be in this and show with you their experience with Precise. We will show with you more about the five markets, precise technology, focused execution and definitely 18 additions, we will appeal in different type of conferences and you can see full details on our website. Again, have a great afternoon or great evening and I will talk with you whenever you would like. Please call Ben or my cell, in a way acceptable for you. Thank you and have a great day. Bye.

That concludes today's conference call. You may now disconnect.