Gen Digital Inc (GEN) 2002 Q3 法說會逐字稿

Good day and welcome, everyone, to the Precise Software Solutions third quarter 2002 earnings conference call. Today's call is being recorded and will be available for replay today beginning at 8 p.m. Eastern time and will be available through Monday, October 28 at midnight Eastern. The rebroadcast dial-in number is 719-457-0820, and you will be asked for a confirmation code. That code is 620798. Again, that phone number is 719-457-0820 with the confirmation code of 620798.

With us today is the Chief Executive Officer, Mr. Shimon Alon, and the Chief Financial Officer, Mr. Marc Venator. At this time, for opening remarks, I'd like to turn the call to Mr. Marc Venator. Please go ahead, sir.

Well, thank you, and good morning everyone. Welcome to our third quarter conference call. Today we will discuss certain matters that may include forward-looking statements within the meaning of Section 27A of the Securities 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, belief, and expectations. These statements are not guarantees of future performance 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 the risks identified in our annual report on Form 10-K and other filings made from time to time with the SEC.

Now I'd like to turn the call over to Shimon.

Thank you, Marc, and thank you, everybody, for joining our call. This is a great day for Precise. I am pleased to report our 20th consecutive quarter of revenue growth, having grown 35 percent year-over-year and 6 percent sequentially in the third quarter, we are proud to report our fifth year of continuous growth.

While this achievement would be strong in any economy, in this business cycle it is especially compelling. There is no question that we are gaining market share and mind share. The third quarter, again, marks the best quarter ever for Precise with record revenue of $19.4 million and operating income of $1.1 million, which represents our 11th consecutive quarter of bottom-line improvement. Ladies and gentlemen, Precise continues to be the company of high growth, thanks to our technology leadership and large addressable market with critical customer needs and a strong execution by our global direct service operation.

Before I continue to share insight about our quarter, I'd like to thank those who continue to contribute to our success. Our nearly 6,000 loyal customers who experienced high return on investment from current Precise product and continue to buy again and again, resulting this quarter in record repeat sales of 64 percent. I'd like to thank each and every one of our 450 dedicated Precise employees who, by satisfying our immediate customer needs, made Precise the fastest-growing company in our industry. Our team effort worldwide successfully launched the Precise i3 next generation. The new Precise i3 is the most innovative technology and the most advanced software in the application performance management space. It extends Precise's market opportunity and competitive edge for years to come.

I'd like to thank our partners worldwide for continuing to adapt sales and support of our new product. I am honored to report that another dominant market leader, Intel Corporation, in joining us as a strategic partner for joint development in reselling Precise Solution. This is yet another validation of our strong position in our market and the uniqueness of our technology. And, of course, I would like to thank our investors for their continued confidence and support.

So what drives our goals? Our solutions enable customers to deploy, utilize, and update their business-critical application in every vertical market in every geography. Companies have already invested billions of dollars in building their application but now they are experiencing end-user response slowdown, which they actually affect their business performance. Companies are updating their ELP and CRM system, going from Oracle 10 to Oracle 11i, from PeopleSoft 7 to PeopleSoft 8, from Seibel 6 to Seibel 7. All of them is a major undertaking; all required new and additional infrastructure tiers and, as you may know, the more tiers to support, the more tears to cry.

An intrinsically cost-conscious IT department, the common dynamic of server consolidation and data migration drives the need to optimize performance. In today's economy, organizations have cut their consulting budget and their IT staff and are forced to do more and more with less and less. The bottom line is organization must focus on the end-user service level and rapid demonstratable ROI and that's why they choose Precise. Precise i3 address all these needs by delivering the most comprehensive and adaptive application performance management solution available.

Precise is defining what application performance management truly means. As we focus on the application, measure the performance, and provide management, we help organization to improve the performance of their business application all the way from the end user to the storage across the entire infrastructure. We are the only company with total correlation technology that provides the ability to trace business transactions across all tiers of an application, from URL to SQL and beyond and correlate the symptom of an application slowdown to its definitive root cause. Our unique small tune technology, then provides automatic interpretation of the problem and provides extra tuning advice to remedy it. We are the only company with the unique ability to automatically detect and correct performance problem across the heterogeneous application environment. And this, ladies and gentlemen, is what application performance management really is. Our latest version of Precise i3 was launched at the end of the third quarter.

Having been, myself, involved with the software industry for over 25 years, I never before seen firsthand such a positive reaction from customers, prospects, and industry analysts. But our story gets even better. Our Precise In Depth for SQL server, jointly developed by Precise and Microsoft and introduced last quarter, has enabled us to expand the market for Precise i3 to include the rapidly growing Microsoft SQL database market, which already exceeds $1 billion.

While we grew 35 percent in revenue year-over-year, what makes this number even more impressive is when you look one level below. Our direct sales license contribution grew 110 percent year-over-year amounting to 55 percent of total revenue compared to only 36 percent last year. This is more than offset the year-over-year decline in contribution from the strategic channel. This clearly shows that our investment in bringing the sales force worldwide and our focused execution is paying huge dividends.

We still believe that the partner channel is a solid contributor, as all of our partners contributed revenue to this quarter. We also believe that this channel will return to a higher level of growth in the future. The best start of Q3 was building strong momentum and enhanced visibility for Q4. This leads us to expect Q4 revenue in the range of $21.4 million to $22.4 million and, of course, we also anticipate continued improvement in the bottom-line results.

Now before I move the discussion to our future outlook, it gives me great pleasure to formally introduce our new CFO, Marc Venator. Marc joined us during the third quarter after previously serving as the CFO and COO of Saville Systems in Burlington, Massachusetts. Prior to Saville, Marc was Corporate Controller of System Software Associates in Chicago. Both companies experienced substantial growth and marked success during his tenure with them.

So here is the young and remarkable Marc Venator. Marc, please.

Well, thank you for that introduction, Shimon. It feels great to be part of the Precise team and part of another terrific quarter.

Third quarter revenues totaled a record 19.4 million of 35 percent year-over-year and 6 percent sequentially, making it our 20th consecutive quarter of revenue growth. In addition, we recorded our 11th consecutive quarter of improving operating results as pro forma operating income totaled $1.1 million. This represents a 24-percent increase over the $856,000 we posted last quarter and substantially above the $68,000 from the third quarter of last year.

The business mix this quarter reflected license revenues at 65 percent of total revenue and services at 35 percent. For the quarter, license revenues were up 11 percent year-over-year. License revenues from our direct business, excluding our strategic channel, were up 110 percent year-over-year. Services, which include software maintenance contracts as well as our professional services business had an exceptional quarter - up 124 percent year-over-year.

Channel revenues were again led by North America, which accounted for 37 percent of total revenues as compared to 41 percent in the prior quarter. Our international business posted another solid quarter, representing 19 percent of total company revenues, about even with Q2.

Services reached a new high, totaling 35 percent of revenues, up from 28 percent in Q2, while our strategic channel was 9 percent of total revenues versus 11 percent last quarter, reflecting the ongoing business challenges facing our partners.

Now let's turn to our key business metrics. Across our direct and indirect channels, Precise continued its emphasis on selling Precise i3. As a result, during the quarter, we closed a record 30 transactions worth more than $100,000, up from 27 similar-size deals completed last quarter. Moreover, 16 of these deals were worth more than 150,000 and 12 were for more than 200,000. Based on worldwide direct sales results that exclude stand-alone Savant and Storage Central sales, our average transaction size was $62,000, up from 58,000 in the third quarter of last year.

Repeat purchasing continues to be one of our most important revenue drivers. Our repeat business in the third quarter was a record 64 percent of total non-OEM license sales, up from both the 55 percent we recorded last quarter and 54 percent we recorded for all of 2001. This metric is significant, and it serves as a strong endorsement of the high return on investment our customers achieved from using our solutions to enhance the performance of their business applications. It's also a great indicator of our customer satisfaction.

Now let's focus on the rest of the income statement. Gross profits for the third quarter were 17.2 million, up 2 percent over the 16.8 million posted last quarter and 27 percent over the 13.5 million posted in Q3 of last year. Our blended gross margin for Q3 was 89 percent versus 92 percent last quarter, reflecting primarily a higher services mix. Going forward, we project continued blended gross margin in excess of 90 percent.

Research and development expenses as a percent of revenues was 17 percent versus 18 percent last quarter. R and D expenses were $3.2 million, about even with last quarter. R and D headcount, however, grew by 4 percent from the prior quarter, but this expense was somewhat offset by the strengthening of the U.S. dollar versus the new Israel shekel. We expect that R and D expense will continue to trend between 17 and 19 percent of sales.

Sales and marketing expenses for the quarter were 55 percent of total revenues, an improvement over the 58 percent last quarter and a substantial improvement from the 61 percent reported during the third quarter of 2001. Total sales and marketing expenses were $10.7 million versus $10.5 million last quarter, which represents our investment in people, trade shows, and seminars, to enhance our direct and indirect distribution channels worldwide. We expect sales and marketing expenses to continue to decline as a percentage of total revenues providing additional operating margin improvement as we further leverage the investments in our sales force and distribution channels.

G and A expenses were 11 percent of total revenues this quarter, or 2.2 million in absolute dollar terms, an improvement from the 12 percent of revenue reported in Q2 and 13 percent in Q3 of last year. We continue to expect an improvement in G and A as a percentage of revenue over time.

Strong cost controls across our business units help contribute to our 11th consecutive quarter of improving operating results as pro forma operating income totaled $1.1 million, a 24-percent improvement over last quarter's $856,000 and well above last year's operating profit of $68,000 for the same quarter. We are reporting this pro forma operating income, as always, net of deferred stock compensation expense and intangible asset amortization to better reflect the true financial results of our operations.

Our third quarter net income was $1.1 million, or 4 cents per diluted share. This compares favorably to our second quarter 2002 net income of $830,000, or 3 cents per diluted share, and net income of $452,000, or 2 cents per diluted share for the third quarter a year ago. On a pro forma basis, net income was $2.1 million, or 7 cents per share compared to 1.8 million or 6 cents per share for the second quarter of 2002 and $1.7 million, or 6 cents per share for the third quarter of 2001. Weighted average shares used in these calculations were 30.4 million for the third quarter of 2002; $30.5 million for the second quarter of 2002; and $29.8 million for the third quarter of 2001.

The company also maintained its exceptionally strong balance sheet with a cash balance of $141 million at the end of the third quarter compared with 136 million at the end of 2001.

The accounts receivable balance at the end of the third quarter was $15.2 million, an increase of $1.6 million from the prior quarter's balance and up from $10 million a year ago. DSOs for the third quarter came in at 72 days compared to 64 days in the third quarter of last year. This is just above our typical guidance of 60 to 70 days and is driven entirely by lower relative contributions from the OEM channel. This is because the majority of the OEM revenue is reported one month in arrears and therefore has a DSO at 9/30 of zero. DSO in the third quarter of 2002 for our direct channel, excluding this OEM effect, was identical to that reported in the third quarter of last year. We do expect to maintain our historical range of 60 to 70 days, going forward, by enhancing our already-strong collections activity.

Deferred revenues increased $0.6 million sequentially to $9.5 million this quarter, up from $8.9 million last quarter and $5.5 million a year ago. Deferred revenues consistent of maintenance contracts and a small balance of undelivered professional services contracts.

We also continued to build and strengthen our overall organization. At the end of the quarter, our total headcount was 451 people, which is up 24 percent compared with 363 people a year ago and from the 431 people in the prior quarter. More than half of our employees work in the sales and marketing function, including, roughly, 130 quota-carrying salespeople, about the same as last quarter.

Looking ahead for the fourth quarter, we expect to achieve revenues of between $21.4 million and $22.4 million, with a pro forma operating income ranging from $1.6 million to $2.2 million, and a pro forma net income in the range of $2.6 million to $3.2 million. This forecast assumes revenue growth of roughly 10 to 15 percent sequentially, and 25 to 30 percent year-over-year. We will maintain this guidance unless there is material change.

In sum, we had a great quarter, a great third quarter, by exceeding the high end of our revenue expectations, and we continued to improve our profitability. We have substantial financial resources and a team of exceptionally talented individuals that are focused on our growth and execution across all aspects of our business. Although economic conditions remain challenging, we continue to see strong customer demand for our performance solutions. We sell truly unique products with exceptionally high margins that produce large and quantifiable return on investment for our, roughly 6000 customers that, in turn, drives our strong repeat business.

I would now like to turn the call back over to Shimon.

Thank you, Marc. Looking ahead, I cannot help but being optimistic. We have the key ingredients to continue to grow and success. Our unique technology and approach to the market, the successful launch of our new version of Precise i3, the strong leadership position of our solid resource management solution, the large market opportunity and strong market demand for our solution mainly in today's economy, successful penetration into new markets such as Java and Microsoft, the financial resources of $141 million cash on our balance sheet with no debt, and with installed base of nearly 6,000 satisfied customers, we have experienced significant cost saving and therefore continue to value for Precise, and our leadership position in the strong market of application performance management.

We are trying to focus on delivering our 21st quarter of consecutive growth and laying the groundwork to continue growth into the future. Ladies and gentlemen, we would like to invite each one of you to join us into the Oracle World, which will happen next month in San Francisco. You will be there with Precise Goods, and you will see what leadership is all about.

I'd like now to open the lines for getting any of your questions, and we'll be glad to answer them. Thank you again.

Thank you, sir. Today's question-and-answer session will be conducted electronically. If you'd like to ask a question, please press the star key followed by the digit 1 on your touchtone telephone, star 1 for questions. If you are using speakerphone equipment, please disengage your mute button so that your signal may reach our equipment. We'll pause for a moment to assemble our roster. We'll go to Jim Mendelsohn with Soundview.

Shimon and Marc, could you talk a little bit about the thoughts on 2003 at this point relative to things like the indirect channel. Is that likely to slip further as a contribution to the total revenues? And a few thoughts in terms of just the direct sales opportunity in terms of prospective growth in 2003.

Jim, good morning. You notice we did not give guidance for 2003 today. We definitely see the strategic resellers and additional ones that we don't have on the list today to join us, and therefore we still see a nice contribution from the resellers, the strategic partners, and future ones such as SIs and others. We'll report this information in our Q4 call.

Okay, thank you.

We'll take our next question from [Abe Finkelstein]with Goldman Sachs.

Hi, guys, just a few questions. First of all, on the new i3 version, have you guys seen any initial traction with that, and maybe you can give us some color into the traction of the i3 product.

Yes, of course. The i3, as you know, is the most innovative product today in the market to address heterogeneous numbers of applications. Actually, it works very well with all the CLM and ELT homegrown and Java applications. What we saw with customers were, I would say, very modestly, very surprised to see the level of innovation that we brought to them. The ability to correlate every business transaction all the way from the URL to the STOL and, more importantly, it is not only to detect any problem but also to be able to correct it. As you know, Abe, we are the only company today who manage to really correlate and also give the real root cause of the problem. Therefore, as you expect, customers in the PeopleSoft environment, in Nortel environments, in the J2E environment love all this - so both existing customers but, more importantly, I will say that we saw new customers who decided to buy Precise just because of what they saw at the Precise i3 version 6.

Were any of the new customers included in the greater-than-$100,000 sales this quarter?

Yes, sir.

Okay. In terms of the revenue mix for guidance, and then you gave gross margin guidance so maybe, Marc, maybe you can give us some color as to where you think the revenue mix will be next quarter in terms of licenses and service. Will it be 65/35, 70/30, what are you guys thinking about in terms of that?

Well, rather than giving a specific percentage, we certainly would expect significant growth in our license business and, therefore, we would expect gross margins to increase somewhat just because of the mix.

Okay. My last question relates to an acquisition you made at the end of the last quarter. I'm curious as to how much that contributed in this quarter and also was all of that in the service line?

Actually, the position of the middleware company, Abe, as you know, we are not reporting by entity, but I can tell you, first of all, that the overall professional service is the smallest contribution to our overall revenue, and also not a significant part of our services in general. The reason for the acquisition was strategic by nature. What we really did, we tried to - we used this acquisition to address and continue to penetrate into the Java market. We definitely got a very large community of Java users and Java customers that now we can address, thanks to the middleware, both services and information they're providing.

What they really help us to do, even though it's not directly related to them but indirectly - we have the record sales of J2E product this quarter, thanks to the need being generated through this company. So, in fact, they contributed both to the license revenue indirectly, and directly to the professional services. Does this answer your question?

Yeah, forgive me, let me just ask one follow-up - so what was it that caused the service revenue to grow rather dramatically sequentially?

I will have Marc Venator take this one.

Well, Abe, when you look at it, we had a significant growth in our maintenance business. As Shimon said, the preponderance of the services number, in total, is maintenance, not professional services, and it was maintenance that counted for the majority of the dollar increase quarter over quarter.

All right. Thanks a lot, guys.

Just to follow up and answer this question as well - what we see, and very pleasantly, we see a very strong renewal of service maintenance, a result of people are using our software. And, again, typically, in the software business you see strong renewal, but we are very pleased with the renewal of service, which continues to contribute to our maintenance revenue.

Thanks.

We'll go next to Sarah Matson with RBC Capital Markets.

Hi, thanks very much. I'd like to go back to guidance for a moment. Your guidance shows very strong sequential growth in December, especially in the license line and, certainly, that's the larger software industry trend. I'm wondering if you would please discuss the dynamics that give you such confidence at that level of growth in terms of maybe pipeline relative to last quarter, any deals that perhaps slipped in the December period, et cetera?

What do we see for the full quarter - first of all, we see a very strong pipeline. We have strong visibility, and we definitely have visibility to some large deals, and some of them we've already received. The purpose of the guidance remains with our conservative approach. As you can see, we are repeating our numbers again and again. We guided a 10- to 15-percent growth in revenue sequentially compared to last year, where we had 19-percent growth for the same period - Q3 to Q4. We remain very strong on our guidance for Q4, and that's part of the Q4 - dynamic part of the version 6 of the Microsoft and definitely the one - the information we are receiving from our sales force worldwide.

Okay, any particular product or platform that seem to be generating that strength? Whether it's into the Oracle market or the IBM market? Which parts are really providing the strength in the December quarter?

The one that really contributes the highest revenue is, by far, the i3, because i3 contributes many of our products and more and more customers, both existing ones as well as new ones are focusing on the i3 in order to get the real solutions for application performance management. With that said, we see a very nice increase already in Q3 but very strong pipeline for the J2E product. I think our pipeline is stronger than ever before with J2E. We see customers who already acquired Precise products now buying the Precise Insight to complete the i3 from the components they have, and we had the very successful penetrations in the Microsoft area, where people bought one or two servers. They might need the same process a long time ago off the databases, and we now see them coming back to buy many more, and we see the Microsoft is one which may not be the highest contributor for revenue but the fastest-growing from a product line.

Okay, fair enough, and then one quick metric question - on the sales force side, you mentioned basically headcount was flat Q to Q, but where do you see that number going over the next couple of quarters, and do you feel you have enough capacity to meet the current expectations?

A very good question. We definitely have the capacity today. What we focus in Q3 and continue to focus is now is ramping and generating higher productivity from our sales force and, as you can see, our sales force actually grow year-over-year 110 percent on the direct license revenue. Now, what we are going to do, we'll continue to hire people, we are going to increase capacity in areas that we believe that we need both internationally, Europe, and here, domestically, in the U.S. So we continue to hire people, maybe not in the same rate that we hired before. Most of the time we'll spend our purpose on ramping and get the productivity while we continue to add capacity to areas that require it.

Okay, and were there any changes in quotas, specific initiatives, that is lending itself to increasing productivity?

Well, in viewing the quota percentage right now, I will hire some top guns to focusing on major accounts so our quota distribution will be a little bit different than last year. The IT become very strategic to many companies. We see more and more companies putting enterprise level and therefore is why we provide the quota to our salespeople will review their accounts and their approach to the market.

Very good, thanks so much.

We'll take the next question from [John Rissuto] with Credit Suisse First Boston.

Hi. Marc, I was looking at the guidance you gave, putting it through my model and trying to figure out - it doesn't seem that with the guidance you gave we can really see this license revenue jump up to historical levels, and so I'm just trying to get a feel where you're trying to really put this. I know you said it would grow significantly, but I have a hard time getting it back up to Q2 levels. Are you expecting it to exceed Q2 levels of 13.2 million?

Certainly, John. We don't break out the exact targets of services and licenses, but as Shimon said, we're very comfortable with these numbers, but absolutely.

Okay, so that should be not a problem. Okay, that helps a little bit. Okay, and just a little bookkeeping question - what was your average deal size in the last quarter? I have it somewhere.

It was $76K.

Thank you. Okay, you were talking about one of the things - then - the EMC relationship became a big issue this quarter, especially towards - the rumors really started flying around September, and if you could qualitatively describe that relationship? There's rumors out there that EMC is looking to move away from Precise, they're looking at somebody else bid on the business that you do with them. What's your feeling, if you can qualitatively talk to us about the EMC relationship?

Our relationship with EMC are very strong, and actually getting stronger and stronger every time. I don't know about the rumors, because I hear rumors in the morning that we are getting [background noise], afternoon that we are getting away from EMC, and in the evening that we are back in with EMC. So I love rumors - they are generating a lot of interest in the market and lots of press, for sure. The relationship here on the East Coast between us and EMC, about 10 miles away from here, continue to be very strong, and we're looking at new opportunities while we continue to leverage our joint technology.

As you know, EMC are bringing their future on being a software company or being a large proportion of the revenue coming from software. Unfortunately, they had excellent experience with the size. It only can be improved. On the opportunity to do something like this or with other companies, as you know, John, we have a unique product that integrated very tightly with EMC. Every company can replace everything, but it's not a process it can do overnight. It's not even a process you can do over a few quarters. It's leveraging technology that works very tightly. On top of it, they have a very large installed base of Precise products, and was DB2 for Symetrix, DB2 for Clarion, and this installed base is very satisfied and come back to buy additional products. So, again, this is not something that we know is talked about replacement - the other way around - the two companies are looking how to strength the ability to sell more, to sell additional product and continue to help each other, us being to EMC in being a software company and EMC to Precise to penetrate high-level executives in large accounts.

Great. You put that rumor well to rest.

Don't worry, there will be another one coming tomorrow morning.

I know that, I know that, but I just wanted to hear it straight from the boss. Is there any way you can characterize, or Shimon, the SAP/My SAP relationship, the HP relationship? I know you said that you received contributions from all your partners. Are you seeing acceleration kind of flattish for as much as you want to talk about?

The SAP reduced the acceleration again, yet small one, but it's going all the time. We have to understand that, a, its recurring revenue and, b, it depends on the number of customers that SAP hosting is receiving and, yes, we see acceleration of these numbers and, again, the number is the quarterly number that is accruing, and we continue to deliver for many years. We are very pleased with the relationship with SAP. HP, we have again, a good relationship there. Revenue, I'm not sure accelerated but, at the same time, it's tough to say because we more combined these with HP. We were using HP and working with HP to get to a large deal. We were referred by HP and some of the revenue recognized by Precise, some recognized by HP. Overall people in the market are very happy with the ability to leverage the HP relationship with customers, the new generation they are providing to us, and, of course, whenever HP can close a deal, it's even better.

Okay, and my final question is on competition. Are you seeing anything out there that's changing or customer behavior toward some of your competitors?

Actually, most of it is the other way around, and I know people will raise their eyebrows most of the time, but the unique solutions that we bring to the market in most of the areas and the focus on the application and the root cause and the correlation enable us to provide value that other people don't provide.

Now, we are not the only one in the market to talk about application performance management. We're not the only vendor in the market that provides solutions for databases, but with that said, I will say that we see less competition - we saw less competition in the third quarter than historically we saw, and we definitely believe that, as you can see from the growth we have, that we are gaining market share, and competition is the same or less than what we had before.

Okay, thanks.

We'll take our next question from [Scott Phillips] with Merrill Lynch.

Taking a look at the maintenance component of the revenue - just saw tremendous strength here in this quarter. Should we expect to see the services decline sequentially going into next quarter?

No, I certainly wouldn't expect that. We said component-wise, expect to see license fees grow faster than services, but we wouldn't expect services to decline. That's a nice visibility business for us, and we expect further growth - certainly - further growth, over time, in that maintenance component.

What was behind, Marc, the jump - typically, when I think of maintenance contracts renewing it tends to be more on an annualized basis coincident with the first of the year. What was it about your maintenance business this quarter that, you know, precipitated the 124 percent year-over-year rise?

First I will say, before Marc will answer, that annual renewal is not on the first of the year. We had decent renewals period based on the time the customer buys, and we don't have the system where everything is being pushed to January 1st, and then the spike of renewals happen there. Actually, as you have good Q2s many times, you see spikes in Q3 and not necessarily in Q1.

And I would say, additionally we had, on the one hand, a very high level of overall renewals - probably over 90 percent for, at least, the domestic business, and in addition to that, some large one-time specific renewals.

Okay. Marc, if we reconcile the jump in maintenance renewal contracts with the balance sheet, how come we didn't see deferred revenues increase by more than $600,000?

Well, you can have the one-time renewal that can partially go to the P-and-L, not just the balance sheet, especially when it's a catch-up, right? So that answers really both of your questions. You have a large, one-time renewal, and if it's a catch-up, the preponderance of that will go to the income statement rather than the balance sheet. So that really addresses both your first and second question - they're related.

So is it reasonable, then, to think about the number this quarter - you went back to the installed base and looked to it falling off of maintenance and then brought them back up to help drive that line? Is that a reasonable -

Scott, first it's a very interesting question and a good one, because it's something which help us to explain something very important - we didn't go to the customers. The introduction of the new Precise i3 - every customer who saw it and was not in maintenance wants to get now the upgrade. Otherwise, he will have to buy the licenses again, and until this came back and saw the Precise i3 and asked to be installed, they found out that they have to renew maintenance, mainly those who did not, and it's not a renewal, it's a catch-up, because some were late in deciding if to renew maintenance or not. So the large renewal is not just the renewal to stay, it's also a catch-up as a result of wanting to get into the Precise i3 v6.

Okay, and then, I guess, just running this all out, then, I could use that 6.a as a base to build, going forward. We should expect that to continue to trend higher?

Yes, that's exactly right.

Okay, thank you.

We'll take our next question from [Scott Hogan] with Pacific Crest Securities.

Good morning. Given EMC's poor performance on software this quarter and kind of looking into the fourth quarter for you guys, considering you recognize it in arrears, you know, they're down 12 percent quarter-over-quarter. Can we assume that you've factored in that to the OEM channel contribution?

The answer is yes. I would say, as you can see, from our results already in the third quarter, strategic partners were 9 percent of total revenue, and as we already have the ability to strategic partners, definitely the EMC, it's been factored into it, although contributions from strategic partners were down significantly from last year, but also in the year went down, we guided them up and down, based on these, and now we expect to win, while the direct channel is the one that's the fastest-growing and the one who gets most of the investment.

Shimon, how close of a tie do you think that really is in terms of the Street looking at EMC software performance?

I think that, although we have to look at performance of companies and so on, it's - we are - if you understand the small components of the entire EMC revenue, of course, we always like to be bigger one, but we feel the small components of the total revenue, and with these numbers they are generating right now, you can see a linear cause and effect between those performance and contribution to Precise.

Okay, if the increase of headcount by 20 to 30 people this quarter - how many people came on from the [Middleware Company]?

Middleware Company has about 10 to 12 professional services people.

Okay. I guess that's all the questions One last question about Wquinn. I remember last year when you guys made the WQuinn acquisition, there could have been earnout expectations. Obviously, we're not talking about them today, so I just kind of wanted you to talk about those earnout expectations and how WQuinn performed relative to those.

It's an opportunity to change the name. They used to be WQuinn about a year ago and since then have become the Precise Storage Resource Management, and that's how we refer to them from now on. This company did well with the sales, as you already know, so we are not going to share the amount today. I would say we are definitely pleased with the development they made both in product and sales, and I think they now build, over time, the right distribution that were delivered in 2003.

Okay, Marc, what was cash flow from operations?

We don't disclose that on this call, Scott. You'll see that in the cash flow statement later.

Okay, that's all I had, guys. Thanks.

We'll take our next question from [John Debussy] with CBIC World Markets.

All of my questions have been asked, thanks.

We'll take our next question then from [Netson Hargill] with SCR.

Good morning, guys. I was wondering if you could give us a roadmap of which new products you're expecting to be announcing over the next few months - what are the major announcements we should be looking for?

As you know, we have three products - the IC consists of Insight, different InDepth and Inform. Over the next 6 to 12 months, you are going to see additional InDepth products for platform. We did not disclose, so far, and I would like right now for competitive reasons not to share this with the audience. So we'll have additional InDepth product, and there will be additional improvement in certain areas in the Insight. Most of it in more [alternation] of product we have. You should expect also to see additional product coming out of the storage, Precise storage management, focusing on additional applications - Window-type applications.

Thank you very much, guys.

We'll take our next question from [Tom Jacob] with UBS Warburg.

Hi, all of the questions have been answered so thank you very much.

Thank you.

We'll take our final question from [Richard Zandy] with Deutsche Bank.

Thank you very much. I'd just like to go back to this service revenue for a second. When you talk about large, one-time renewals - is that from many customers or from one or a handful - how would you characterize that?

I would say, roughly, a handful.

A handful? And when you say "one time," does that mean you don't expect everybody who was going to catch up to be able to move to the next version of the platform have done it, or do you expect there will be additional, large, one-time next quarter?

Like in the model, we did not anticipate one - I think people who wanted to do it did it already. Even though things may happen there, you know, we always like to see more customers renewing- their V6 definitely would deliver more, but I think we will push those large accounts and, again, the difference between the small size revenue and a few large ones. We talk with them, we don't model it. If it comes, it will be a bonus to what we have already.

Okay, I just would like your help, then, understanding if the preponderance of the increase in service revenues came from maintenance, and the preponderance of that was these one-time to a handful of customers, can you explain why gross margins deteriorated several hundred basis points from 73.4 percent in the June quarter to 71.1 percent in September quarter. One presumably would think that the one-time catch-ups would be very high-margin business.

Well, I don't believe we said "the preponderance." Certainly, the majority of the increase in services was due to maintenance, but we had growth in the professional services side of the business, too.

So, let me understand, did the mix of professional services as a percent of total services increase? I'm just trying to understand why gross margins in the service line fell 240 basis points sequentially if it came from maintenance revenues?

Those maintenance and professional services grew Q2 to Q3. The biggest growth for the maintenance but for both of the group, which we definitely like to deliver when customers ask us for additional professional services, and that's the reason for the change in the gross margins.

Okay, and then, just finally, you mentioned that you are seeing more traction with the suite approach - larger deals - but the average deal size went down sequentially. I was wondering - you know, rather substantially - I was wondering, you know, down, even, again from the March quarter - I was wondering if you can reconcile what the numbers are telling us and what you're seeing.

What we can see that - we see an increase year-over-year for last year $59,000 to $62,000 this year. We have seen over four years of trend increase. Yet you will see lumpy from quarter to quarter. What is really important to us, we have records of 30 days of $100,000. So if you looked at traction for the suite approach in the large deal, this quarter was a record of 30 days of $100,000. The majority of those $100,000 came in the area of $100,000 and less came in the area of $200,000, and I would attribute it some to the timing of Q3, but at the same time, I would say it gave us great visibility and great momentum into the fourth quarter where you will see the bigger deal coming in is already, talk with [inaudible] and share this information with her.

If I could just ask one question on the product - I guess, encouraged by the success you had with EMC over the last year-plus, you've launched Precise Crosspoint, Precise Lightpoint, and recently Precise Sharkpoint. Can you talk about if you continue to view that strategy of tuning the solutions to specific storage platforms to be high ROI to you guys? And if you continue to see traction in that business?

I would just rephrase the objective - the objective is not to tune certain storage devices and so on. What we do, what we continue to do, is we're the only company who can take any transaction and correlate symptom to root cause. Without having the ability to look at storage, you do not have an application performance management solution because you miss the ability to correlate between the application, the end user, and the storage. The purpose of our relationship with EMCH, the Hitachi IBM, is to be able to go and provide the answer across their own fields of the application. What the storage for Precise and high ROI is the ability to leverage the storage into the entire suite of i3. Many of the EMC customers, many of the Hitachi HP customers are not just buying the seemingly storage to database product. It's one component of their entire suite of i3. Many times it will be sold as a component by EMC, but then we leverage it to become a full i3. So we are leveraging this large dominant company to enter and seed to the customer, and we go after them and up selling the entire suite of i3. So that's where the return on investment and the business opportunity is all about.

Okay, thank you very much.

Okay, ladies and gentlemen, there are no other calls - or questions. I'd like to thank each one of you for joining our call today. Again, we now have 20 consecutive quarters of revenue growth. We'll take a few minutes off and continue our effort in building the 21st quarter of revenue growth. If, again, if you like to see our leadership position, you are invited to our booth in Oracle World, and I promise you it will be very exciting over there. We'll be in different investor conference in the next few weeks, and you can go to our Website and get an updated list of conferences, dates, and presentations. Again, thank you, everybody, and have a great day.

Again, that does conclude today's Precise Software Solutions third quarter conference call. Again, thank you for your participation. You may disconnect at this time.