惠普 (HPQ) 2004 Q1 法說會逐字稿

Good day, everyone, and welcome to the Opsware Inc. first-quarter 2005 conference call. (OPERATOR INSTRUCTIONS). Today's call is being recorded. If anyone has an objection, you may disconnect at this time. And now I'd like to turn the call over to Mr. Ken Tinsley. Please go ahead, sir.

Thank you, Ruthie, and good afternoon. With me today at our headquarters in Sunnyvale are CEO, Ben Horowitz, CFO, Sharlene Abrams and Chairman, Marc Andreessen.

During the course of today's call, we will make forward-looking statements regarding future events and our future financial performance, all of which are subject to risks and uncertainties. Actual events and results may differ materially from these statements. Please review our Form 10-K filed with the SEC on April 15, 2004 and our reports on Forms 10-Q and on Form 8-K filed with the SEC for discussions of important factors that may cause actual events and results to differ. The term pro forma operating cash flow used in today's discussion excludes certain nonrecurring items recognized in connection with certain liabilities related to our former managed services business. The term pro forma net loss used today -- in today's discussions -- excludes the effect of two items, one, a nonrecurring charge for in-process research and development relating to the acquisition of Tangram Enterprise Solutions; and two, a nonrecurring gain recognized in connection with the settlement of our litigation with Qwest. Reconciliations of these items to GAAP are provided on the Investor Relations section of our Web site at Opsware.com.

By now you should have received a copy of our press release that was distributed after the market closed today. If you have not, it is available on the investor relations section of our Web site. In addition we are currently Web-casting this call and an audio replay will be available on our Web site following the conclusion of the call. Now let me turn it over to Ben.

Thanks, Ken. Today I am pleased to announce a strong first quarter. Revenue was $7.3 million, up from $6.2 million last quarter. We generated cash flow from operations of $1.1 million, our fourth straight quarter of positive cash flow from the software business. Deferred revenue and advances grew to $14.1 million, up from $10.2 million in the previous quarter. Additionally, we settled our litigation with Qwest, which Sharlene will detail in a minute. During the quarter, we saw more indicators that our market continues to develop. IDC estimates that global server shipments are on track to surpass 5 million units in 2004, up 10X since 1995. IDC also estimates that the total number of servers in production worldwide will double again over the next five years. As a result, demand for offshore automation software continues to grow.

Since our last call, we signed eight new significant deals. Highlighting three of the eight, first, Lehman Brothers, who selected Opsware after a lengthy multi-vendor evaluation process, Lehman will use Opsware in multiple global data centers as a platform for automating their application life-cycle end-to-end. Importantly, Lehman is also a commercial adopter of DCML. Second, British Sky Broadcasting, our first major deal in Europe, BSkyB will use Opsware to automate and consolidate its IT operations across more than 1,000 servers. And third, a significant upsell to Comcast, who has expanded their use of Opsware to be the backbone of their provisioning system for all services, including digital cable, broadband Internet and voice over IP. Excluding EDS, our average deal size for all deals signed by Opsware remains over $600,000.

On the product development front, we announced Opsware Satellite. This product enables smoother deployment and management of servers in remote locations, even in low band width locations. Because roughly half of servers in production today are operating in clusters outside a data center, these capabilities expand our reachable market significantly. This capability is unique to Opsware and we expect to ship it this summer with the release of Opsware System 4.1. To further increase our reach, especially within the government sector, we initiated the evaluation of Opsware System under the U.S. common criteria evaluation and validation scheme. Opsware is the first IT automation system to be evaluated and upon completion of successful validation, will acknowledge that Opsware complies with the highest security standards worldwide. This certification furthers our lead among competitors, given the stringent security standards required in government agencies. We also launched Opsware Asset Tracking Edition, which can discover and track more than 30,000 software components and enable IT organizations to gain full visibility into their existing software assets. This visibility translates into efficiency for customers by eliminating costs associated with renewing licenses and maintenance for underutilized and redundant software. Opsware Asset Tracking Edition is available stand-alone now and will be fully integrated into the Opsware System later this year.

On the partner front, NTT announced that their new hosting business in Japan, named AGILIT, will utilize Opsware as its automation platform. With Opsware, NTT is able to offer its customers a unique 100 percent scheduled up-time service level agreement while operating with superior cost efficiencies. Given our early success with NEC and NTT in Japan, during the quarter, we opened an office in Tokyo to further our sales efforts in Asia-Pacific. This is a huge opportunity for us given that over 800,000 servers were sold in Japan over the last two years with another 2 million servers forecasted over the next three years. Our international expansion also included the addition of seven new distributors in Europe and Australia. Our partners in these regions will initially focus on the sale of Opsware Asset Tracking Edition. And finally, I am pleased to welcome Mark Cranney as our new head of worldwide sales. Mark brings exceptional experience in the enterprise software sales arena and will be a strong leader of our sales team.

In summary, I am pleased with another good quarter. The shift from client/server to Web-based architecture is the largest re-platforming in computing history and has created serious quality and cost problems in IT that we uniquely solve. As the number one provider of IT automation software, we are best positioned to lead this new product cycle. Now, here's Sharlene to provide more detail on our financial results and outlook.

Thanks, Ben. As we forecasted, we generated another quarter of positive cash flow. For the first quarter ended April 30, we generated $1.1 million in cash flow from operations. In the last four quarters, we have generated $4.7 million in pro forma operating cash flow on revenues of $19.4 million. These results demonstrate the good leverage in our financial model.

On the P&L for the quarter, net revenue was $7.3 million compared to $6.2 million last quarter. As in prior quarters, the majority of our revenue came from our $52 million contract with EDS. Recall that until we establish vendor-specific objective evidence of the fair market value of our software and services, we recognize all revenue ratably over the term of the maintenance contract and only after we have satisfied all deliverables under the contract.

To reiterate how we treat and record customer contracts, there were three categories other than revenue into which a customer contract can fall. First, if we sign a contract and have completed all deliverables under the contract, the amounts are recorded as deferred revenue. Second, if we sign a contract and have received cash but have not completed all deliverables, the amounts received are included in advances from customers. Or third, if we sign a contract, have not received any cash and have not completed all the deliverables, the contract is not reflected anywhere on the financial statement.

On the expense side for Q1, you'll note a few new line items that arose from the Tangram acquisition -- cost of developed technology, in-process R&D and amortization of intangibles. All of these items are non-cash and the in-process R&D is a onetime charge. Operating expenses totaled approximately $7 million, up about $1.2 million from the previous quarter, primarily due to retained R&D headcount from the Tangram acquisition. Although we reported GAAP net income of $2 million, we took a non-recurring, non-cash gain of $4.3 million related to the settlement of the Qwest litigation. We also had a $610,000 noncash charge for in-process R&D. Excluding both of these items, pro forma net loss for the quarter was $1.7 million or 2 cents per share.

On the balance sheet at April 30, deferred revenue and advances grew to $14.1 million, up from $10.2 million last quarter. Many of you have asked, so I thought I'd comment on the anticipated mix of the perpetual versus ratable revenue mix after we achieve the SOE. Although we expect customers to continue to purchase perpetual licenses, we're modeling the business to continue recognizing revenue on a ratable basis.

Regarding the shelf registration statement we filed last month, we are still in the registration process and at this time do not have plans for a takedown.

Finally, as I mentioned, we settled the Qwest litigation this week, which was the last remaining liability from the managed service business. We settled this litigation for less than we had accrued, which is why we recorded a $4.3 million recovery. The April 30 balance sheet reflects all adjustments for this event. As part of the settlement, we will make a cash payment of approximately $2.2 million, which will be reflected in Q2's results.

Now turning to guidance, we are reiterating our full-year revenue estimate of 35 to $37 million. In Q2, we are forecasting revenue of 8 to $8.5 million and expect to continue generating positive cash flow from the software business. We now invite your questions.

(OPERATOR INSTRUCTIONS). Seihun Kong, ThinkEquity Partners.

Hi, good afternoon, congratulations on the quarter. I just wanted to first start off with a couple housekeeping and then go into some longer-term questions. But of the eight customers that you mentioned, minus the three that had been previous announced, I just want to make sure, how many of those customers were buying the Tangram-only solutions versus buying your core automation products?

Yes, basically all of the new customers again were signed under Opsware and are primarily Opsware customers, particularly among the significant eight. And you know again the average deal size that we reported was -- continues to be over $600,000. We're trying not to report the business in exact detail separately, but primarily Opsware.

Perfect, thanks, so much. I was a little surprised to see the big jump in deferred and then a little decline in advances. You know can you tell us how many customers completed implementations or went live this quarter? And you know I guess more importantly, is this an indication that implementation times are shortening at all?

Yes, so, I don't know if I would read into it that implementation times are shortening due to the numbers but they are shortening. So why don't I just go ahead and tell you that.

Okay.

And in terms of how it tracks in the future, it is a little bit unpredictable.

There is going to be fluctuations that are going to go between advances and deferreds and from the off-balance sheet to advances just because of timing of collection of cash.

Got you. And just one last question, I guess if you look a little bit over the longer-term, you know within the last couple of months, have you seen any sort of shift in the buying patterns? Primarily, are people still looking at the provisioning and the app deployment types of functionality? Or has patch management increased as a driver? And are customers still buying in modules versus buying small initial deployments of the full stack?

Right. In general, when people bus Opsware, they are interested in at least getting to the full stack. So we have very -- have a relatively few number of opportunities that are say a pure patching deal or a pure provisioning deal. Having said that, oftentimes, they might start in what we call a pilot phase with a smaller deployment and then expand from there. In terms of the drivers and what people are interested, certainly patch-on security are interesting now. We're seeing actually quite a bit of interest in something that we refer to as labor virtualization, which is something that we did very effectively at Loud Cloud and we're seeing our partner, EDS do very effectively and other companies are interested in it, which basically means that you can have operations people moves seamlessly between end customers without re-training or information transfer and whatnot, and that tends to be a big efficiency gain as well as a big quality gain. So I'd say the biggest new thing is labor virtualization, and we have by far the best functionality available for that.

Perfect. If I could just ask one more then I'll jump back in queue, I guess are you seeing any more or less activity at the core versus the edge? And what do you think the impact of this new satellite product is going to have on this dynamic? Are you basically putting out the product ahead of demand or is this something that you are seeing in the demand curve at this point?

Yes, so the satellite product was driven from customer requirements pretty directly, so we definitely see it out there, the need for it today. And it varies a little. So there are customers like -- a really excellent example of it is Comcast, who I mentioned in the call. Now they are rolling out -- when you think about rolling out broadband and voice over IP and so forth, it is a highly distributed network; and the satellite gives them a bit of reduction in complexity in how they manage that in that the satellite itself is very light weight. Having said that, Comcast has a relatively sort of high bandwidth network. You contrast that with an EDS, who has many remote data centers in customer environments and some of those are over really narrow pipes. The satellite is also tremendously effective in addressing that need. So I think that we see servers going up all over the place, particularly it is rare that we see somebody who's got all of their servers centralized, so we think that this is probably one of the most important new features we've come out with in quite some time.

Perfect, thanks, so much.

Nicholas Aberle, Caris & Co.

Good afternoon. A couple quick questions here. First off, could you give any type of color with respect to off-balance sheet pipeline and how that played out through the balance of Q1?

We don't give any guidance on what's off-balance sheet, because that's going to fluctuate from quarter to quarter just because of the timing of collection of cash.

Okay. And with respect to gross margins, it seems like they tailed off a bit in the quarter on an incremental basis. Can you briefly comment on what the causes of that might have been?

Well, we're including now the cost of the Tangram acquisition, so there is some additional headcount in there. Primarily the costs in there are headcount related; so that's going to fluctuate a little bit from quarter to quarter.

Can we expect it to stabilize around this level on an incremental basis going forward, right around the 75 percent level?

It's probably going to be in the '70s.

Mid '70s?

Roughly.

Okay. Customer advances, just to build on the previous question, I expected those to actually trend up in the quarter. I thought I remember in the previous call talking about NTT making the cash payment that would fall in Q1. Any color there as to why that didn't happen?

The cash payment did happen and it moved into there. But there's going to be fluctuations between that category and the deferred revenue. So things move into advances and then they move out of advances into deferred revenue.

Okay, got it. And lastly, I guess more broad question talking about the verticals that you guys are starting to penetrate. Obviously, we've seen the Lehman deal BSkyB deal, penetration within the media and financial services sectors. Are these really areas where you guys intend on focusing going forward? And what other verticals would you expect to see penetration in through the balance of fiscal '05?

So, I think that's right. Media and financial services are probably two of our best verticals. Additionally, U.S. government, defense and intelligence has been an outstanding vertical for us and we see that growing considerably this year. The next most significant is probably tele co's and outsourcers, so ISP's. And in that category, we include companies like NEC's Big Globe, NTT, Inflow, EDS, among others.

Okay, perfect. Okay, thank you, very much.

Absolutely. Thanks for calling.

Andrew Schroepfer, Tier 1 Research.

Thanks, congratulations, guys. A few questions for you, one on BSOE, the standard question is, is everything still on track, any change in timing, any milestones, and updates there?

Andy, we're having a little trouble hearing you. (multiple speakers) repeat your question, that would be great.

Sure, on BSOE, I'm just looking to see if there's any change in expectation on timing, any new events that happened that either changed it more favorably or hurt the timing on that?

No, the timing is basically the same and we did mention that we were modeling the business to continue recognizing revenue on a ratable basis after achieving BSOE.

On your channel partners, you continue to grow the number of partners you have each quarter, yet traction from the channels fails yet to really show up in a meaningful way outside of the obvious players. So any comments on feedback from what the channel partners are saying and when they're expecting to hit something meaningful for you?

Right, we have a variety of different channel partners. So on the kind of outsourcing front of course, EDS and Inflow and H.P. all tend to do well on the outsourcing side and contribute to revenue. In terms of the reseller channels and the system integration channels, on the system integration front, we're doing most of our deployments now via a third-party deployment channel so that's progressing nicely. In terms of just straight software resellers, that's probably where we're in the most nascent stage with H.P. and NEC. And for those, we are continuing to make progress and get them trained and effective. And we'll continue to report our progress as we go. In terms of the new channels that we signed, I'll just note that these are channels that we acquired -- or didn't actually acquire the channel, but the relationships were acquired, certainly through the Tangram acquisition, and so they'll be primarily I think good channels for the Asset Tracking Edition. But really remains to be seen and I don't think that you'll likely see a lot of the through (ph) Opsware Suite through that particular channel.

Got you. The last question is on the sales force. I am a believer that you guys could add a few more sales reps to the mix. I'm curious where you're at with quota-carrying sales reps and maybe since Mark joined on, kind of what his thoughts are on growing the sales force and when to look for equal (ph) milestones of additions?

Right. So we are currently at 16 quota-carrying salespeople. And with Mark now on board, we are certainly looking to expand that and we are in the process. We just made another offer today, so we're expanding that pretty rapidly and so you should start to see some pretty good growth from us on the sales rep front.

Excellent, thanks for the help. Good work, guys.

Thanks.

(OPERATOR INSTRUCTIONS). Donovan Gow, American Technology.

Hi, guys, great quarter. On the balance sheet, a big spike obviously in advances and deferred, up 40 percent sequentially. Is that somewhat of an anomaly given the size of the NTT deal? Or do you see that more as indicative of the underlining growth trends in the business?

I think that's a good question. I mean in general, I think the growth trend in the business is very positive and we're happy with how things are growing. On the other hand, that one, as we noted last quarter, is a little tricky because there are really three categories in that bucket and you're only seeing two of them. So I won't forecast that it will increase 40 percent every quarter because it could be flat as it was last time, and so some of the growth is a combination of what happened over the two quarters as things moved through the three categories, again, two of which you're seeing.

Okay. So I guess without putting a specific number on it, is it possible to say whether the off-balance sheet deals, whether the revenue in that category moved up or down in the quarter?

We don't give any guidance on that number.

I thought I'd give it a try. Then if I understand your comments on the ratable revenue model going forward, Sharlene, does that effectively -- it makes the BSOE issue kind of irrelevant, correct?

Basically, in some ways.

It's mostly irrelevant. There is one different -- there are two things to note. One is, the time that the clock starts ticking gets shortened, so recall that now if we sign the deal, we have to deliver all professional services before the recognition clock starts. Once we establish BSOE, parts of the deal, not all of the deal, but parts of the deal, we can start recognizing much earlier. So that's thing one. Thing two is that there may be circumstances where there is a deal that we're forced to take not ratably or upfront just because of the way the contract terms are structured depending on how it falls into GAAP, although we don't anticipate a lot of that. That becomes a possibility where it's certainly not a possibility today.

Also one other thing, the balance sheet will look different because there will be no more advances category. As soon as we bill it, it will go into deferred revenue. Whereas now, even though these are signed contracts and we may or may not have invoiced them, they are -- there will be no more off-balance sheet per se if we billed it.

Okay. But in terms of the recognized revenue growth on the income statement, then, there should be no impact going forward.

Revenue will get recognized. The timing between revenue recognition -- revenue starts getting recognized and the deal signed will shrink.

Okay, that'll contract a bit. Okay, and then finally, can you give us an update at all on EDS, you know, where they are in terms of number of servers deployed today and when you anticipate them running through the 18,500 on the initial contract?

Right. So one thing that we don't do is forecast EDS's deployment number. I know that a time, some of you have talked to them and they've given you numbers and given you forecasts, and that's fine if they do that. But as part of our agreement, we're not permitted to forecast what they're doing or report on it. Having said that, our EDS relationship is going extremely well. We're definitely pleased with where we are with them. And we feel quite good about both the contract and future business from them beyond the original $52 million contract. Having said that, we don't have anything to announce on that today.

Okay, great. Thanks a lot. Great quarter.

Thanks, Donovan.

Joseph Craigen, Needham & Co.

I haven't been able to catch all the calls, so I don't know if you guys have covered this already, but could you please touch on just what the opportunity is with the satellite product and what the potential timing of seeing any impact of that would be, and what you might have to do as far as sales force wise, how you approach the market, do you need to make any changes there?

Okay, sure. The satellite product really gives us the opportunity, so if you think about how people are deployed with the current product, we have a very robust multi-master capability that gives very strong disaster recovery and so forth across data centers. It does assume that those data centers are connected by a pretty robust network, however. The satellite enables us to go into areas where people have servers -- much smaller numbers of servers, so far less than 100 in a data center, which tends to be the sort of economic breakeven point for a full multi-master, and then it also enables us to go over very slow bandwidth lengths. So if you think about an operation that's got many remote sites as in the case of Comcast or many sites over slow lengths, as in the case of EDS customer-owned data centers, then this product fits in very well. Another type of customer that it fits well with is our retail customer that's got many, many stores.

As far as the sales force goes, it's pretty in line I think with the rest of Opsware, so there's not a lot of sort of changes in personnel that we need to make. However, it does open up sectors, particularly on the retail side where the product -- we could not do (indiscernible) as large deals, and that -- most retail outfits have less than half of their data centers stored centrally -- servers centrally.

That's helpful. Thank you.

Peter Hermansson, Pan Capital.

Great quarter, just one sort of financial question and one sales question. Once you do the SOE, you say you're going to retain a ratable recognition policy. I am sort of curious why, since ratability is more sort of a feature of the business as it used to be, sort of what the thinking is there? But if you do go in that direction and you no longer have advances from customers, and you no longer have anything off-balance sheet, then will deferred revenue always be cash received but not accreted? Or will it also include deals signed but not necessarily cash received? And then the second question would be, I gather one of the sell side firms who followed you had a call yesterday or the day before, sometime like that, in which they highlighted a customer called Inflow; and if I understood correctly, and I may be completely off base on this because I heard it secondhand, they referenced the cost per server as $1000. And I had the impression for some reason that your price per server was higher than that. So can you comment on those two questions?

So on the first question, first of all, items that are in deferred after BSOE, may or may not have been collected yet. So the offset obviously would be receivables, accounts receivable, okay?

Okay.

And obviously we are also going to follow Generally Accepted Accounting Principles in our revenue recognition. The most conservative method is obviously to be ratable and considering that we have a large deal, the contracts are very complex. They are -- that using a ratable revenue recognition methodology is conservative and allows the most flexibility and continuing involvement and staying close to our customers.

Okay.

Great, okay. So let me talk a little bit about the sell side report. So first off, just want to separate a little bit as we look at the Company, which you should be thinking about in terms of modeling us versus what you ought to think about in terms of market sizing. So we've always discussed $600,000 average deal sizes as the thing that's probably most relevant to our business right now and then we said gee, you ought to market size it around $1200 a server. Historically, you know when people have asked and we've kind of stated what we've on average gotten per server, it's a little higher than that, approximately double that, which continues to be the case. But again the way we forecast the market we think that is going towards more like $1200 a server over time. Now in the particular case of Inflow and you know gee, why is that $1,000 a server and not $1200 a server and not $2400 a server, that has to do a lot with what they bought, which again is not the case -- not the same, in all our customers; different customers buy different parts of the product line. In their case specifically and just to give you an example of some of the things without talking too much about what they're doing, they are 100 percent Windows, which is about 40 percent cheaper than Unix per server. They are all on one data center, so there's no multi-master capability, which is a unique capability for Opsware and re -- and generates a significant price as a result. And then third, they don't have any of the asset tracking capability. So they have everything that they need. And I think that was one of the confusions in the report is, they said gee, do you have the whole thing, and they said -- you know Inflow's response is, yes, we've got everything we need. But everything they need is not everything we sell. And so there's just a delta in functionality between what they're buying and then what a lot of other customers buy. And then there are other circumstances that go into the deal. Note that -- you know, I'll just say that I think they are doing great as a customer and we're really happy to have them and they're doing a tremendous job with their large, large accounts that they're managing via Opsware. So in general, that's why we put the market size at about $1200 a server rather than what we've been getting, because we think we are going to be selling more like that, more deals like Inflow over time and probably less of the full boat.

That makes a lot of sense. I appreciate it. You have such a -- so many moving parts, I just appreciate the clarification.

No problem, thanks for the question.

Carsak Farma (ph), Tiger Technologies.

Just one quick question, what was the revenue contribution from Tangram this quarter?

We're not breaking that out specifically. It's not a separate segment. As we had forecasted and had guided before, we said that revenue from Tangram would be minimal.

Okay. You had a onetime cost item from Tangram. Can I assume that the revenue was less than that or more than that?

We haven't broken that out.

The revenue -- so

Revenue is minimal.

Revenue is de minimus from Tangram. The expenses correlate more to -- if you're trying to think of gee, how did the deal work -- more to cash collected. Cash collected does not match up to revenue with Tangram in that we don't recognize any revenue for maintenance renewals that occurred -- you know, that were signed under the old Tangram company. So revenue this year as a result is minimal.

Right. So if I look at the -- there was a in-process R&D charge (inaudible) of 610,000 related to the Tangram acquisition. My question is more, is it fair to assume that the revenue contribution of Tangram was less than that?

Yes, we said it was minimal.

Okay. And on a go-forward basis, how would Tangram grow from here, do you think?

Well Tangram --

(multiple speakers) maintenance revenue stream builds up, how should we be thinking about Tangram going forward?

I think that you shouldn't think of Tangram as a growth business, particularly on the maintenance side in that, we're taking the functionality from the product and incorporating it into Opsware; we're not looking to be in the asset tracking market per se, other than as it relates to our market. So it's going to be -- you know it's going to be small and it's going to go down. In terms of the cash collected from the maintenance contracts, it's generally enough to cover the R&D expense, but that's the way I would look at it.

We said it was a cash neutral acquisition.

Okay. And it becomes cash neutral as of next quarter -- I mean in terms of net cash flow from the next quarter on, it's kind of a neutral event?

Yes.

Yes.

Okay. Great, guys. Thanks, a lot.

Seihun Kong, ThinkEquity Partners.

Hi, I just wanted to see if I could follow up with a couple of questions. I guess first is for Sharlene, philosophically, I guess, how do you feel about the use of term deals? You know it seems like customers are kind of moving away from it right now, but is this something that you could still offer up to customers and do you think that it could become you know something meaningful in your business model going forward, post BSOE?

So generally, we're selling perpetual licenses. We're not actually moving towards term deals.

Got you. And then I know Mark Cranney has only been there for a little while, but are there any sort of big changes that we should expect? And than just as a follow-on, where are some of the new sales guys coming from? Can you give us a little bit of an idea? And where do you expect to see the ramp in sales headcount you know let's say by the end of this year or so?

I think what you should expect to see with Mark is more salespeople in that he's very focused on that and building out the direct sales channel; this is why we brought him on board. We're getting -- you know we continue to get salespeople from a variety of places. Some of the new places since he's joined us three weeks ago that we've been looking at are places like Parametric Technology, as well as i2, where they've got you know people who are -- have been making their numbers and doing a good job with those companies over the last several years have been outstanding in that they've been flying into a bit of a headwind. So those tend to be good backgrounds. We're not forecasting the total size of the sales force for the end of the year other than to say we're going to continue to grow it.

All right. And just one last question on the DCML standards. You know, has there been any word on you know whether we could get you know Microsoft, Sun or IBM to come on board and you know to hear that you know Lehman is on board with this as well as good news. I'm just wondering how many other end users or end customers have really signed onto this initiative?

So DCML itself has around 70 members today. So, and many of those are end customers, including Lehman Brothers. In terms of the progress of the standards, we've published the initial spec, which is a huge milestone, and then it will be going to a standards body in the next probably 30 to 60 days, which will be a big step and something that some of the larger guys were very interested in. Now when you think about the progression of a standard, the reason that we wanted to get the spec out before putting it to the broader audience is there's almost no standards that started in a standards body and succeeded. I can't think of a single one. I know at Netscape, we started many standards outside of the standards body process, including SSL, LDAP, and now you know -- not to mention to a large extent http and HTML were started that way. On the other hand, the one standard that we did attempt to adopt that was started in a standards body, CORBA, really failed completely for us, so we're very aware. We're very experienced in creating standards. And we're using the methodology that works on this one. In general, from a timeline standpoint, what I would expect to see or you should expect to see is number one, it will go to standards body; number two, you'll see multiple interoperable implementations; and then number three, I think you'll see most of the larger vendors trying on. This is what happened with HTML for sure; this is what happened with SSL; and this is what happened with LDAP; none of H.P., Microsoft or IBM were in any of those standards until we got the other two done first. So and you know that generally makes sense for them and makes sense for us.

All right, that's about it for me. Thanks, so much.

Okay, great.

Eric Stevens, Compass Investments. Eric Stevens from Compass Investments, your line is open.

Ruth, let's go to the next queued caller, please.

Tom Leach, Bennett Lawrence Management. Your line is open, sir. Mr. Leach, your line is open, sir. Please go ahead with your question.

Okay, anybody else queued, Ruthie?

Sure, we will go to Damian Roscoe (ph), H4 (ph) Capital.

I just had a quick question. Can you give a breakout of how much revenue EDS accounted for in the quarter?

They accounted for about 65 percent of revenue this quarter.

Okay, great. Thanks, very much.

Andrew Schroepfer, Tier 1 Research.

I was going to ask the same thing on EDS, so that was it. Thanks.

Mark Allen, Grobsky (ph) Assoc.

Congratulations on great execution. I had a question regarding the eight new deals that you signed, the five you can't discuss, can we assume that they were at average sales -- average revenue generating contract, 600 grand?

Yes, so in general, so what we've said is that if you add these deals into the total -- the deals that we've done to-date and we're over $600,000 on average, we try not to -- and we don't talk about the -- this on a per quarter basis just because we're not wanting to lead people to model number of customers times average deal size for the quarter and get to the bookings number, which is something we don't disclose.

So the five customers that you haven't mentioned -- you know you didn't mention the names (multiple speakers) --

They are part of it, yes.

They were part of the overall number. But on those five itself, would it be approximately the same range, $600,000, maybe a little bit better?

We don't actually talk about any sort of specific set.

Okay. Regarding Tangram, the pipeline, are we expecting -- when the deal was consumed, I noticed they had a great deal of -- quite a few fortune 100 customers and had maybe 100, 200 other customers. Are we expecting to retain any of them or upsell to some of them? What's our forecast with the Tangram deal other than the technology aspect of it?

Yes, so all we've forecasted for Tangram is that it will be cash flow neutral and we're very comfortable with that. In terms of that business and those customers -- so from a maintenance standpoint, we will expect that to continue for some time. On the other hand in terms of upsell deals, we're still a little early on that, although we certainly think there are some opportunities in the Tangram install base for upsells.

Okay, great. Thank you, very much.

Thank you.

Mr. Tinsley, that does conclude our question and answer session. I will turn the call back to you for closing remarks.

Thanks, Ruthie, I appreciate that, and thanks, everybody, for your participation today. As always, if you have any questions, feel free to contact us here in Sunnyvale.

Ladies and gentlemen, we do appreciate your participation. You may disconnect at this time.