International Business Machines Corp (IBM) 2002 Q2 法說會逐字稿

Good afternoon ladies and gentleman and welcome to the Mercator Software conference call.

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Before I turn the call over to Jonathan Cohen, Vice-President, Corporate Communications for Mercator Software, I will address some administrative details.

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I would now like to turn the call over to Mr. Cohen.

Thank you.

You may begin.

Thank you, operator.

Welcome to Mercator's conference call for the final results for the second quarter of 2002.

Mercator's Chairman and CEO, Roy King and Mercator's Executive Vice-President and CFO, Ken Hall, will make some brief comments and then open the floor to questions.

Before they begin, I'd like to read the customary safe harbor statement.

In connection with this conference call, the company wishes to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to statements that may be deemed to be forward-looking statements under the Act.

Such forward-looking statements could include general or specific comments by company officials about future company performance as well as certain responses to questions posed to company officials about future operating matters.

The company wishes to caution participants on this conference call that numerous factors could cause actual results to differ materially from any forward-looking statements made by the company.

Please refer to the risk factors included in the company's filings with The Securities and Exchange Commission.

And now, I'd like to turn the call over to Mercator's Chairman and CEO, Roy King.

Thank you, Jonathan and thank you for joining Mercator's conference call for the final results of the second quarter of 2002, which are in line with the guidance we gave on April 30th and the preliminary results we provided on July 12th.

Allow me to briefly recap some of the highlights of the quarter before asking Mercator's CFO, Ken Hall, to take us through the numbers.

We've come a long way, both in the turn around of the company, which began in early 2001 and in executing our business strategy that we began to roll out in the first quarter of this year.

When charting our progress of the turn around, we note several data points.

First, we reduced our pro forma net loss by almost 45% from $6.1 million a year ago to $3.4 million in the second quarter of this year.

Second we have dramatically reduced our cash burn from $12.1 million in the first half of 2001 to $900,000 in the first half of 2002.

And third, we significantly improved our cash position from $6.2 million a year ago to $27.3 million today.

Our business strategy gained significant traction in the quarter despite the fact that technology spending continues to be hit hard.

We reported revenue of $27 million including license revenue of $10.9million, which represents a 14% increase in license revenues sequentially.

We had 44 customer wins, valued at $100,000 or more in the second quarter.

Overall, our average selling price was approximately $300,000.

Mercator second quarter customers and financial services, healthcare and manufacturing retail and distribution included

Limited, Amazon,

, Avon,

, Blue Cross Blue Shield of Arkansas, Blue Cross Blue Shield of Missouri,

, Eli Lilly,

, First State Investments, HSBC,

, Pacific Life and Annuity, QVC,

, and WebMD.

On July 12th, we announced the implementation of the next phase in Mercator's strategy - to place greater focus on industry integration solutions and strategic partnerships with systems integrators, application servers and software companies.

Our success in the early phase of this strategy with partners like BEA Systems, KPMG Consulting and others, is one of the reasons we were able to have a respectable quarter.

It also allowed us to move forward with a planned reduction in our global workforce of approximately 90 positions, or 15%.

We eliminated positions mostly in the services and sales organizations that are no longer needed in light of our industry integration solutions and partner strategy.

As a result, we anticipate an annual savings of approximately $10 million.

Subsequent to our organizational shift, we also made some changes to our executive team.

Our worldwide sales services and support teams have been consolidated under one leader, Mark Register, who has been named worldwide president of field operations.

In the Americas, Mark will be supported by

, Vice President of Americas' sales, who recently joined us from AOL.

Bob Farrell, President of Mercator Americas has departed the company.

Additionally, we have named a new Chief Marketing Officer,

, who replaces outgoing CMO Eileen Garry.

In his previous role as President of Mercator's international business units,

led our Asia-Pacific operations to growth and expansion.

also successfully reorganized our European operations.

has an impressive track record of building high-performing, revenue growing software and technology sales teams across the country for AOL and iPlanet, and other technology leaders.

has been a senior marketing executive at a number of notable software companies, including Exchange and

Software, where he worked closely with Mercator's CTO, David Linthicum.

have the skills and experience well-suited to our integration solutions and partner business strategies as it shifts in the next phase.

As we've discussed on the last several calls with you, we have been energetically rebuilding our partner program, adding one or more major new partners per quarter.

On our July 12th call, we mentioned the work we are doing with our

consulting partners for a large international fast food company, among other customers.

And we announced an important

systems.

As a

premier partner, we will co-sell and market joint Mercator-

industry integration solutions across several vertical markets, as well as enhance our support of

universal application network.

In Q2, we formally announced an official relationship with BEA Systems, to jointly sell BEA and Mercator solutions to mutual customers.

Yesterday, we made the first formal announcement of a major Mercator-BEA joint customer, APL Limited, the large international shipping company based in California.

At APL, we are deploying our new data exchange solution, and EDI XML logistics hub, developed over the past several quarters for commercial shipping ports in Europe and Asia, private logistics companies like XL and Crimson Logic, and national postal services around the world.

On the R&D front, we completed a variety of new products, such as JCA Gateway and Web services solution.

JCA Gateway links Java-based applications running on JCA to Mercator, and Mercator's Web services solution is already in use with customers such as the French bank CDC.

We also enhanced our core technology, including upgrading Mercator Integration Broker to version

.

Under David Linthicum's leadership, Mercator R&D continues to be highly productive and market focused.

It is important to point out that between R&D and our industry integration solutions units, about 25 percent of the Mercator workforce is now dedicated to developing our core products and industry integration solutions.

We feel confident that our industry integration solutions and partner strategy, coupled with a commitment to our core integration technology and strong fiscal management, will allow us to continue to gain market share, even in this down market.

As Ken Hall takes us through the number for the quarter, I believe you will see that it is already beginning to happen.

Ken.

Thank you, Roy.

In addition to success in managing tax and expenses, we are also seeing success in our business strategy in a continuing tough economy, we posted a solid second quarter featuring total revenue of 27 million dollars and license revenue of 10.9 million.

Representing an increase of 14 percent sequentially.

We posted a net loss per share on a pro forma basis of 10 cents in line with expectations for the quarter and representing a 50 percent improvement over the 20 cents loss per share a year ago.

We continue to focus on cost management aided by our strategy to utilize the sales and services team of our partners which allowed us to eliminate approximately 90 positions from our global workforce.

As Roy pointed out, this was a planned reduction designed to support our partner strategy.

We anticipate annualized savings of approximately 10 million dollars from this move.

Now, let me walk you through the highlights of the P&L.

Looking at the revenue by line of business, license revenue represented 40 percent of the total revenue for the second quarter compared to 35 percent in the first quarter and 44 percent a year ago.

License revenue was 10.9 million dollars compared to 9.5 million in the first quarter and 13 million dollars a year ago.

Professional services revenue was 6.9 million compared to 8 million in the first quarter and 8.2 million a year ago.

The decline in professional services revenue reflects the softening in license sales over the last two quarters consistent with the overall IT spending downturn.

Maintenance revenue of 9.2 million in the second quarter was down compared to 9.9 million in the first quarter and 8.5 million in the second quarter last year.

Maintenance revenue is closely linked to license revenue and we have begun to realize the impact of softening license sales in the prior quarters.

By geographic basis, revenue from the Americas business unit represented 60 percent of the total revenue compared to 59 percent in the first quarter and 68 percent a year ago.

revenue represented 31 percent of our total revenue as compared to 35 percent in the first quarter and 28 percent in the second quarter of 2001.

Asia Pacific continued to grow representing 9 percent of our overall revenue compared to 7 percent in the first quarter and 4 percent a year ago.

Now the revenue composition of our vertical industry portfolio shifted this quarter with healthcare and manufacturing, retail and distribution or MRD showing significant increases compared to financial services.

Healthcare represented approximately 33 percent of license revenue versus 18 percent last quarter.

MRD represented 30 percent of license revenue versus 24 percent last quarter and financial services represented 23 percent of our license revenue compared to 42 percent last quarter.

Now, in Q2 we had 44 transactions valued at a 100,000 dollars or more including one deal valued above $1 million.

Now, to better track our progress in our vertical strategy, we have re-engineered our ASC calculations to track the average selling price of transactions greater than $100,000 within our three target vertical.

For the second quarter, the ASC within these verticals was approximately $300,000, which is down slightly from the first quarter.

One third of the license revenue came from our partner channel compared to 19% in the prior quarter, another validation of the traction we are realizing from our partner strategy.

And we continue to have a healthy revenue mix of new and existing customers. 81% of the total license revenue came from existing customers with the balance representing new customers.

Pro forma gross profit margin excluding stock option repricing benefits and amortization of intangibles was 70%.

This compares favorably to 64% in the first quarter and 69% a year ago.

Management of operating expenses was a strong point of the quarter.

Total pro forma expenses, which exclude amortization of good will and intangibles charges and benefits relating to restructuring, and stock option repricing benefits, worth $32.3 million compared to 33.1 million in the previous quarter and 39.7 million year ago.

This represents 6 sequential declines in total pro forma expenses and the lowest expense level since the first quarter of 2000.

Now, let me break out the expenses by category.

R&D expense was 5.2 million, up 16% compared to 4.5 million in Q1 and down 2% compared to 5.3 million a year ago.

Now in light of the recent restructuring, let me assure you that we remain committed to making revenue generating investments in R&D to enhance our core technology and deploy additional industry integration solutions.

Moving on, sales and marketing expense was 11.9 million which is down slightly compared to 12 million in Q1 and down 31% compared to 17.1 million a year ago.

D&A expense was up slightly at 7 million compared to 6.8 million in Q1 and down 12% compared to 7.9 million in the second quarter a year ago.

Our pro forma EBITDA was a loss of 4.3 million compared to a loss of 4.5 million in the first quarter and a loss of 8.6 million a year ago.

Our pro forma operating margin was a negative 20% compared to a negative 21% in the previous quarter and a negative 34% a year ago.

And we dramatically reduced our pro forma net loss compared to a year ago by a full 45%.

Now assuming a tax benefit of 38%, our pro forma net loss was $3.4 million in the second quarter compared to 3.6 million in the previous quarter and 6.1 million a year ago.

On a EPS basis that equates to a pro forma net loss per share of 10 cents compared to a pro forma net loss of 11 cents in the previous quarter and a loss of 20 cents per share in the prior year.

Now lets turn to the balance sheet.

We ended the quarter with 27.3 million in cash, up 21.2 million from a year ago, and down a mere 800,000 from the prior quarter.

In addition to effective cost management, we were able to enhance our cash position by successfully negotiating the risk of a restricted deposit, making $3 million available as a short term asset.

Our day sales outstanding came at a very respectable 69 days, up 6 days from 63 days in the first quarter, when we posted the lowest DSO since going public in 1997.

Following the dramatic decline in DSOs over the last five consecutive quarters, we continue to expect DSOs to stabilize in the range of 70 to 75 days.

As far as cash flow, net cash use in operations was negative $4 million.

Now, let me provide some guidance for the third quarter and the balance of the year.

Barring further deterioration of the economy, we expect to continue to capture market share over the course of the year.

With respect to specific revenue guidance, we anticipate being flat sequentially, with a slight increase in the fourth quarter.

This guidance is consistent with the adjusted guidance we gave earlier this month.

It represents a 15 percent decrease in total revenues for the year, and allows us to continue to capture market share.

In closing, we cannot control the IT economy, but we can control our cost structure and our strategies for building value.

Close management of expenses, DSOs, and cash are becoming a Mercator hallmark.

As a result, we enjoy one of the lowest cost structures in the industry.

With our vertical market leadership, core integration technology, expanding menu of industry solutions, and growing partnership programs, we're making strong progress.

Thank you.

Thank you, Ken.

There are some impressive numbers in your report and it clearly demonstrates the progress we've been making in our efforts to both improve the operations of our company while we launch a new business strategy.

Two metrics stand out among many.

One is the fact that we've been able to reduce our pro forma net loss by almost 50 percent compared to a year ago.

The other is that we've been able to grow our license revenue by 14 percent sequentially, considerably outpacing our peers in a down market.

We are proud of our accomplishments to date, and we are focused closely on what we need to do to become profitable in the future and gain market share through our differentiated business strategy.

These are tough times in our industry, but I am extremely confident that better days are ahead and that Mercator will be in a strong position to enjoy them.

We are excited about the significant steps we've taken, both to strengthen Mercator from an operations standpoint and to become a leader in reshaping the enterprise application integration industry.

We will continue to offer the very best integration technology available.

We will continue to bring new, higher value industry integration solutions to market that meet the unique needs of specific vertical industries, and provide clear ROI for customers and partners.

And, we will continue to aggressively pursue our partner strategies, not only with leading systems integrators to achieve wider customer reach, but also by embedding our technology in the offerings of application server and software companies in order to achieve higher sales volumes.

We have the team, the strategy, the customers and the partners to win and gain market share even in a difficult environment.

We look forward to reporting our progress to you as we reach our goals.

So, on that note, I'd like to open up the call for questions.

Operator.

Thank you.

At this time if you would like to ask a question please press star one on your touchtone phone and I will announce you by name prior to your asking the question.

Again, it is star one and for those participants that would like to hear a replay of today's conference call in its entirety, it is available on both the web and a telephone replay.

For the web portion the URL address is www.mercator.com.

For the replay -- audio replay portion the numbers are 1-800 391-9852 for domestic locations or (402) 220-9826 for international.

No pass code is required.

Once again, to ask a question, it is star one.

And our first question today comes from Neil Herman.

Sir, your line is open and please state your company name.

Hi guys, this is actually Dave Layman from Leahman Brothers.

Just if you -- if you look at the cash flow from operations, can you guys give us any color on what we should expect going forward and maybe when we expect to be breakeven and at what revenue level that might be?

And then maybe in conjunction with that, it sounds like the headcount reductions are complete, can you give us a time frame, I may be wrong there, and would we expect any more headcount reductions going forward?

Hi, Dave, how you doing?

Good thanks.

Okay, before Ken walks through some of the details on your question of cash, just let me help set the stage here and then address the question on where we are with the head count and restructuring effort.

We will continue, as we have in the past, to manage our operations and our cash efficiently and effectively here and we have really looked to the future where we have modeled the strategies that I've talked about through 2004 and based on the guidance that Ken just walked through, through 2002, and a continuation of the economic environment through 2003, with a modest pick up in the second half of 2003, we're well positioned in 2004 to really continue to gain market share with an industry that is much more attractive at a 15 percent kind of growth market.

So, I feel very confident of where we are relative to the way we're managing the business.

Where we are with our cash and where we are in executing our -- defining and executing our strategy through that 2004 period and Ken will walk you through some near term kind of objectives and where we see things.

Relative to the progress on the restructuring, I think it has happened swiftly.

It's something that we had planned to do as we rolled out the new business strategy and business model.

The restructuring effort is going well.

It's been communicated to everyone in the company.

Everyone at this point really has their marching orders and I'm really happy to say that our workforce understands and really agrees with the necessity for the change.

At this point, we've really been through about 75 to 80 percent of our scheduled cuts have already been effected and the remainder will be completed through this year.

So, Ken.

Dave, thanks for joining us this afternoon.

As far as cash flow is concerned, we've been very limited and not giving any specific guidance there, I will tell you this, we expect negative cash flow for Q3 as it will continue to be a difficult quarter.

However, in Q4 we expect to be able to see some of the benefits from a cash flow point of view begin to be realized as a result of the strategic realignment that was done of the organization and we expect to be substantially reducing the negative operating cash flow position by the fourth quarter.

OK.

Great.

And then another question, just, on the pipeline, can you talk about what you're seeing out there?

Maybe compare to, you know, the beginning of Q2 and you guys had a million dollar deal this past quarter, any comments on the pipeline for big deals?

Thanks?

Dave, our pipeline continues to be strong and just a word of caution there, it's stronger especially because of the new partner traction that we have but also the sales cycles in this environment have really elongated and there is many customers that are deferring their buying decisions.

But our pipeline remains exceptionally strong and robust given the new partner traction that we are getting.

Ken?

Just to add on to what Roy has said, our current guidelines, we've really pared down our assumptions on closing rates and increased as relates to coverage ratio because as you all know, sales cycles are being elongated, customers are deferring buying decisions and those that are making buying decisions are doing it in perhaps a phased approach.

All that being said, there is limited visibility in the current macro environment so we're continuing to be very conservative in our forecasting.

I will say that we've gotten off to a great positive start in the quarter with some large deals having already been closed.

Any of those deals a million dollars plus deals.

Not million dollar plus, but material deals nevertheless that would be in excess of our ASC.

OK.

Great.

And final question, if you could just give us an update from a regulatory position or activity that's going on around

in the healthcare business and the

and

in the financial services?

Sure, well as we noted earlier, our healthcare revenues remain exceptionally strong and there was a fall off in the financial services but it's true that

has temporally declined.

I think that is a result of the economy and certainly not the abandonment of

, which of course, is a settlement standard.

, global straight though processing and

are all aspects of the same thing, which is something that we do very well, and that's straight through processing.

I think from our perspective the

will now be focusing on

in other forms such as improved processing of institutional trades, electronic book entry to replace physical securities and payments, and also a range of other automation projects which address the processing of corporate actions, stock blending, syndicate underwriting and other operations functions.

So there is certainly plenty of work in all of that for Mercator in those areas.

In global straight through processing, the matching utilities for cross boarder trades will be coming in line very soon, possibly before the end of the year and there is certainly still plenty of

work that needs to be done.

Just to point out, Dave, you may have seen a press release from

which recently talked about the straight through processing seminar we held with them in New York a few weeks ago along with KPMG and Tower Group.

It was extremely well attended by leading IT decision makers from top financial institutions.

And

has sized the FTP market at $6 billion through 2005, so yes, we've seen a temporary decline on the financial services front, but we certainly expect it to come back very strong.

OK, great, thanks.

Sure.

Thank you.

, you may ask your question.

Please state your company name.

It's

Partners.

I have a question for Ken.

Ken, on the balance sheet under liabilities and stockholders' equity, there's an item, accrued expenses and other current liabilities, which increased from 18.6 million up to 25.4 million.

Could you explain that to me?

Sure, again, first of all, good afternoon, thanks for joining me and say hello to the boys.

You know, the accrued expenses went up by approximately $5.5 million dollars.

The majority of that is a timing issue, and that is, we had a payroll which went over the end of the quarter.

So between payroll, the associated taxes, and then a second item, insurance premiums, our premiums for our directors and officers and error and omissions policies all were renewed in the month of June but not paid out.

So you're looking at almost 60 percent of that 5.5 million that falls into those three items, payroll, the associated taxes, and the insurance premiums.

So I believe it's mostly timing items.

But how will that affect your cash?

Obviously, those are items -- some of those items are ones that are going to be paid out.

In the case of the insurance premiums, we've received financing on those insurance premiums.

You know, let me remind you, we had a fairly significant set of deals that closed, given that we're backloaded in the quarter.

So we've got a bunch of receivables that were put on the books at the end of the quarter and we will -- as typically, have a very strong collection quarter in the month following the quarter, as we are indeed realizing this month.

So most of that should be offset.

OK.

And you said your cash burn was going to be a little -- about $4 million?

No, I didn't put a number on it.

I said we will have negative operating cash flow for the fourth -- excuse me, for the third quarter.

Do you think it'll be more or less than the second?

I would put it in the range of plus or minus an additional $1 to $2 million of negative cash.

Got it.

OK.

And then I had another question which was on the departure of Bob Farrell and Eileen Garry.

I wanted to -- does that in any way relate to the cut back in personnel of 90 people?

, actually, Bob Farrell and Eileen Garry left the company for personal reasons ...

Both the executives had made what I think are significant contributions in their ...

What is your personal -- I mean, that standard, you know -- personal -- it had nothing to do with the company, then?

You know, I've wanted to -- since you've asked the question, I wanted to thank them for their service to the company.

I think it allowed us to really make a move with a very strong executive in

.

We have the opportunity to consolidate our worldwide -- under worldwide sales and service and customer

under

.

He certainly demonstrated his progress by growing Asia-Pac, putting the business model we need in place and he's already got a home and ready to roll here in the Americas.

He's already found a place here in Westport.

When did Bob

and

leave?

I would say last week.

I don't the specific dates.

Sometime last week.

OK.

OK, thank you.

Let me add one other -- I mentioned Mike

, Mike has actually worked with Dave in the past at

he's very familiar with the integration space and I think will help us build even stronger relationships between our marketing and our development organizations.

So he's a good addition to our staff.

OK, thank you.

Thank you,

.

Thank you, Dave Taplin you may ask your question and please state your company name.

Arista Data.

One for Ken and one for Roy.

Ken, I know you don't want to be too precise on the cash, and as you know, I'm ultra-concerned about the cash issue, based on, you know, your projections as best you could see them with your economic assumptions et cetera, et cetera, for this year, for next year, where do you see the low point in your cash?

Whether it be in the first quarter of next year, second quarter, fourth quarter this year, whatever.

I just want to get a feel from your point of view as to when you do your analysis, where is that low point?

At what level?

And then I have a question for Roy.

All right.

OK, Thanks Dave.

Dave, I applaud you for always asking, but as you know, I'm not going to give you a specific number but let me give you some

guidance from that perspective.

You're looking at the company, let's just talk historically first and then I'll give you an answer going forward.

From an historic point of view, recognize that I've been here four quarters.

The third quarter of last year we managed to have 200,000 dollars of positive cash flow -- excuse me, negative operating cash flow, 200,000 after having a cash burn that was approximately 12 to 13 million dollars for the first half of last year.

So we've made significant progress by having 200,000 in negative operating cash flow in Q3.

Q4 we generated 5.8 million of positive cash flow and the first quarter of this year we had, I believe, it was a negative 600,000 dollars of operating cash flow and it was just mentioned about Q2.

So, we've been extremely aggressive in managing cash, reducing our cash burn which year over year, let's not overlook, we had cash burns this year, thus far, the first half of a mere 900,000 dollars versus over 12 -- as I said, 12 to 13 million last year this time.

So I think we've been extremely successful.

I and my staff continue to be extremely focused on it.

That being said, let's talk about going forward.

Where do I see cash -- the toughest quarter on a going forward basis?

I've to tell you that the current quarter Q3, at this point in time, is the quarter that I'm most closely focused on.

As you know, seasonally the fourth quarter tends to be a very strong quarter.

Last year it's one where we were cash flow positive and therefore I'm -- I'm focused on Q3 as being the most difficult challenge that we have on a going forward basis.

That being said, our cash position, again, is approximately 27.3 million.

We've held our position relatively close within a million dollars for the last two quarters and I'm not losing a lot of sleep and I am focused on the business 24 by 7.

OK, fair enough.

Roy, you know, it's very

that you've gained a chunk of market share in the healthcare area.

I assume a good part of that change from the 18% to the 33% of the total is

related.

My question is on the gains in market share.

From whom, and if you could also shed some insight on the MRD area where you've increased your percentage, who are you gaining from in that area and even though financial is down, are you at least holding marker share in that area?

Yeah, thanks, Dave.

Let me just make an overall comment about our competition and then what I'd like to do is to talk, if I can, since you asked about MRD, and healthcare and about our solution strategy around there.

Our competition was pretty much the same as we have seen in previous quarters with the usual

players.

We saw some from SeeBeyond, we saw less of Vitria and occasionally webMethods or TIBCO.

So I think there were the usual suspects that were in there.

We're also in a market that this year, the integration market, I think total revenue, if you look at different analyst reports should be down 15 to 20% total revenue and even license revenue is down as much as 30%.

So it is a very difficult year in the integration market.

However, on a bright spot, the integration issues still remain one of the top business challenges for the enterprises today.

And one of the ways that Mercator is differentiating itself, is through the industry integration solutions that really co-exist with our core integration technology and in some cases like the announcement of

with

, it really shows how our technology works very well with

in fact, if you just allow me, if you didn't see the press release, we love the proof on concept, Dave, so when we get into it, that's where really win.

That's where we really demonstrate what Mercator can do.

And there was a quote in there from the CIO of

and I quote, "We selected Mercator to work with our

installation after a rigorous and competitive proof of concept stage, which Mercator completed with solid success.

In mapping, routing, transformation, and connectivity, Mercator demonstrated significant productivity gain."

So rather than me telling you what Mercator's power is in the market, I think it's best said through what this customer quote is.

So as we look to our healthcare market specifically, Dave, we will be creating complementary solutions that really leverage our customer's investment in

for long-term strategic business advantage.

So among those will be our healthcare hub, which is expected to be generally available in Q4 of this year and that healthcare hub will automate transaction processing and data management using a centralized repository to streamline business processes and reduce cost.

So to your point, we're actually going to leverage our customer base in health care and around

.

Relative to MRD, we just announced our data exchange solution which is actually a super EDI and XML hub for handling complex data transactions of logistics enterprises such as the one with

.

And then additionally, as I have mentioned before, we're completing a new supply chain visibility solution that handles replacement and fulfillment cycles by providing customers really, a single global point of view into inventory and supply.

And we expect that one to be ready by fourth quarter.

So, you can see how we're really making, I think, the necessary investments and commitment to our customers on our core integration technology, plus, leveraging our customer base, healthcare and MRD.

Financial services, we are also working on a global settlement solution for payments, and we'll leverage our

relationship, really to help large banks, custodians, and concentrators manage that payment life cycle using multiple external payment standards with protocols.

And we expect that solution, then, to be ready in Q1 of next year.

So your question triggered me into these areas -- sorry for the longwinded answer, but I think it's very important to understand where we are in these verticals and the importance of the industry integration solutions that we're -- that we have had in the past and that we're going better leverage in the future.

Thanks, Roy.

But I was also trying to get a feel of that substantial increase, as a percentage of total, was a good part of that related to HIPAA?

Where I'm coming from on a broader scope is, you've clearly had a gangbuster performance in the second quarter, you know, on the revenue side of the equation, certainly, compared to your peers.

It looks like, to me, that that was largely as a result of that increase in the healthcare area, and in particular, which is where my question is, if it as HIPAA related, given that you've got HIPAA going out certainly to, you know, third quarter of next year, with the extinction, and that's only on piece of HIPAA.

That, you know, if you've got that -- have garnered that edge in the HIPAA related area, you've got a good, three, four years cut out for you that -- in that area, so even if this whole IT spending sits in the doldrums for longer than any of us would like to, you should be able to keep your head above water.

If nothing else, because of HIPAA.

That's where I was coming from, so on the specific question for ...

I concur with your observation.

Really, HIPAA has led to insurance companies, and it's really a springboard, and we have, I think, a leading edge position in healthcare.

I also want to point out, though,

, that this quarter, we also saw a pick up as we look at our industry portfolio, in both MRD and healthcare.

And you did have a question about financial services and market share there.

I think financial services in general was off due to the economic climate that we're in and also some unique impact that is happening on Wall Street.

So I believe that we've been able to maintain our share on the integration space and financial services, it's down, and that we've been able to pick up in the other two areas.

OK, thank you, again, and we'll see you both next month.

OK, thanks a lot.

Bye, bye

.

Thank you.

, you may ask your question, and please state your company name.

Yes, this is

with

.

Hi,

.

Hey, how are you guys doing?

OK, how are you?

I'm doing well, thank you.

Good.

Just got a few questions here.

Just to clarify, Ken, your comment on the cash burn.

So are you saying for Q3 the cash burn would be

plus or minus 1.2?

In other words, a range of

to

?

Well, our

.

Plus or minus $1 to $2 million.

One to two.

$2 million dollars on top of the four.

On top of the four.

On top of the four, so I'm giving myself a wide range of between 2 to 6 million negative operating cash flow for the quarter.

OK, thank you very much.

And then, again if I could, for the components of the restructuring charge, were there any closed facilities included in that?

The restructuring charge in Q2, all right, that we're taking here, which is approximately 1.3 million dollars is almost exclusively relating to real estate where we've had to make some adjustments predominantly related to a corporate headquarters that had been -- a lease had been entered over a year -- year and a half ago to occupy space that the company, as a result of its series of downsizing beginning in the second quarter of last year, no longer had a need to.

And we had initially taken a charge in Q2, this is now making an additional charge we're relating to our -- trying to sublet that space which, unfortunately, is in the market where we're trying to sublet it, vacancy rates are approximately 30 percent.

So that's the Q2 charge.

Relating to the streamlining of the organization that we announced two weeks ago, we'll be taking a restructuring charge in Q3.

That restructuring charge is approximately a million 7.

That would be predominantly relating to employee related costs such as severance and out placement.

Yeah, OK.

That help you.

Yeah, that's very good.

And then just going forward on a pro forma basis, operating expenses, so not including

but a G&A, R&D, sales and marketing, do you think you can achieve pro forma less than 22 and a half million by the end of Q4?

Let me hold off on that one.

I'm not going to commit to a specific number.

Well, that's why I was giving a, you know, under than.

But, recognize, we've had six consecutive quarters where if you take

s as well as operating expenses, I really think you need to look at them both.

We've been able to consecutively reduce our total expenses six consecutive quarters.

That's a pretty powerful track record.

Something that we're proud of.

It's been a lot of work.

I expect that to continue as a result of the restructuring efforts that we have.

And to get back to the question from Dave Taplin before about, you know, do we have enough cash there?

Recognize that we've been very aggressive in streamlining the organization.

We believe we've got the lowest cost structure in the industry of our direct competitors.

We've very stringent with the payment terms that we offer out there.

We're not doing 180 days and things like that that we've seen some of our competitors doing and we've been extremely aggressive from a cash management or receivables collection point of view.

All that, again, leads us just to be able to be relatively judicious with our cash flow.

Yeah, no I understand.

OK and one sort of last financial question, any guidance or what should be think about with respect to gross margins going forward?

Obviously, we've made some great progress in this quarter getting back to an approximate 70 percent range and that was driven predominantly by two factors.

One being the 14 percent sequential increase in license revenue.

The second is, we made some good progress with our professional services where we had a fairly respectable quarter from a gross profit margin point of view on the services side.

Given the fact we're talking about sequentially flat revenue going to Q3, at this point in time, I don't want to set expectations beyond saying, continuing to maintain a gross profit margin at approximately the same level.

Yeah, OK.

That's ...

In Q4 where we said we expected to be up slightly as far as total revenue, I would hope that there be some opportunity for upside above the levels we're at today.

Yeah, that makes sense.

OK, very good.

And then just my final --

And also, just, you know, one of the drivers behind the gross margin, of course, is Mercator's a software company ...

Yes.

And focused on the integration needs in our vertical markets and as we shift our business model to also focus on the software through partners that we're driving whether it be imbedding our technology or industry software in the areas that I just mentioned, that drives an increased percentage of software and our mix, which also I think is a very important driver of our gross margin.

So our ongoing business model clearly, is to recognize software, Mercator is first and foremost a software company that's driving the integration solutions for our customer.

Yeah, very good.

Roy, then my last question, if I can, is to you, and can you just talk about the deals that you have, and you gave the number, how many of those were contested and what was your batting average in those?

Are you talking about the 44?

Well, overall, just a recap on the numbers.

There were 44 customer deals that we highlighted and 81% came from existing customers and in some of those cases, in some of those cases, there was a competitive bake off, if you will, and I'm happy to say that when we do get in the proof of concept like we did with

, we will win 90% of the time, if not greater.

I'm being conservative.

We love proof of concept and bake offs.

Then the other 20% on new customers is where we saw the balance of the competition and when we're in proof of concept again, we find ourselves in a very good position and where we haven't, where we're not in those proof of concepts, we will win, half the time, but we really want the proof of concept and I think that in this environment, customers are really trying to demand that more.

So, it's an environment that's conducive to Mercator.

OK.

Well, thanks very much and good luck.

Sure.

Thank you.

Paul

, you may ask your question and please state your company name.

Good afternoon.

A couple questions, one, I just wanted to get some clarification regarding the couple things, the contribution from the financial services business, if you can give that from a license perspective.

And then, the second question, your comments regarding the global straight through processing, if the mandate for implementation is relaxed -- I didn't understand.

Did you say that there were other avenues of business within those firms that were contemplating bringing you on to ensure that they were going to be compliant with global straight through, that there were other avenues of business for you within those same prospects, I guess.

Could you respond to those?

Yes, that's exactly what I said.

And relative to our license, to our revenue and financial services, it was 23% of the total in Q2 versus what it has traditionally been is closer to 40%.

OK.

Just as a follow up.

Did you have any customers that, I guess, saw this coming with regard to the relaxed mandate and deferred purchases?

Well, I believe so, you know the bottom line is that straight through processing does cut costs.

So there are other avenues there.

You'll notice that in the last, towards the last -- there was a pilot for global straight through processing that, where 12 companies out of 32 or 33 made decisions on their integration player and Mercator was selected eight out of 12 times.

Now, first and second quarter, any new GSS deals have really been delayed and other avenues being pursued.

However, the straight through process needs, as I mentioned, when BEA sizes this market at 6 billion, and others plus or minus a billion of that number, it's a huge opportunity.

And one that Mercator has not only domain expertise around, but also are partnered with the right people, and have the right technologies to address the straight through processing need ...

So, so ...

... so strong in financial services, just bear with me for a minute, financial services that we're extending that into our healthcare vertical.

OK, so incrementally, going forward, do you envision that you can get business from existing of those eight, or prospects, potential prospects as well, that you're brought in for some other work.

I'd say yes to both, especially as our partnerships with technology companies like BEA, and our SIs like KPMG and Accenture continue to grow.

OK, great, thank you very much.

So it's both.

Thank you very much.

Thank you.

, you may ask your question, and please state your company name.

Partners.

Roy, with respect to BEA, are they going to -- will you partner with them over all your verticals, or are they specialized in any certain verticals, financial or HIPAA or what?

Well, they do have a very, very large sales force that is deployed geographically and by industry, and we have made those linkages in our deployment plan.

We are all across the verticals of MRD and financial services, we're first.

You'll note that we have been working with BEA and through some SI partners prior to that formal announcement being made.

So within the last six months, we have gained some traction with BEA.

I know that healthcare is next, and you'll see that while the momentum first started in financial services, the first deal that we were able -- that we closed with them, was in MRD with APL.

Right.

So while it's -- once our sales force starts working together for larger value propositions for the customer, and they see the power of the combined technology in APL, we can leverage the existing DEA systems that are there.

It just makes for a powerful combination, and that's the kind of traction we're getting with them.

And Ken?

And let me just add, you know, we've talked about BEA, but obviously we've got relationships with other application server software companies today, and we're continuing to pursue even other ones that will give us much greater reach and breadth out there in the marketplace through leveraging their sales force.

Yes, the

relationship, of course it's newer, and we don't have as much history in working with

.

However, I can tell you that we're engaged right now in building that relationship and working on a deployment plan which does exactly the same kind of thing with Seebil that we're doing with BEA.

So these aren't -- they're not exclusive agreements, but clearly need to be driven from a customer market perspective, and we're excited about both.

And as Ken said, there are others on the horizon we're working on.

It's a key part of our strategy.

Are you gaining good traction with Accenture?

Accenture -- Accenture has started in the healthcare.

You may know that as the SIs have gone through a very tough services business, they too are in the process of reorganizing and doing -- conducting their business differently, so our traction has started with

.

It's primarily

and we will be working closely on this healthcare hub that I had mentioned earlier.

OK, thank you.

Thank you.

And as a reminder if you'd like to ask a question press star one.

At this time I'm showing no further questions.

OK, well, Ken and I would like to thank you for joining us on the call, we look forward to our next review with you.

Take care.