International Business Machines Corp (IBM) 2002 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Mercator Software Conference Call.

At this time, all participants will be on listen-only mode.

This call is being recorded.

If you do have any objections, please disconnect now.

Later, we will conduct a question and answer session.

You will be instructed on how to participate at that time.

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

This call is being webcast.

The URL for that for that is "www.mercator.com."

Both web and telephone replay will be available after the call.

The replay number is 888-473-0134 for domestic locations and 402-998-1355 for international locations.

No pass code is required for the replay.

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

Thank you, sir.

You may begin.

Thank you, operator.

Welcome to Mercator's conference call to discuss our final results for the third 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 the future operating matters.

The company wishes to caution participants in 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 third quarter of 2002.

Now, before I ask Mercator's CFO, Ken Hall, to take you through the detailed results of the third quarter, I'd like to just put the quarter into perspective.

We had a difficult quarter in a very difficult IT spending environment.

At $8.3 million, license revenue was well below our expectations.

Fortunately, this was offset to some degree by our maintenance revenue, which grew sequentially by 12 percent resulting in a total revenue shortfall of 6 percent.

Results of the third quarter followed a relatively successful second quarter.

Over the course of 2002, though, we have experienced inconsistent and increasingly back-ended loaded quarters in which the timing of one or two deals can make all the difference.

Although, we cannot say with certainty when business conditions will change for the better, we will continue to position ourselves to take advantage of the turnaround when it happens and we will continue to take the actions necessary to manage our operations and our cash.

We are focused on reducing expenses, while serving our customers and partners.

During the past nine months, we've cut total proforma expenses by 19 percent compared to the same period last year, while our revenue has declined by 15 percent year to date.

We have made a commitment to bring our costs in line with revenues without hindering our ability to serve customers and partners, and need to do more to that end and to better align delivery capacity with customer demand.

We're implementing approximately $15 million, a new annual cost cutting initiatives aimed at further reducing our cash burn.

These initiatives will reduce our global workforce by roughly 20 percent to a level below 450 employees.

In addition to these significant cost reductions, we have frozen all management salaries, until the integration market and our business improve.

I have also set a target for Mercator to be EBITDA and cash flow positive by the second quarter of 2003.

While we're disappointed in our third quarter financial results, I would be remiss [ph] if I didn't mention some of our achievements in the third quarter.

We enhanced our core Integration Broker Technology with JCA Gateway and other products.

And we announced Mercator Version 6.7 in the third quarter, featuring a number of enhancements for Web services, B2B and Java-based integration among other critical integration functions.

We also launched two new solutions, Healthcare Hub and GSS for Payments.

A vertical integration solutions for the healthcare industry, Mercator Healthcare Hub was launched with a beta customer, Vytra health systems.

Mercator is expanding its healthcare business beyond HIPAA with Healthcare HUB.

A solution that ties together all the transaction points to process claims faster and more efficiently.

Mercator GSS for payments is the financial services solution that delivers straight through processing to connect diverse payment systems.

GSS for payments, attracted many interested perspective customers at the recent Siebel's [ph] Convention in Geneva where we also closed the deal on the floor with a European Bank.

Additionally, a major international bank headquartered in Europe has already signed a deal for our new payment solution in the fourth quarter.

We continue to also make progress in our partner strategy both with systems integrators and technology partners.

Our strategic alliance with Bearing Point previously known as KPMG Consulting is especially notable.

In Q3, we continue to partner on implementations for major customers including a global fast food franchise.

And we just recently we concluded an important resale agreement with Bearing Point that will allow Bearing Point to directly offer Mercator integration solutions to our mutual customers.

We're already co-marketing to identify joint Mercator-Bearing Point customer prospects.

On the technology partner front we renewed and expanded our OEM relationship with Boston Software and with BEA we added two more mutual customers since announcing our alliance in June.

We will continue to execute on the company strategy of enhancing our core integration technology, leveraging our vertical integration solutions, and partnering with systems integrators and technology companies to better serve our customers.

Our management team is also committed to achieving our cost reduction and EBITDA objectives while selling Mercator's strong assets in the market.

Now I would like to ask our CFO, Ken Hal to take us through the detailed results, Ken.

Thank you Roy.

As Roy said, we're experiencing a very tough IT spending environment resulting in inconsistent performance in terms of revenue.

We reported total revenue of 25.3 million, 6 percent below our guidance and a posted net loss per share on a proforma basis of 9 cents.

We continued to focus on cost management in the quarter.

We were able to reduce our total proforma expenses again both sequentially and year over year to $30.4 million.

Now lets take a look at the P&L.

Looking at the revenue by line of business license revenue represented 33 percent of total revenue for the third quarter compared to 40 percent in the second quarter and 52 percent a year ago.

License revenue for the third quarter was $8.3 million compared to 10.9 million in the second quarter and 18.6 million a year ago.

Year to date, Mercator's license revenue has declined 33 percent, which on average is comparable to the rest of our peer group.

Professional services revenue was 6.8 million compared to 6.9 million in the second quarter and 8.6 million a year ago.

Maintenance revenue of 10.2 million was a bright spot in the third quarter, and it was up compared to 9.2 million in the second quarter and 8.5 million in the third quarter last year.

This is largely the result of improved maintenance renewal rates from satisfied customers, which grew sequentially to 91 percent from 82 percent.

Now by geography, revenue for the America's business unit represented 64 percent of total revenue compared to 60 percent in the second quarter and 65 percent a year ago.

AMIA [ph] revenue has remained constant as a percent of total revenue at 31 percent for the third quarter of both 2002 and 2001, as well as the second quarter of 2002.

Asia Pacific revenue fell off sharply contributing to just 5 percent of our overall revenue compared to 9 percent in the second quarter and 4 percent a year ago.

We believe both Europe and Asia Pacific have been strongly affected by the downturn in financial services projects.

The revenue composition of our vertical industry portfolio was distributed more or less equally among healthcare, financial services, and manufacturing, retail and distribution or MRD as we call it.

Healthcare represented approximately 26 percent of license revenue versus 33 percent in the last quarter.

MRD represented 24 percent of license revenue versus 30 percent last quarter, and financial services represented 26 percent of our license revenue compared to 23 percent last quarter.

In the third quarter, we had 37 transactions valued at $100,000 or more including one deal valued above $1 million.

That compares to 44 such transactions in the second quarter including one deal valued above $1 million.

Average sales price is a highly sensitive metric in this economic environment with the ability of one large deal to make all the difference.

For the third quarter, ASP of deals valued at 100,000 or more within our verticals was approximately $262,000 compared to approximately $286,000 in the second quarter.

License revenue from our partner channel represented 36 percent of our total revenue compared to 33 percent in the previous quarter.

Approximately, 83 percent of our license revenue came from existing customers with the balance representing new customers.

Proforma gross profit margin, excluding amortization of intangibles and a stock option repricing benefit, was 70.1 percent.

This compares to 69.5 percent in the second quarter and 73 percent a year ago.

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

Total proforma expenses, which exclude amortization of goodwill and intangibles, stock option repricing benefits, and charges relating restructuring, were 30.4 million compared to 32.3 million in the previous quarter and 37.5 million a year ago.

This quarter represents seventh consecutive quarterly decline in total proforma expenses.

We have reduced our expenses by 19 percent year to date compared to a 15 percent decline in total revenue in the same period.

Now, let's break out our expenses by category.

Research and development expense was 5.8 million, up 11 percent compared to 5.2 million in Q2 and 4.5 million a year ago.

Sales and marketing expense was 11.3 million, which is down 5 percent compared to 11.9 million in Q2 and down 30 percent compared to 16.2 million a year ago.

D&A expense was down 5 -- excuse me, G&A expense was down to 5.7 million as compared to 7 million in Q2 and down 22 percent compared to 7.3 million in the third quarter a year ago.

Our proforma EBITDA was a loss of 4 million compared to a loss of 4.3 million in the second quarter and a loss of 700,000 a year ago.

Our proforma operating margin was a negative 20.4 percent compared to a negative 19.9 percent in the previous quarter and a negative 5.2 percent a year ago.

Comparing the first nine months of 2002 to year ago, we have reduced our proforma net loss by 31 percent or $4.6 million.

Now, assuming a tax benefit of 38 percent, our proforma net loss was 3.2 million in the third quarter compared to 3.4 million in the previous quarter and 1.2 million a year ago.

On an EPS basis, that equates to proforma net loss per share of 9 cents compared to a proforma net loss of 10 cents in the previous quarter, and a loss of 4 cents per share in the prior year.

Now, these results include 1.2 million from the reversal allowances for bad debt, litigation reserves, and legal fees based upon actual settlement of certain legal disputes, fees, and collections of accounts receivable on terms more favorable than expected.

Please note that the reversal of these items does not reflect the proposed settlement of the shareholder litigation announced earlier today.

Now, let's turn to the balance sheet.

Day sales outstanding came in at 56 days, down from 69 days in the second quarter and 78 days a year ago.

As far as cash, cash is a concern to shareholders, board members and management.

We ended the quarter with 20.2 million in cash, down 7.2 million from the previous quarter but up 12.9 million compared to a year ago.

Net cash used in operations in the third quarter was negative 7.3 million, compared to 4.0 million in the previous quarter and 200,000 a year ago.

Now, let me address guidance.

Clearly, we're in the grip of very -- of a very tough IT spending environment.

The budgets are tight, and purchasing decisions are being put off until the last possible moment.

Although there are more seven-figure deals in our pipeline today than we're seeing in several quarters, we have to assume that the difficult conditions will persist making continued aggressive cost-cutting measures necessary.

To that end, we are reducing our global workforce, as Roy said, by roughly 20 percent to a level below 450 employees.

We will achieve these reductions by closing unproductive offices overseas, by reducing under performing sales and services positions, eliminating unprofitable products, and by outsourcing non-core parts of our business.

Additionally, we are freezing management salaries until the IT market and our business improve.

These actions are aimed at reducing our total expenses and helping us conserve our cash so that we can achieve positive EBITDA and cash flow by the second quarter of 2003.

Now, we will continue to study ways to align our expenses with revenue in order to ensure that we achieve positive EBIT and cash flow by the second quarter of target.

As to our cash position, we do not expect cash and cash equivalents to fall to the low levels of approximately 6 million we experienced last year.

As to revenue, 79 percent of our license revenue closed in the last month of the third quarter versus 65 percent a year ago.

This trend makes the visibility murky to the point that we're not comfortable forecasting the fourth quarter.

We're, therefore, withdrawing our revenue guidance for the fourth quarter.

Roy.

Thank you, Ken.

We will take all appropriate steps to conserve our cash and bring our expenses in line with our revenue.

This includes the new cost reduction activities, avoiding cost increases in 2003, and focusing more sharply on our core integration technology, our customers, and strategic partners.

A year ago, we had $7 million and average quarterly expenses of approximately 37 million.

At the end of the third quarter a year later, we're reporting 20 million in cash, a significantly lower cost structure, and a stronger product portfolio.

I, too, am a Mercator shareholder; and I assure your frustration, when I look at where we were trade -- where we're trading right now.

Our management team is committed to achieving our cost reduction and EBITDA and cash flow objectives.

We're committed to realizing greater value inheriting our technology, our customers, and our industry integration solutions.

I look forward to sharing our progress with you.

At this time, let's open it up for questions.

Bryant [ph].

Yes.

At this time, if you'd like to ask a question, press "*" "1" on your touchtone phone.

You will be announced prior to asking your questions.

Once again, that's "*" "1" to ask a question.

Please hold for our first question.

Once again, if you would like to ask a question, press "*" "1" on your touchtone phone.

That's "*" "1" to ask a question.

Our first question comes from Dave Kaplan.

And please state your company name, sir.

Arista Data [ph].

At your low point in the second quarter of next year, what are you assuming for revenues, and Ken, can you quantify it a little better albeit, if not accurately on the low point of the cash position.

I know you said it would be -- wouldn't be as low as the 6 million of a year ago.

But can you quantify that a little better or atleast, you know, even if you have to bracket it a bit?

And then the third question is the license revenues of healthcare dropped from the 26 -- to 26 percent from 33 percent, if I understood it right.

What was the reason, was it a shifting, you know, into an ASP?

Was it just stuff that was supposed to take place and didn't take place and got deferred and maybe even closed in this quarter?

What was the reason for the drop?

Dave, thanks for your questions.

Before Ken gets into addressing the cash questions, let me take revenue overall and specifically in healthcare.

David, as you know, the year to date licenses in the industry -- in the integration market in general are down over 30 percent, and we're clearly right in the middle of that pack.

And in this difficult IT economy that we have, I think, healthcare was just as we have seen with, you know, with MRD and across our portfolio of verticals.

There wasn't anything unique that caused the healthcare to be a lower percentage of our portfolio.

I think it's a very difficult IT climate.

And Ken had mentioned that, you know, 79 percent of our revenue had come in the last month.

And when you peel the onion on that one, it's actually in the final days.

And so, I know, that we are out hard trying to close the business in our respective verticals.

We've reorganized the company to address the verticals to sales and opportunities including our presales.

But I don't think its anything that's particularly unique to healthcare there, Dave.

I think that we do see a lot of strong customer interest though in our recently launched solution, the Mercator Healthcare Hub, and there's still activity around HIPAA.

Our partners too still see, you know, the pipeline and interested customers in that area of the business.

Well, you know, given that you're very heavily oriented in the payer [ph] marketplace, and the payors in the light of HIPAA are spending money.

And I was just curious as to why the drop off in the quarter.

Now, was it that, you know, there was the slower business, and as you've mentioned that you were down to the last days and last hours to close but some of that slipped into the -- into this quarter, or was it a shifting because from everything like I see, you know, you at the results of first consultants and the others that are geared to having a HIPAA or HIPAA related product, the business has been okay.

And, you know, the drop-off from fourth -- from third to a second was surprising.

Yes, Dave.

There wasn't anything significant in the healthcare as opposed to the other industries.

Okay.

Hi Dave, regarding a question about cash position.

I know you have been waiting patiently for us to give you guidance on that.

Hopefully, you recognize we put a stake in the ground here saying that we expect to eliminate our cash burns by the second quarter of next year.

Let me give you some flavor around that.

Okay.

We are announcing today approximately $15 million as an annualized expense savings that we're in the process of beginning the implementation of.

We forecast this which will allow us to become cash flow positive as I said, but let me point out a couple of key data points for you.

As we go forward, we expect that we'll be recognizing a restructuring charge of approximately $3 million associated with that.

As a result of that restructuring charge, the prior guidance I had given saying that Q3 would be our worst cash burn quarter, I have got to revise that because there will be charges and cash associated with those restructuring charges that will occur in Q4 and somewhat in Q1.

So, I expect it will get slightly worse before it gets better that being the fourth quarter will be slightly worse.

But again, we expect that the level of our cash position will be above those levels that we saw last year which was approximately $6 million to $7 million.

As far as the revenues that we are looking at, we are expecting the first quarter to be the most difficult quarter that this company has seen in the last couple of years in that regard.

So, that we factored that into our model.

The first quarter of next year, did I hear you say that?

That is correct.

And you are expecting an improvement in the second quarter, sequentially.

Dave, at this point, we are expecting 2003 to continue to be a very difficult year.

We have not seen any signs just to lead us to believe otherwise.

Okay.

Okay.

Thank you.

Thanks, Dave.

Our next question comes from Peter Richard and please state your company name.

Yes, Empire Capital.

I have the same concerns or questions about cash and where it's going to bottom out.

The guidance is slightly or greater than the $67 million it was a year ago; left a wide range between that level and the current 20 million.

But the -- times that fourth quarter burn and some tapering off, I assume, in the first quarter leaves us -- sounds like somewhere below 10 million is that right?

Peter, I can only repeat what you have already said.

I expect it to be above the 6 million to 7 million levels that we're seeing historically.

Okay.

Okay.

Can you give some color on the 24 percent fall off in license revenue this quarter compared to some of the competitors that all saw flat license revenue quarter to quarter?

Peter, I don't see it as anything specific to Mercator.

Our year to date license revenues for -- you know, for the industry here, as I mentioned earlier, are down about 30 -- 31 to 33 percent and we're clearly -- you know, we're clearly in line with that.

I do think that some of the -- some of our competitors took a hit in the first quarter, some in the second quarter.

We happen to take our hit here in the third quarter.

But I can tell you, our customers, that we do have and the leads that we're pursing as Ken just mentioned in the multimillion dollar deals that we have in the pipeline would see Mercator software as adding value to their business.

So the fact that we're sitting here allowing some differentiated product that allows transaction rates and interoperability and a level of platform independence that's different than our competitors, I think is differentiated in the market.

Its, frankly, that the IT climate is so difficult now and the sale cycles have extended and everyone's quarters are getting backend loaded.

That's the reality of the market.

But I think -- don't think that it's anything unique here to Mercator's product or our business.

Okay.

So there's just -- that the pain suffered by you this quarter may come to others in future quarters?

I think some of it already have and some of it may have in the future.

That's correct.

If you look at the performance here, we also were often AMIA and Asia Pacific more than we had anticipated, and we're working the distribution models and other things that we have going across our industries.

Some of our competitors did a better job, frankly, in those specific geographies, and I think when you look at the Americas, we clearly -- you know, we're clearly holding our own and maintenance overall was up.

So that's kind of the net to net of where we position.

So as we look to, you know, where the senior management -- where do we really take a look at how to achieve our expense reduction plan.

It's really got to be focused on exiting under performing products as Ken said, the unprofitable products, closing offices frankly that are just not performing up to the market conditions, outsourcing non-core functions, and making sure that we bring our cost structure even further and more in line with revenues.

If you take a look back year, Peter, about, you know, just the last couple of years and you say where is our revenue gone and how does that compare with headcounts from operating expenses?

And just take a look at it.

Our revenue over that two year period of time is probably going to be down anywhere from 22 to 24 percent on the order of magnitude.

And our headcount, however, when we started at that period was around 815 which says when you look at driving this business down below 450, it really says we've taken our headcount nearly in half, 45 to 50 percent in half while revenues could be down a quarter.

I am just using round numbers...

Right.

...so you get an idea of the magnitude.

Our operating expenses over that period of time probably down to 30.

So, I think, that we understand that we're working on smaller footprint.

We need to do more with lowering our cost structure.

And I think -- I'm confident that we see ways on how to achieve that 15 million in fact we're starting tomorrow to -- as I get on an employee call to make sure that we direct those cost reductions in the right way.

Yes.

And still remain in a better position to serve our customers and partners in this difficult economy.

Two other things is presumably by the wide margin of the license revenue miss, there's some deal that fell through at the end of the quarter that didn't close.

How is this first month gone for you?

We had, I think, we said on the last -- I'm trying to recall what we said on the last call.

There was actually one, you know, one particular deal in the manufacture, retail, and distribution -- in the distribution space that was actually a part of the global deal that actually closed in the first few days of the fourth quarter.

That could have gone, you know, that could have gone either way.

There is other things in the pipeline that were, you know, that we're working on, but I don't think it's materially changed from what we have seen in the third quarter and other quarters.

So...

I think it's going to be just as backend loaded this quarter as it was last year.

So, we assume it was 10,10, 80 [ph] month a quarter -- last quarter.

There is nothing that didn't close last quarter that came substantially through in the first month of this quarter.

Peter, we have carry over that consistently will occur from quarter to quarter and this quarter it's probably not any materially different than last quarter was.

So a 10, 10, 80 [ph] kind of a track again?

That's what we're anticipating, given we're 3.5 weeks to 4 weeks into the quarter, yes.

Okay.

Thank you.

Our next question comes from Bob Moriarty [ph] and please state your company name.

Yes Twin Oaks Partners.

The R&D line, Ken, I saw it looks like it's spiked up and just wondering if you could put a little color on that and let us know how that's going to trend and whether that's going to be impacted by any of the anticipated cost cutting?

Yes, Bob, as you know we've made enhancements to the core integration technology that I mentioned, that I highlighted and we were also involved with launching two new solutions and there was an announcement, I believe, today wasn't that Jonathan, on supply chain visibility.

So, there were three new solutions that Mercator has come out with in the recent weeks all driven through, you know, customer demand and that was the reason that you saw an up tick in the R&D expenditures.

Now, the headcount reductions that's announced today will in fact affect all departments and include R&D.

But Mercator will retain all the resources that we feel is necessary to provide, you know, the real value to focusing on our core integration technology and focusing on the new solutions that we just launched.

Through the cuts that we're taking, I have mentioned before that there is vertical integration solutions that we had on the drawing board for 2003.

I can no longer make those commitments that new solutions will be coming out in 2003 under these marketing conditions.

We have to prove that the three that we just launched, but the enhancements we're making in our core integration technology makes sense to our customers and our partners.

So, Bob, I think, the temptation in the market is to try and be all things to all people and really serve as many different industries as possible.

And I can tell you that I feel the need, right now, in this market to really sharply focus on our core integration technology, our core vertical solutions and our core industries and frankly, we doubt any products that just aren't making money.

Now it's the time to make sure we improve under performing assets, products and focus on that which can create a strong foundation from Mercator going forward.

Okay Ken as -- in terms of an absolute number, can you give us any idea where that might trend down to?

For R&D?

Yes.

We're still in the stages here of finalizing our plans to implement the cost cutting and as Roy said, it's going to cut across all boundaries.

You know, I am -- at this time, we are not able to tell you exactly to what extent that will hit R&D.

I can assure you any R&D cuts, and working with David Linthicum in the team we'll not hit adversely any core integration or new solutions that we're -- we have come out with.

What it will impact is any future new industry solutions and any under performing products that just don't make sense in the markets that aren't producing the revenues that we need.

I think that's prudent to do.

Yes.

Fair enough.

And then, Ken, I'm interested in your commentary on the first quarter of '03.

And what is -- what do you see -- what are you basing your commentary that it could be most difficult quarter?

And how would it differ from say the fourth quarter, you know, '02 that we're in now?

Is there something materially different that you see?

Or is just a lack of overall visibility?

It's a combination of things.

Clearly, you know, lack of visibility, which is contributing to us taking guidance off the table for Q4, is one of the items there.

Secondly, you always have seasonality, which is a major contributor in the first quarter.

And then lastly, it is -- you know, we honestly have not done a very good job at being able to manage and forecast our revenues.

We recognize that.

We understand their frustration.

We are frustrated ourselves, and we're therefore taking an even more conservative look [ph] than what we thought we previously had already been taking in that regard there.

With the situation that we're in, from a cash point of view, we can't afford not to hit our numbers going forward.

And then, I guess just finally this maintenance line item, what does that tell you, if anything positive or negative about what's going on out there in the customer base?

Yes.

Let me say maintenance line item.

Our maintenance revenue was up, our renewal rates were up as well from about 82 to roughly about 91 percent for the quarter.

What is that telling us?

A couple of things.

It's telling us that we get customers that are out there that are utilizing the products and need to upgrade their products, and they're coming back to us, and making sure they are in compliance from a maintenance and service support point of view.

It also tells us that some of the customers that are willing to pay for our upper end maintenance service out there, and it's an extremely profitable product line for us.

So, maintenance to us, as I think, is one of the few bright spots that we saw on the revenue side in the quarter.

And we're confident that we will see some continuing renewal rates at an encouraging level going forward.

I can also tell you that after being with some customers in Europe and in the States and meeting with global CTOs and CIOs that are utilizing Mercator and we're working with them, they expect us to be there with them and helping to maintain, you know, their products and Mercator's assets.

So it's very important piece of the business.

It's important to them at that level.

And it's good to see the renewal rates, you know, trend up from -- than what we'd seen in the previous quarter.

All right.

Okay.

Well, good luck.

Thank you.

Thanks, Bob.

Our next question comes from Peter Richard.

And please state your company name.

Yes.

Hi.

It's Empire Capital.

One thing I forgot to ask you about, before, was -- Ken, you'd mentioned the freezing of management salaries?

Yes.

Yes.

What does that entail?

What we have -- the plan that we typically have in place, Peter, is that, every year, we review management's performance in their respective function and consider merit and increases relative to promotion or year performance.

And we do that on an annual basis and make them effective -- I think it's February 1st -- somewhere between February 1st and March 1st.

So what we're saying is all the management employees of Mercator will -- salaries will -- there will be no increases until we see a return to the IT spending market and our -- improve our business performance.

So we're trying to do a couple -- we're trying to do a couple of things.

One is to not only reduce cost but to avoid future cost increases.

And we don't think it's appropriate to take those salary increases in management, when both the IT spending market and the business performance is -- doesn't justify.

How is the partnership program going?

I think the partnership program is going very well.

It's going very well with selected partners, like KPMG, and on companies like BEA, and Siebel Alliances are going well, especially, while considering the time that it takes to build productive relationships in the field.

In fact, we signed four joint BEA-Mercator deals since its inception.

The relationship in the pipeline of the joint deals does continue to grow nicely.

So those relationships, in particular, are building; and there's other partnerships that we are actively working on.

So I think that's a very strong component of Mercator's business model and will remain important.

And do you break out what percentage of this quarter's revenues it came from?

It was 36 percent versus 33 percent last quarter.

Okay.

At this time, I show no further questions and I'd like to turn it back to Mr. King.

Okay.

We thank you for being with us today and look forward to sharing our progress with you.