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Operator
Thank you.
Operator good afternoon of afternoon, ladies and gentlemen and welcome to the Mercator Software conference call.
At this time all participants is in a listen only mode.
This call is being taped.
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Later we will conduct a question and answer session and you'll be instructed how to participate at that time.
Before I turn the call over to Johnathan Cohen who is the Vice President of Corporate Communications for Mercator Software I'll address some administrative details.
This call is being web cast.
The URL is www.mercator.com both a web and telephone replay will be available after the call.
The net replay number is 888-567-0405 for domestic locations or 402-998-1779.
No pass code is necessary.
Mr. Cohen you may begin.
Johnathan Cohen - VP Corporate Communications
Thank you operator.
Welcome for Mercator Software's conference call to discuss our fourth quarter and full year 2002 results.
With me are Roy King and Ken Hall, who will make 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 the future company -- about the company's future performance.
And certain responses to questions posed to company officials about 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 & Exchange Commission.
And now, I'd like to turn the call over to Mercator's chairman and CEO Roy King.
Roy King - CEO
Thank you, Jonathan and thank you for joining Mercator's conference call to discuss the final results of the fourth quarter and for the full year of 2002.
Before I ask Mercator's CFO Ken Hall to take us through the numbers in detail I'd like to provide some perspective on 2002, and describe our objectives for 2003.
We generated $32.3 million in revenue in the fourth quarter of 2002.
Of which, 51% or $16.4 million came from license sales.
Solid revenue performance and strong operations management allowed us to post pro forma net income of $1.5 million and achieve positive cash flow of $1.6 million in the quarter.
In addition, to increase total revenue and license revenue, our deferred revenue increased in the fourth quarter by $4.7 million, to $24.5 million, our largest ever deferred revenue balance.
A key feature of the quarter was the return of several million dollar plus contracts.
Of the 40 customer contracts in the fourth quarter valued at $100,000 or more, three were valued at more than $1 million including Home Depot, the state of Illinois and a large telecommunications company.
This telecoe customer is standardizing on Mercator across its enterprise to integrate billing systems, B2B applications and XML applications.
In addition to closing several million dollar plus customer contracts the quarter had other significant highlights.
While the financial services sector has been weak throughout 2002, Mercator continued to generate business with established financial services customers in need of integration improvements for swift and other systems.
Mercator software helps to process billions of dollars of swift traffic on a daily basis making us a clear global leader in facilitating swift message exchange.
This week, we announced a new comprehensive swift net migration program for our customers using Mercator, financial institutions will be able to implement their required migration to swift net by 2004.
Looking at other areas of our financial services activity, we began implementation of Mercator inside payments, our most recent industry ready integration solution with a large global custodian bank.
Our FS customers in the fourth quarter included AB and Amro, bank of New York, Credit Suisse asset management, Deutsche Banc, the European Investment Bank, Harris Bank, the UK asset manager M&D and U.S. Bank.
An estimated 40% of London securities transactions through Creft [ph] the central securities depository for the U.K. and Ireland are powered by Mercator.
Additionally eight of the 12 GSTPA pilots that chose a vendor solution selected Mercator and 100 international banks, 70 investment managers, 40 broker dealers and ten global custodians rely on Mercator for straight through processing.
We are expanding our footprint in the global financial services markets to be well positioned when I.T. spending picks up again in that sector.
Now, turning to the health care industry, our HIPAA and other health care related solutions continue to provide key opportunities for Mercator.
As evidenced by agreements with ACES health care, EMC insurance.
McKesson , Oregon Dental Services, Pacific Care Health System, the state of Illinois and Universal American Financial.
In addition to representing one of our largest contracts in the quarter, the state of Illinois purchased one of our new solutions, Mercator Inside Healthcare Hub which we introduced in Q3 with beta customer Vitra Health Care.
Inside Healthcare Hub will be deployed by several agencies including the departments of human services, the central management services and public aid.
Combined, these and other state of Illinois agencies plan to use Mercator Healthcare Hub to process upwards of 200 million health care transactions per year on behalf of the state of Illinois.
Mercator inside Healthcare Hub is an industry-ready integration solution that transforms, structures, manages and stores large volumes of complex health care transaction data.
It captures data throughout the processing cycle across diverse internal systems and provides essential information for analysis and reporting.
Gartner identified Mercator as having been selected as a potential HIPAA solution vendor by more healthcare organizations than any other healthcare vendor.
With a compliance deadline of October 2003 just eight months away, we expect to continue to be a leader in health care related integration solutions.
Of our three industry disciplines, manufacturing retail and distribution or MRD as we call it made a big difference for us in the quarter.
Clearly, there remains a significant need for integrating legacy systems dealing with high volumes of complex business data.
Our customers tell us that Mercator meets that challenge better than anyone.
The Home Depot deployment is a case in point.
At Home Depot we are integrating SAP, PeopleSoft and IBM messaging on multiple platforms across the Home Depot enterprise.
Other fourth quarter MRD customers who are using Mercator to integrate high volume, complex data flows include ALTEL information systems, Blue Rhino, CP shifts, Excel logistics, INI seal [ph] Nestle, NTT com wear, Sara Lee and Sumitomo Chemical.
I'd like to point out that as we did in the other industries in Q4 we introduced a new solution in MRD.
Mercator inside supply chain visibility was rolled out with beta customer blue rhino.
Mercator inside supply chain aggregates critical information from across a diverse set of applications and databases and places the data in a central repository where organizations can better analyze the information and improve the processing of relevant data.
At Mercator, we pride ourselves in being customer-focused.
In addition to our proven integration technology it is our unwavering focus on customers that sustained us through a tough year, and resulted in a strong quarter.
Since the economic downturn began, we have engineered the company in order to improve productivity while improving customer service and be prepared to take advantage of the turn-around when it comes.
Strong operations management, including cost control, is key to that strategy.
As evidenced by several operational achievements in 2002.
While total revenue declined 13% year-over-year, total pro forma expenses declined by 18% including a 28% reduction in our global workforce.
Bringing our total number of employees down from 614 to 441 in 2002.
In addition, we reduced our total pro forma expenses in the fourth quarter by an additional 3%, marking the eighth consecutive quarter of reduced total pro forma expenses.
Finally, we put behind us a shareholder securities class action litigation dating back to 2000 that was covered by insurance.
We also had a very productive quarter in terms of new product and solutions.
We introduced Mercator inside integration 6.7 which is our core product suite including our integration broker, featuring enhancements for web services, Java support and B2B capabilities.
And as I mentioned earlier, in conjunction with prestigious pilot customers, we released important new integration solutions including Mercator inside payments for financial services, Mercator inside health care, and Mercator inside supply chain.
On the partnership front, we deepened our relationships with systems integrator partners ABG Censure, Bearing Point and Logica.
While reinforcing highly valued technology relationships with BEA, Lawson Software and Sun.
We also enhanced international reseller channels with IT Plus with Korea, Disponet [ph] with China and Sat Yam [inaudible] with India.
In 2002, partners became a significant feature of Mercator's industry strategy.
Positively influencing 75% of our total revenue in the fourth quarter.
All in all, it was an important quarter for Mercator.
We begin 2003 ready to serve our 1100 customers, welcome new customers to the fold, and generate profitable revenue for all of Mercator's stake holders.
And now I'll ask Mercator's executive vice president and CFO Ken Hall to provide the financial details.
Ken.
Ken Hall - CFO
Thanks Roy.
As Roy said closing major contracts and improving operational efficiency were the themes of the quarter.
For the quarter, we generated total revenue of $32.3 million.
And on a GAAP basis our loss narrowed by 16% to $6.9 million dollars, versus $8.2 million in the fourth quarter a year ago.
On a pro forma basis, we had net income of $1.5 million or 4 cents per share compared to pro forma net income of $600,000 or 2 cents per share a year ago.
Now, we continue to demonstrate strong expense management, recording our eighth consecutive quarter of reduction in total pro forma expenses.
And our balance sheet improved.
Most notably, a 24% increase in deferred revenue and an ending cash and cash equivalent balance of approximately $30 million.
Lastly, the quarter was marked by a return to positive cash flow from operations.
Now, let's take a look at the P&L.
Looking at revenue by line of business, license revenue represented 51% of the total revenue for the fourth quarter, compared to 33% in the third quarter, and 46% a year ago.
License revenue for the fourth quarter was $16.4 million compared to $8.3 million in the third quarter and $15.9 million a year ago.
Let me point out that Mercator is one of only 2 EAI companies to report year-over-year increases in license revenue in the fourth quarter.
Professional services revenue was $5.9 million.
Compared to $6.8 million in the third quarter and $9.9 million a year ago.
This decrease in professional services revenue reflects the decline in license revenue earlier in 2002, as well as a strategic shift to drive a greater percentage of license revenue through partners which we've begun last year.
Now, maintenance revenue was $10 million compared to $10.2 million in the third quarter and $9 million in the fourth quarter last year.
By geography, revenue from the Americas represented 66% of total revenue, compared to 64% in the third quarter, and 63% a year ago.
AMIA represented 29% of total revenue, for the fourth quarter, compared to 31% both in the third quarter and a year ago.
Asia Pacific contributed 5% of our overall revenue compared with 5% in the third quarter and 6% a year ago.
Now, let's look at the revenue composition of our industry portfolio.
Health care represented approximately 12% of license revenue, versus 26% in the last quarter, and 19% a year ago.
MRD represented 35% of license revenue, versus 24% last quarter, and 27% a year ago.
And financial services represented 17% of our license revenue, compared to 26% last quarter, and 37% a year ago.
Let me point out that the revenue composition was impacted by the significant contract with the leading telecommunications company Roy referred to earlier which fell outside of our industry categories.
In Q4 we had 40 transactions valued at $100,000 or more, including three contracts valued above $1 million.
That compares to 37 transactions in the third quarter , with only one contract valued above $1 million.
In the fourth quarter, the average sales price of contracts valued at $100,000 or more within our industry increased to approximately $390,000 compared to $260,000 in the third quarter and $275,000 a year ago.
License revenue influenced by partners represented 75% of our total revenue, compared to 36% in the previous quarter.
Approximately 80% of our license revenue came from existing customers.
This reflects the success of our strategy to sell further into our significant existing customer base.
Pro forma gross profit margin excluding amortization of intangibles and stock option repricing charges improved to 78.9%.
This compares favorably to 70.1% in the third quarter and 73.5% a year ago.
Management of operating expenses was, again, a strong point of the quarter.
Total pro forma expenses which exclude amortization of goodwill and intangibles, stock option, repricing charges, and restructuring charges, were down 3% to $29.3 million compared to $30 million in the previous quarter and down 14% compared to $33.8 million a year ago.
Let's break out our expenses by category.
Research and development, expense was $5.5 million, compared to $5.8 million in the third quarter and $4.6 million a year ago.
Sales and marketing expense was $12.2 million, compared to $11.2 million in Q3 and $13.1 million a year ago.
General and administrative expense was $4.7 million in the quarter which includes the reversal of a legal accrual for the shareholder litigation that was settled.
This compares to $5.3 million in Q3 and $7 million in the fourth quarter a year ago.
Pro forma operating income for the fourth quarter was $3 million, compared to pro forma operating loss of $4.7 million in the previous quarter, and pro forma operating income of $900,000 a year ago.
We took a restructuring charge of $7.9 million in the fourth quarter.
This included $5.4 million for costs associated with leases for excess real estate and $2.5 million of severances and other employee related cost associated with a 20% reduction in force.
Our pro forma operating margin was 9.4% compared to a negative 18.8% in the previous quarter and 2.5% a year ago.
On a GAAP basis, our net loss narrowed by 16% for the fourth quarter to $6.9 million or 20 cents per share compared to a net loss of $8.2 million or 24 cents per share in the previous quarter, and net loss of $8.2 million or 26 cents per share a year ago.
Assuming a tax rate of 38%, we recorded pro forma net income of $1.5 million in the fourth quarter, compared to a pro forma net loss of $3.2 million in the previous quarter, and pro forma net income of $600,000 a year ago.
Pro forma net income per share of 4 cents for the quarter compared to a pro forma net loss of 9 cents in the previous quarter and pro forma net income of 2 cents a year ago.
Now, let's turn to the balance sheet.
Deferred revenue increased by $4.7 million for the fourth quarter to $24.5 million.
Our largest ever deferred revenue balance.
This 24% increase is also our largest ever sequential quarterly increase.
The deferred revenue balance consists primarily of maintenance revenue.
We established a new $20 million credit facility in the quarter.
As required under the terms of the facility we drew down on the term loan.
We supplemented our cash position with $9.3 million of net proceeds.
Combined with cash generated from operations, we ended the year with $29.9 million in cash and cash equivalents, up from $20.2 million last quarter, and $28.2 million a year ago.
As for cash flow, we generated $1.6 million in net cash flow from operations in the fourth quarter, compared to a negative $7.3 million in the previous quarter, and a positive $7 million a year ago.
Now, let me address guidance.
We fully understand that one good quarter does not mark a turn-around in the IT economy.
While it's evident we saw a return of spending in the fourth quarter, it is too early to tell if that trend will continue through 2003.
We expect Q1 results to be directionally lower than Q4, due to normal software industry seasonality.
Our previous guidance said that the company would break even both on a cash flow and EBITDA basis by the second quarter of 2003.
We achieved that goal in the fourth quarter, which was earlier than expected.
Given the inconsistent performance of the overall economy and I.T. spending in general, it's extremely difficult for us to forecast quarterly results.
With that in mind it is imprudent for us to provide specific guidance until visibility improves.
However, we are confident in our ability to achieve pro forma profitability for the full year 2003.
Thank you.
Roy King - CEO
Thank you, Ken. 2002 was a difficult year.
But it ended on an encouraging note, including improved productivity and achieving profitability gains.
For example, while reducing our marketing and sales expense, our sales productivity improved delivering more license revenue with fewer resources.
We also continued to drive more revenue from our partners' program which influence 75% of our total revenue in the fourth quarter and we introduced three new industry-ready integration solutions to market in the second half of the year each of which have high profile beta customers under way and specific rollout plans for 2003.
We believe a key challenge in front of us now is to get the word out about Mercator's unique value proposition in each of the industries we serve.
To do this we are undertaking a new marketing effort to underscore Mercator's value as the technology advantage inside any integration architecture.
When you see the Mercator brand name on our brochures, Website and other information, you will also see the words Mercator, the advantage inside integration.
Advantage inside integration refers to Mercator's unique flexibility in working alongside and within other technologies, even those of our competitors.
For customers and partners alike, we provide strategic value by solving complex, high volume, business integration problems and delivering the ROI.
In keeping with the advantage inside theme, Mercator's core product has been renamed, Mercator inside Integrator 6.7.
Inside Integrator 6.7 also powers our industry ready integration solutions designed to meet the challenge of mandate and standards compliance.
Our solutions have been rebranded as Mercator inside health care, Mercator inside financial services, Mercator inside MRD and Mercator Inside partner solutions.
The Mercator advantage inside theme will clarify our message and differentiate us from our competitors.
Finally, we ended 2002 with a strong quarter.
For 2003, we are committed to achieving three primary objectives.
First, executing our industry and partnership strategies.
Second, running our company with strong operations management principles and discipline.
And third, being profitable for the full year of 2003.
And now, we'd be happy to take some questions.
Operator.
Operator
Thank you.
At this time we are ready to begin the question and answer portion of today's call.
If you have a question, please press star 1 on your touch tone key pad.
You'll be announced in prior to asking the question.
You need to withdraw your question, you can press star 2.
Once again if you do have a question, please press star 1 on your touch tone phone at this time.
Please stand by for your first question.
Looks like our first question is from Dan Moriarty Twin Oaks Partners. [ph] and please state your company name.
Don Moriarty - Analyst
Dan Moriarty, Twin Oaks Partners.
I think you had a 20% reduction in headcount in the third quarter.
Will that reduce expenses in the first quarter?
Roy King - CEO
Our overall workforce reduction was 28% on the year and 20% for the fourth quarter.
Ken, can you share with us the first quarter impact.
Ken Hall - CFO
Sure, Don, good afternoon.
You may recall we had announced back in October when we had our last call that we were putting in place a reduction in workforce.
We said that we expected to have on an annualized basis approximately $15 million in expense reductions resulting out of that.
We implemented those reductions in workforce over the course of the fourth quarter.
So we don't have a full quarter of expense reductions reflected in the fourth quarter numbers.
Don Moriarty - Analyst
Everything else being equal your expenses should be down the first quarter?
Ken Hall - CFO
We would expect that.
Don Moriarty - Analyst
Okay.
Could you speak to the partnership program, because obviously, that was the major contributor to new license business in the fourth quarter.
And is -- are you expanding that, you know, the partnership program beyond the names that you enumerated in the release?
Roy King - CEO
Yeah, Don.
Good question.
Let me just take a few minutes to address that, okay?
Because it is a very -- it is, what I said, one of our primary objectives, it is executing our industry and partnership strategies for the year.
The partnerships with systems integrators and the technology companies are very critical to us and to them.
Through them, we believe that we can greatly expand our customer reach and really drive greater revenue on higher sales volume.
So as indicated here in the fourth quarter, it did influence 75% of our revenue.
And our efforts with systems integrator partners like Accenture and Bearing Point and Logica, and then with the technology partners I mentioned that we enhanced this year, BA Lawson and Sun are certainly strong and growing stronger.
But we need to keep in mind we really just started those in 2002 and we need to nurture those partnerships and train the people that are involved, and I think we'll see much more even out of those existing partnerships, and yes, we do intend to expand the partner program.
In Q4 we also expanded our international reseller channels in Korea and China and India.
And we were doing similar things in Europe.
It's interesting to note, Don, that all of the three million dollar plus deals in the quarter were closed with the influence of the partners.
And I'd certainly not, with 75% revenue, while that was good for the fourth quarter, I certainly wouldn't say that the partner program is yet in full swing.
We began it in 2002, with some -- with some solid partners, and we can enhance it going forward.
Okay?
Don Moriarty - Analyst
Yeah.
Undoubtedly you had a budget flush in the fourth quarter.
But the success with the partners, is this -- have you reached a point even though there was a budget flush, that because of the results, 75%, does that tell you something significant in that how you're going to run your business going beyond, you know, 2002 and for the next three or four years, are the partners going to be increasingly important and the sales force probably not growing as fast as the partnership relationships?
Roy King - CEO
The partnership program is increasingly important for Mercator.
And our whole -- the whole company, including our sales force is now geared toward working directly with those partners.
Whether it be SI or the technology partners.
And you did mention something that we felt, is that we did see the return of some of those large deals in the fourth quarter.
And it was a part of a year-end budget flush.
So you know, we do see that as I.T. spending continues to be tight, and sales cycles continue to be longer, you know, than historical averages, we really haven't seen a concrete sign of a sustained turn around in the software market however we need to continue to build those partners.
And it is part of the strategy that we started in 2002.
I certainly wouldn't expect the 75% to continue through -- into Q1.
But we did have a business model that was clearly based on at least 50% of our business being driven with and through partners.
Don Moriarty - Analyst
Okay, thank you very much.
Roy King - CEO
Thanks Don.
Operator
Our next question is coming from Dave Kaplan.
Please state your company name.
Dave Kaplan - Analyst
Arista Data.[ph] First of all congratulations on an excellent quarter.
I've got just a couple of questions.
To develop a greater comfort factor that you don't dig back into the hole again next year.
First of all, of the health care business that was down in the fourth quarter, to roughly half of a year ago.
What's the reason for that, in light of the fact that we're getting even closer to the HIPAA mandate?
Roy King - CEO
Well, that was influenced -- thanks for the question, Dave.
That was influenced largely because of the -- when we track our industries, we telecommunications is not included in those industries.
And one of the largest deals, it was actually the largest deal that this company has ever done.
I think we announced one of those in 2001, and this exceeded that particular deal.
So while we were very pleased with closing the largest deal that Mercator has ever done, it fell outside of those three industry groupings which on first blush looks like that those industries are not as important revenue generators.
However, health care as I mentioned with the state of Illinois and Healthcare Hub and the other customers that I mentioned were very important part of the fourth quarter, and health care will continue to be something, especially with the October 2003, you know, mandate, we're going to be out there in front of it.
Ken, did you want to share some --
Dave Kaplan - Analyst
Well, you know, I'm trying to get a handle on the -- not dealing with percentages because the percentages throw it off.
If I do it in absolute dollars, compared to the percentages that you gave, you know, in the preceding quarter, it seemed like dollar-wise it was down.
Ken Hall - CFO
Dave, it's Ken Hall here.
On an absolute percentage basis you're looking at roughly parity on a sequential quarterly basis.
Hopefully that could put you at ease.
Dave Kaplan - Analyst
Play more with the math then.
The other question is, in the third quarter, Ken, you made a statement that your low point in your count would be no worse than or better than the $6 million and I think you tied it to a preceding low point. $30 million, and if I take out the $10 million bank, the money that's yours, let's call it $20 million, in light of the good fourth quarter, and in light of, you know, the deferred revenues and your business that you see going forward this year, what do you now see as your low cash point?
Ken Hall - CFO
You got a good memory.
I appreciate it, Dave.
Let me say this about our cash on a going-forward basis.
I think we've demonstrated here, in Q4, and throughout the course of the last two years, the company has been very aggressive in maintaining and managing its expenses so as to have those expenses be right-sized with the declining license revenue demand that's been out there, that eight consecutive quarters were brought our total pro forma expenses down.
Obviously we are as successful this quarter at least on a pro forma basis in having profitability and positive cash flow.
That being the case, our operating plan for 2003 calls for us to not be borrowing any more debt, and we expect that that's an operating plan that should not have a material deviation from a cash point of view.
Dave Kaplan - Analyst
A material deviation from what, the $20 million that you currently have --
Ken Hall - CFO
Yeah, there should not be a material deviation in our cash from where we ended the year at.
Dave Kaplan - Analyst
Okay, good.
Ken Hall - CFO
Okay?
Dave Kaplan - Analyst
Good, great, thank you again, great.
Ken Hall - CFO
Thank you.
Operator
Looks like our next question is from Mark is it Kurlin, please state your company name.
Bob Ritsis - Analyst
Yeah, it's Bob Ritsis.
Ken Hall - CFO
Hi Bob how are you doing.
Bob Ritsis - Analyst
From Newcastle Bear.[ph] Your assessment of being in the black next year, profitable, what kind of economic scenario or I.T. spending are you assuming in that, assuming flat, up five, I'm curious your assumption there.
Ken Hall - CFO
As we were very conservative with our guidance in Q3, we expected as you heard from Dave Kaplan before you, we continued to build in the conservative assessment.
We expect the first half of '03 to basically be flat.
And then we're looking for some sort of modest pickup in the second half of the year.
Bob Ritsis - Analyst
Okay.
So in terms of advise visibility for the current, you know, let's say three to six months, do you think it's improving relative to expectations or about as you expected?
Could you just kind of talk about that?
Ken Hall - CFO
Sure.
You may recall in Q3, we had linearity of license yield closing where it was approaching 75 to 80% of the deals closed in the last month of the quarter.
While we had some slight improvement in Q4, I'll attribute that more to Christmas and everybody wanted to go on vacation and not work between Christmas and New Year's.
So we haven't seen to the level that I'd like any material change in that linearity.
Visibility continues to be very limited., and thus, is the reason for us not giving any quarterly guidance.
Bob Ritsis - Analyst
No, I understand that.
In fact I think that's the wise thing to do.
Roy King - CEO
let me add something here if I may, Bob.
Just to talk about the pipeline.
It does continue to reflect, you know, significant opportunities, including those with partners.
And I think, too, there's several positives that are helping to stimulate the customer's demand that including the release of our Mercator 6.7, we've been demonstrating productivity and profitability gains, improving in our cash positions, and you know, we've successfully concluded the shareholder class action suit.
But it still remains that the sale cycles on those enterprise license contracts continue to be extended.
And overall, it remains relatively weak in the I.T. spending environment.
As you listened to most of the technology players out there, and Cisco last night.
But we continue to be very conservative in our expectations.
I think we've demonstrated as a management team when we're making a commitment as part of a major objective for 2003, to be profitable for the year of 2003, we're going to get it done.
Bob Ritsis - Analyst
Okay.
And one last question.
The first caller asked you, if you take a look at what you've done in terms of restructuring, how much do you think you've taken out of cost?
What's kind of the dollar number, or by the end of the first quarter, what would that number be, just roughly?
Ken Hall - CFO
Just on a year-over-year basis, I think we've taken out about 25% of total pro forma operating expenses.
If the question is how much is left to be taken out from the remaining reduction in workforce that we have out there, we've got -- we have some remaining amount, I would say it's not a substantial amount.
But there's still some efficiencies that we can seek out at this point in time.
Bob Ritsis - Analyst
I guess the question that I wanted to get at is, if I look at some of the -- your costs in terms of like services and maintenance, will those numbers be coming down in terms of the cost in the next quarter because it's just rolling through, should we expect to continue -- are these about the base level that we'll see?
Ken Hall - CFO
I think you'll see continued improvement with some of the professional services margins, and then on the operating margins side, there are some operating expenses that I think we still have economies that we can realize.
Bob Ritsis - Analyst
Okay.
Roy King - CEO
Bob, as we went through the expenses, just as a reminder on the fourth quarter with a 20% reduction, most of that was in sales and marketing and G&A related expenses, and not in the customer and customer care and R&D areas.
We felt it was very important, you know, to protect those going forward for --
Bob Ritsis - Analyst
I guess the base level I'm looking at is G&A running at 12.1 and G&A running at 4.7.
Are those the baseline, would the first quarter be 11.5, I'm just curious G&A is that going to come down?
If you take the totals, roughly $17 million for those two together what do you think the run rate, you know, that you need or will see going forward after that?
Ken Hall - CFO
Yeah, I can't give you that level of guidance, Bob.
Bob Ritsis - Analyst
Okay.
Thank you.
Ken Hall - CFO
Thank you.
Operator
Our next question is from Ron Benvenu and as always please state your company name.
Ron Benvenu - Analyst
Hi, this is Ron, I'm with Strategic Software.[ph] First of all, congratulations, Ken, you guys did a great job on the quarter.
Congratulations.
Ken Hall - CFO
Thanks, Ron, good to have you on the call.
Ron Benvenu - Analyst
Good to be here.
As you guys are pretty well aware my biggest concern really relates to a strategic issue.
And my strategic concern is if you study the history of the enterprise software market, as markets mature, players become marginalized.
That is my concern.
I have a couple of studies here in front of me that show that from a market share perspective, Mercator's market share has declined consistently over the last several years.
What are we going to do about stemming that decline so that we remain relevant in a critical component of the enterprise software industry?
Ken Hall - CFO
Ron, very good question.
Let me take it from a couple of different standpoints.
First of all, relative to market share, market share this year, let me offer a couple of proof points.
We think that we've been competing very effectively against the pure play EII competitors.
The numbers this year speak for themselves.
But Mercator did gain market share on a license revenue basis in 2002.
And in addition, Mercator was one of only two EAI players that posted a year over year license growth in the fourth quarter.
And for the full year 2002 Mercator saw total revenues decline by 13% versus industry of 15%, the land was only one EAI player that was above that industry average.
So I think Mercator, in the industry, in the integration industry, has clearly demonstrated that it is a healthy company, providing value to some very significant customers of the 1100 customers that we serve.
Now, in 2001, with the new management team coming on board, clearly in 2001 our focus was on really -- on a few very basic issues.
And 2002 allowed us to really define the new strategies for Mercator.
And part of those new strategies for Mercator included executing on both industry and partnership directions which were very, very new and different for Mercator, yet addressing market needs.
So going forward, as part of that ongoing planning process Ron that we've been going through, management has been analyzing and reviewing with the board on a periodic basis the strategic direction of the firm and the value that is expected to be realized from the execution of that plan.
Included in those reviews are certainly any potential strategic alternatives that enhance shareholder value in the future.
And I just want to assure everybody that our primary objective, both from the board and management, continues to be maximizing on shareholder value.
And I think in front of us now is really executing on our industry and partnership strategies continuing to, you know, do an excellent job of running this company through operations management and demonstrating that we're going to be profitable in 2003.
That's what I think the priorities are, and we'll continually evaluate our strategies and how to differentiate ourselves even in a tough market.
Ron Benvenu - Analyst
Great.
Roy, could you supply independent research that supports your market share figures?
I have EAI Journal in front of me and Buckingham Research Group which came out February 3rd of this year, and both point to declines and I would like to see independent research this year or even your own internal research maybe you could --
Ken Hall - CFO
Ron, I think you hit the nail on the head.
The date of the Buckingham Research Report was issued obviously before our final results came out.
There were some estimates there.
The estimates showed a substantial decrease, and obviously it's inaccurate research that's out there.
We'll be happy to share with you both our own internal research, as well as there's some independent research, in particular I direct you and other callers to Aberdeen who put out a report that shows Mercator is ranked fifth in a market share point of view in pure EAI integration software.
We'll be happy to provide that.
Very simply you look at total license revenue for 2002 versus 2001 for the five pure play EAI players and you'll see that Mercator picked up market share in the space.
Roy King - CEO
Ron, let me point out something else too.
Because I think the strategic issue is very important.
Mercator, when compared with our other pure EAI players, really do not have the technology that allows them to work with many of the technology players that are out there.
And I'll just point to, for example, what we have done with BEA.
You may be familiar with it.
But basically, BEA's integration technology, the web logic integration, you know, is largely a business process management based.
And a majority of their customers are using the technology, you know, in a certain way, to automate their repetitive business processes.
But what Mercator and BEA does together is, by combining Mercator inside integrator's data transformation and connectivity with their WLI process capabilities, we're able to provide our customers, our joint customers with a scalable, reliable, high volume swift payment solution and that supports the swift data formats and swift connectivity out of the box.
So together we are exceptionally strong with BEA.
And the same is true with other technology players.
So I believe that Mercator is changing the game, helping to change the game in this industry space, which I think is the point that you brought up.
How do you gain market share, how do you grow the business?
And clearly, industries and partners and having the technology that allow you to work with partners in a different way is the way we see creating value.
Ron Benvenu - Analyst
Okay, great.
Finally, and I'll wrap it up, you know, always encouraged to hear the CEO say we're really focused on shareholders to value.
Would the board consider hiring a banker to determine what other strategic alternatives might be out there for us?
Roy King - CEO
You know, Ron, at the right time that would be an appropriate thing to do.
But as I mentioned, our ongoing, you know, strategic planning process, where management analyzes and reviews with the board on that periodic basis, we review the base case of our strategy, the value we expected from the execution of that plan and we also assess the strategic alternatives that could happen and hence shareholder value in the future.
We listen to industry analysts, investment banking perspectives on the industry as part of that process.
But I don't see, at this point in time, a need to hire an investment banker to pursue other alternatives.
Ron Benvenu - Analyst
Okay, thank you.
Roy King - CEO
Okay, thank you.
Operator
Your next question is from Evan Flicker.
Please state your company affiliation sir.
Evan Flicker - Analyst
ES advisors.[ph] Ken, did you give the size of the reversal for the accrual litigation?
Ken Hall - CFO
No, I did not.
Evan Flicker - Analyst
What was that?
Can you give us the amount please?
Ken Hall - CFO
No, we're not going to go into that level of detail, obviously.
This had to do with litigation, and it's not something we're comfortable releasing.
Let me say this.
There were a multitude of transactions both debits and credits that occurred within general administrative expenses in the fourth quarter that had offsetting impacts.
Evan Flicker - Analyst
So this 4.7 number, you could say is normalized going forward?
Ken Hall - CFO
It's normalized, yes.
Or excuse me.
Let me take that back.
I'm not giving you guidance along that level, okay?
Evan Flicker - Analyst
No, no, not trying to trip you up there.
Ken Hall - CFO
Okay.
Evan Flicker - Analyst
Your headcount as of today is it less than the number at the end of the year?
Ken Hall - CFO
No, it is level with the 441 that we reported at the end of the year.
Evan Flicker - Analyst
Okay.
And do you see that number going forward being lower than it is now?
Ken Hall - CFO
There may be some minor downward movement in that number.
Evan Flicker - Analyst
Okay.
And should we expect to see any more restructuring charges or any really cash outlays going forward from the restructuring that you took?
Roy King - CEO
Yes.
We took Siebel restructuring, obviously the bulk of that ask relating to real estate.
We do have some offices that we are still evaluating whether or not to downsize or to close the physical facilities themselves.
So there may be over the course of 2003 some modest restructuring charges, nothing that we are currently anticipating at this point in time.
Obviously, we do have some cash expense associated with these restructuring charges which are a P&L hit at this point in time.
But will be some drain on cash on a go-forward basis.
Evan Flicker - Analyst
Okay.
Great, thank you.
Operator
Once again, we are in the question and answer portion of today's call.
If you do have a question, please press star 1 on your touch tone phone.
It looks like our next question is coming from Jean Orr.
Please state your company name.
Jean Orr - Analyst
I'm with Nutmeg Securities.[ph] You mentioned the fourth quarter strength was a lot of what you call budget flush.
Is that -- can we imply from that, then, that business has not carried through into the first part of this year?
Ken Hall - CFO
Jean, it's Ken Hall.
We didn't characterize it as a budget flush.
One of the callers did it as such.
We obviously benefited from some year-end budget flushing that occurred but that's not necessarily how we characterized it.
Go back to my earlier comments from a guidance point of view, we had a strong quarter.
Yeah, it was driven by some year-end budgets that were being spent.
We still see no material signs of improvement in the I.T. economy that's out there.
And we're still somewhat cautious on a going-forward basis.
For the full year, though, we do expect that we would achieve pro forma profitability, and are confident in our ability to execute towards that.
Roy King - CEO
I also commented about our pipeline.
And it does reflect significant opportunities, and we've made comments about the partners, and there's a lot of positive that we've been able to accomplish.
But you know, we still remain very cautious because of what we see in the sales cycle, and on these enterprise license contracts, it continues to be a very tough, tough environment.
So we're just being very conservative.
We'd like to close everything that we have in our pipeline and see a growing aggressively.
But the case is that the pipeline's there and we're working with our partners and our customers to close those when the customers are ready.
Jean Orr - Analyst
Can you give us some idea of the sales cycle and how it compares with maybe a year or two ago?
Ken Hall - CFO
The what cycle?
Jean Orr - Analyst
The sales cycle.
Or the length of time it takes to get it done.
Ken Hall - CFO
Yeah.
Well, if you go back to, you know, Mercator two years ago, and in part, most -- a lot of 2001, you would find where Mercator was really being sold as a real tactical tool.
And many of the sales below a $100,000 level.
Now you see the strategic shift that we have made, and by -- through executing those strategies, you see larger $1 million plus deals that are much more complex, involved at the ELA level, and so we're -- and with the new solutions we're also at the business level.
So the more that you have, you address complex business issues that cut across an enterprise, I think that by definition is also going to extend the sales cycle time.
So where we saw it two or three months, it can now be cycles that are six to 12 months long.
I will tell you that once we, however, work with a customer and lock in on a particular demonstrated proof of concept, that typically, if everything is lined up within that organization, it's only a matter of weeks before we can demonstrate that value, prove the ROI case and get it sold.
So the more proof of concept and the more we can get into with our customers, it actually helps us and helps the customers reduce that sales cycle.
Jean Orr - Analyst
Is there any way of getting a handle on how much the sales cycle has been expanded because of the I.T. spending environment, versus the change that you've made in terms of your focus?
Ken Hall - CFO
Well, I think for that, I mean, our partners are, whether it be the SI partners or many of the other technology partners will also share with you that the sales cycles have lengthened you know by a quarter or two.
I think that's industry and the I.T. economy, and that's part of what -- that's part of what we are seeing, too, in our markets.
Jean Orr - Analyst
Thank you.
Ken Hall - CFO
Thank you, Jean.
Operator
Looks like that concludes today's question and answer portion of today's call.
Any concluding remarks from Mr. Roy King.
Roy King - CEO
Okay.
I want to thank you for being on the call.
And just to remind you, we are committed, Mercator's management team, to executing on the three primary objectives that I mentioned, to execute on our industry and partnership strategies, running our company with a strong operations management and being profitable for the full year of 2003.
We look forward to talking with you in the near future.