International Business Machines Corp (IBM) 2003 Q1 法說會逐字稿

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

At this time all participants are in a listen-only mode.

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Later we will conduct a question and answer session.

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

This call is being webcast.

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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 to discuss our results for the first quarter of 2003.

Mercator's Chairman and CEO, Roy King, and Mercator's EVP 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 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.

Please note that we have changed the way we describe our historical financial performance in our earnings report.

In connection with the adoption by the SEC of Regulation G and other rules affecting the use and disclosure of non-GAAP financial measures.

Accordingly, unless otherwise noted, the company's financial results described in this call have not been adjusted for items that may affect their comparability including such matters as restructuring charges.

The impact of this change in the current quarter is to change certain growth rates over comparable 2002 period from what they would have been without the change in reporting.

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

Thank you, Jonathan.

Good evening and thank you for joining us tonight.

I'd like to summarize the quarter and then provide some perspective on the integration marketplace.

Then I will ask Mercator's CFO, Ken Hall, to take us through the financial detail.

We generated $23 m in revenue in the first quarter of 2003 including $7 m in license sales.

Maintenance revenue increased by 5% over Q1, 2002, to $10.4m.

Expense management and operational efficiency were strong in Q1, which marked our lowest total expense in 16 quarters.

We narrowed our year-over-year Q1 loss by 30%.

At $24.2m our deferred revenue remains at historically high level, and our DSO of 63 days reflects and excellent rate of receivables collections.

As a general observation, we believe the economic environment is causing customers to make purchases at a very tactical level.

We believe that strategic integration purchases, including enterprise license agreements and the high ASPs they bring will not return in a consistent way until the economy rebounds.

From what we see this is true throughout the industry, not just for Mercator.

We had 23 customer contracts in the first quarter valued at $100,000 or more, including one deal valued over $1 m.

Some of our customers in the quarter included State of Arizona Healthcare, Bayer, City Street, Credit [Unord] (ph.), Daimler Chrysler, General Motors, Hawaiian Medical Services Association, Lily Pulitzer, M&G, Mitsui, Organon, Panasonic, Personics, and World Insurance Corporation.

It is also worth noting that Hawaiian Medical Services Association is the third Mercator customer to purchase our new Mercator Inside Healthcare Hub Solution since it was launched last fall.

Other highlights of the quarter feature several important partner agreements, including the renewal of our reseller agreement with Mitsui, one of the most significant partners and a key to our continued success in the Japanese market.

During the quarter we announced a new alliance with Sink, the Swedish company specializing in supply-chain management to deliver a global order-management solution to manufacturing retail and distribution customers.

We also announced a new alliance with Items, a Connecticut-based provider of e-commerce solutions to the insurance industry to develop an automated solution for property and casualty insurance customers.

Today I am also pleased to announce that we have just concluded another new marketing agreement with Sun Microsystems.

Together Sun and Mercator will collaborate on the engineering, marketing, and selling of enhanced industry-ready integration solutions to our mutual customers in the industries we serve.

By combining our core technology and solutions with the offerings of important SI and technology partners like Sun, Mitsui, and others, we can achieve broader customer reach and higher volume and higher value sales opportunities.

To support our partner in solution initiatives the Mercator R&D marketing and solutions teams were very productive in the first quarter.

In financial services we announced a successful test to Omgeo central trade manager.

Omgeo is the leading international provider of financial trade management solutions for roughly 6,000 investment managers, broker dealers, and custodians in more than 40 countries.

Omgeo's central trade manager is a trade-matching utility for improved straight through processing.

Working closely with Omgeo we expect to launch our new Omgeo connectivity solution soon.

We also announced the release of several new products and enhancements to our current product portfolio.

Including new packages for Mercator Inside HIPPA, Mercator inside HL7, and Mercator Inside NCPDP, which serve the healthcare and pharmaceutical industry.

The latest version of Mercator commerce management for enhanced [B to B] and EDI, and the second generation of Mercator business processed management, a component that offers state-of-the-art business process modeling, automation, monitoring, management, and web services.

In terms of the first quarter revenue, we expected a weak quarter compared to Q4.

In addition to the normal seasonality our industry usually experiences, we believe that economic conditions were unlikely to improve and that IT spending would be adversely impacted.

This trend was made notably worse by the uncertainty surrounding the early stages of the war in Iraq.

The challenge that proved most daunting in the first quarter in terms of its impact on our ability to close business, however, was the proxy contest with strategic software holdings.

Even though we were able to settle the content in fairly short order, the proxy contest and the unsolicited proposal to acquire the company initiated in the last two weeks of the quarter gave our customers pause as we work to close another back-end loaded quarter.

As a result, a number of customers representing a significant amount of licensed revenue deferred their purchasing decisions.

Proxy contest was a distraction to everyone, but I am pleased to report that since it was settled on April 17, a number of the deferred deals have closed.

We strongly believe that this settlement is in the best interest of all of our stockholders as well as our customers, partners, and employees for two important reasons.

First, in addition to the adverse impact of this matter on our customers and partners, waging a proxy contest was a drain on management's time and resources.

Second, the additional cost of continuing the proxy contest to its conclusion would have been substantial.

The settlement avoids those additional costs and distractions that adversely impacted our business.

With that in mind, I'd like to ask Ken Hall to walk us through the financial details of the first quarter.

Ken?

Thank you, Roy.

As Roy said, the proxy matter combined with a weak global economy caused customers to defer purchasing decisions in the quarter.

We continued our strong management of expenses recording Mercator's lowest total expenses in 16 quarters, our DSL day sales outstanding with 63 days, up only one day from the previous quarter, once again reflecting a strong collections program.

Deferred revenue, which represents a backlog of revenue mostly comprising maintenance revenue was $24.2 m compared to $24.5 m in the previous quarter.

Now, let's go through the financials in detail.

Looking at revenue by line of business, license revenue represented 30% of the total revenue for the first quarter compared to 51% in the fourth quarter and 35% a year ago.

Licensed revenue for the first quarter was $7mcompared to $16.4min the fourth quarter and $9.5 million a year ago.

Professional service revenue was $5.6 m compared to $5.9m in the fourth quarter and $8m a year ago.

Maintenance revenue was $10.4m compared to $10m in the fourth quarter and $9.9m in the first quarter last year.

By geography, revenue from the America's represented 53% of the (inaudible) revenue compared to 66% in the fourth quarter and 59% a year ago.

Revenue from Europe, the Middle East, and Africa or AMEA represented 35% of total revenue compared to 29% in the fourth quarter and 35% a year ago.

Asia Pacific contributed 12 % of our overall revenue compared with 5% in the fourth quarter and 7% a year ago.

Now, let's look at the revenue composition of our industry portfolio.

Healthcare represented approximately 16% of licensed revenue versus 12% in the last quarter and 18% a year ago.

Manufacturing, retail, and distribution, or MRD, represented 46% of licensed revenue versus 35% last quarter and 24% a year ago.

And financial services represented 31% of our licensed revenue compared to 17% last quarter and 42% a year ago.

In Q1 we had 23 transactions values at $100,000 or more compared to 46 such transactions a year ago.

For the first quarter the average sales price of contracts valued at $100,000 or more within our verticals was level with a year ago at approximately $300,000 but declined compared to $390,000 in Q4.

Licensed revenue as influenced by partners represented 64% of our total licensed revenue compared to 75% in the previous quarter and only 19% a year ago.

Approximately 74% of our licensed revenue came from existing customers, compared to 80% of the fourth quarter and 82% a year ago.

Gross profit margin, and I remind you, on a GAP basis, was 65.2% in the first quarter as compared to 75.9% in the fourth quarter and 61.8% a year ago.

Total expenses for the quarter were 27.5m, down 28% from 38.3m in Q4 and down 17% from 33.1m a year ago.

Mercator incurred $150,000 of expenses in the first quarter in connection with the proxy contest and we expect to record a charge of approximately $550,000 in the second quarter, which includes $300,000 paid in connection with the previously announced settlement.

We also expect to record a charge in the second quarter of 2003 of approximately $4m relating to excess office space overseas in connection with the previously announced restructuring in the fourth quarter of last year.

We continually evaluate our space requirements on a global basis, which may lead to additional future charges.

Now let's break our first quarter expenses down by category.

Research and development expense was 5m, compared to 5.5m in the fourth quarter and 4.5m a year ago.

Now the marketing expense was $8.3 m, down from 12.2m in Q4 and 12m a year ago.

G&A expense was $5.6m in the quarter, compared to 4.7m in Q4 and 6.8 m in the first quarter a year ago.

Now you may recall that we reversed a legal reserve of 1.5m in Q4.

Without that reversal G&A expense would be down both sequentially and year-over-year.

Our operating loss in the first quarter was $4.5m, compared to an operating loss of $6m in the previous quarter and an operating loss of $5.7m a year ago.

Our operating margin was a negative 19.4% compared to a negative 18.6% in the previous quarter and a negative 20.9% a year ago.

Our net loss narrowed both sequentially and year-over-year.

For Q1 our net loss was 4.3m, or $0.12 per share, compared to a net loss of 6.9m or $0.20 per share in the previous quarter, and a net loss of 6.1m or $0.18 per share a year ago.

This represents a 30% narrowing of our net loss year-over-year.

Now let's look at the balance sheet.

Cash and cash equivalents declined by $4.5m in the first quarter to 25.4m at the end of Q1, compared to 29.9m at the end of the fourth quarter and 28.8m at the end of the first quarter a year ago.

As for cash flow, we recorded a negative 3.4m in net cash from operation in the first quarter, compared to generating 1.6m in net cash from operations in the previous quarter and recording a negative $600,000 a year ago.

Now let me address our guidance.

Due to poor visibility we did not provide specific guidance for Q1.

We did however say that we felt we would be profitable for the full year on a pro forma basis.

We expect that poor visibility will continue going forward, although we are seeing some recovery from Q1 level.

Consistent with previous guidance, we remain confident that excluding amortization of goodwill, intangibles and restructuring charges, 2003 will be profitable.

With that I'd like to turn it back to Roy.

Thank you, Ken.

Before we open the call for questions, I'd like to say a few more words about the SSH matter, in response to questions I've received from shareholders, customers and partners.

On April 21, we announced an agreement whereby SSH terminated the proxy contest and withdrew their previously announced proposal to acquire Mercator.

In settling the proxy matter we ended a significant distraction that had an adverse impact on customer's purchasing decisions and we limited the amount of time and money that would have been spent to wage the proxy contest to its conclusion.

We remain committed to our goal of returning to profitability.

We continue to focus on our stated strategy, for long term growth, by combining our core technology and industry specific solutions with the offerings of Systems Integrator and Technology Partners.

We believe this is the strategy that continues to position us to take advantage of the higher market demand anticipated for enterprise-wide integration once the economy turns around.

Earlier this month our strategy was validated by a statement from the Gartner Group, which said, "Mercator has evolved its products to stay competitive.

Mercator continues to exploit its historical strength in transformation and electronic data interchange, but has shifted its strategy to more complete vertical integration solutions.

Mercator is wisely rebuilding its core architecture to make its product more scalable and manageable.

Mercator is thus positioned to participate in the general market recovery."

On that note, I'd like to invite your questions.

Operator, can you please open it for questions?

Thank you.

At this time, if you would like to ask a question, please press star one on your touch-tone phone.

You will be announced prior to asking your question.

To withdraw your question at any time, you may press star two.

Once again, if you would like to ask a question, please press star one now.

One moment.

Our first question today comes from Dave Kaplan.

Please state your company name.

Arista Data.

Roy, or Ken, can you give us a feel for the magnitude approximately, of the revenues that you said got deferred as a result of the SSH situation?

How much already closed in this quarter and on the assumption that what you expect got deferred, what do you expect that probability of the remainder closing in this second quarter?

Hi Dave, let me try an address your question.

While I cannot share the exact dollar figure for the value of the deals that slipped, let's suffice it to say that there are a number of deals of significant size that slipped.

Several unexpected factors, like the proxy contest or the unsolicited proposal to acquire Mercator and the war, certainly added increased uncertainty into those deals.

And frankly, I've been out with the customers that all those factors certainly led to the extension of their closing cycles.

And we've already seen several of these deals have closed since the resolution of the proxy matter and I am confident that the majority of those deals remaining will close in Q2.

As I see it and I've been out with those customers, but the fact is that Mercator's offering a unique technology.

And a value proposition that the customers need and so there's a mutual desire on the part of the customer and Mercator to get those transactions done and to get them done in Q2.

Well, Roy, I don't want to pin you down onto the exact amount, what I was trying to get are a rough feel.

You used the word several and you used the word several million dollar deals, I mean that amount to me is multiples of millions of dollars.

That is close.

I just want to talk about what is close so far.

Even if, you know, we don't want to speculate on what might happen, sort of as a reporter, but I'm trying to get a feel.

I mean are we talking about a million dollars, or are we talking about, you know, $3m or $4m or thereabouts?

Well let me just say it's several significant deals.

There's a number of deals and that I believe there's several millions of dollars that are captured in those, in the total value of the pipeline.

That with a reasonable probability, should close in the second quarter?

I don't want to put words in your mouth.

No.

I believe that we're working hard Dave to close all those deals that had fled from Q2 where--where these things were factors.

So, you know, I'm not going to give specific amounts.

I will say that the value of the deals that have slipped certainly explains a major part of the Q1 shortfall.

Okay.

Okay.

Thank you.

Next question?

Once again, if anyone did wish to ask a question, please press star one now.

Our next question comes from (Richard Rofe) (ph.).

You may ask your question.

Please state your company name.

Arcadia Capital Management.

Question is of the $7 m in the license revenue, how much of that is from new customers versus existing?

I believe existing customers represented about 74% or 75%, so a quarter, 25% was new.

A quarter, thanks.

Sure.

Next question?

Our next question comes from (Tim Morieartey) (ph.).

Please state your company name.

This is actually Bob and it's Twin Oaks Partners.

Hi Bob.

How you doing?

Okay.

Ken, in your guidance you said that you have seen some recovery in Q2 so far and I was wondering if you could separate that from Roy's comments about the deals that have closed that were pushed out from last quarter and if there's a discrepancy there?

If it's more than just those deals closing?

And if it is more, you know, what's different?

What's going on out there?

And then secondly, Roy, if you could just give a little more detail and color behind the Sun Partner agreement, I'd appreciate that.

Sure.

Before I get into Sun and before Ken answers your question on Q2, let me just provide some color on just the general market conditions and kind of a view of our pipeline because I think that helps set the stage.

We have yet to see any concrete signs of a sustained turnaround in the software market.

And the trend that we see is the customers using the II for tactical solutions to extend the life of their existing systems, you know, in anticipation of future strategic deployment.

So in that view I think it's (audio gap) by recent research by outsiders and some market research we've done ourselves.

That said, our pipeline continues to reflect significant opportunities.

And in the near term we see a larger number of deals of a smaller initial ASP, you know, similar to those seen in the first quarter, rather than the ELAs and larger deals we were able to close at the end of 2002.

So through conversations that I've had with customers, we're certainly finding many companies making smaller initial investments with plans to follow up down the road with a wider implementation of Mercator technology.

And that said again, with the settlement of the proxy contest, we find a number of those initial deals are beginning to firm up.

So clearly our focus has been on closing the transactions that slipped and then working that pipeline with a larger number of opportunities that I just mentioned.

Hey, Roy, just quickly, is that smaller ASP in the first part of the year, is that consistent with past seasonal patterns?

And then you would get--.

I believe it is.

Ken do you have the details on that?

Bob, it is consistent.

ASP, year-over-year is basically level at about $300,000.

So we're on target with that.

Obviously fourth quarter is always a higher ASP year-end you tend to get larger transactions that had been deferred to the end of the year when the CFOs start giving clearance on releasing the big budget dollars.

Right.

And we've always highlighted when we take significant transactions, anything over $100,000.

So, you asked about Sun.

As you probably know, Sun's current strategy is built around assumptions of growth in software centered on solution selling.

And the agreement announced today really allocates resources from both Sun and Mercator, toward developing and bring to market solutions containing Mercator technology that's targeted to financial services and healthcare markets.

So, just to get specific with an example, we're working on a demo of Mercator's HIPA solution running on Sun and our upcoming Omgeo solution, also running on Sun.

And they're in the works such that they'll be installed in Sun's I Course demo centers on both the west coast and in New York.

So you can expect to see further announcements as this relationship progresses, but this is one that certainly we have been working on for a period of time and we're pleased to see it come to fruition.

Okay.

Next question please.

Once again, if anyone did wish to ask a question, please press star one now.

Our next question comes from Leon Staciokis.

You may ask your question, please state your company name.

L. S. Mesquite Ventures, LLC.

Hi Leon.

Hi.

I'm curious, I heard a lot of good things about it, but one of the things I didn't hear about is that are you going to try to expand marketing, which is usually today's problem and R&D, tomorrow's problem.

Response please?

Leon, we don't have intentions that--we feel that our expense structure right now is in line with our revenue forecast and so we don't anticipate at this point in time expanding our marketing and R&D dollars.

But we believe that we'll continue to work on being, you know, being more productive with the resources that we have.

Appreciate that, thank you.

Thank you.

Any more questions?

I'm currently showing no further questions.

Okay.

Let me offer some--let me offer some final comments here.

At the close of my prepared comments I mentioned a recent Gartner report that validates our technology and business technology and which says, "Mercator is positioned to participate in a general recovery."

Let me tell you in my own words why I believe our strategy is working.

It's a very important question.

I want you to hear it directly from me.

Over the last two years we have stabilized the company through two major restructuring efforts: one for survival in 2001, and the other to adjust for weak market conditions following 9/11 in 2002.

During that time the integration spent on licensed revenue was down and we began to regain share in 2002.

And in addition, Mercator has been a leader among the EIA players in expense reductions and profit improvement over those same two years.

Concurrently we've laid the foundation with our technology, industry ready integration solutions and partners for the higher market demand anticipated when the IT spending environment improves.

Our technology, as evidenced by Gartner and existing customers who expand their use of Mercator has improved; our industry solutions are gaining traction, as evidenced again by Gartner, our partners and customers for new solutions.

And our business model has shifted from 80/20 direct/indirect, to our goal of generating roughly at least half of our business through partners.

We've also greater confidence as we see a larger number of opportunities in our pipeline, although smaller initially (inaudible) due to economic conditions, and after visiting several CIOs and CTOs over the last few weeks who have stated, and I quote, they, "love our technology and they have confidence in our people."

And in fact, one case in point, where the customer believes in our technology so much, that even after one of our competitors offered to give their software away for free, including free services people, they're in the process of finalizing terms with us because our technology can get the job done.

The testimonials from our customers and partners give us the confidence that our strategies are working.

So in closing, let me offer these comments.

We're seeing some recovery from Q1 levels.

We are closing the postponed deals and we'll close the majority of them in Q2.

Our new partners in solutions should gain greater traction and as the demand for Q2 firms up, the pipeline for second half becomes clear we will continue to execute our strategy and if necessary, make any appropriate changes so as to achieve our profitability objectives.

It is very important for us and we are committed to be profitable on the year.

Thank you.