International Business Machines Corp (IBM) 2003 Q4 法說會逐字稿

Hello.

Welcome the Ascential Software fourth quarter 2003 earnings release conference call.

All lines will be in a listen-only mode until the formal question and answer session.

If you wish to ask a question, simply press star one on your touch-tone phone.

At the request of Ascential Software today's conference is being recorded.

I would now like to introduce Mr. David Roy, Vice President of Investor Relations for Ascential Software.

Mr. Roy, you may begin sir.

Thank you Operator.

Welcome everyone.

We are very pleased to have you join us for our yearend earnings conference call.

Here today for Ascential on the call are Peter Gyenes, our Chief Executive Officer and Chairman, Pete Fiore, our company President, and Bob McBride, who is our Chief Financial Officer.

Before we begin the call, we need to point out that the presentation includes forward looking statements for purposes of safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

They are subject to factors that could cause actual results to differ materially from those in the forward looking statements.

In addition, new factors emerge from time-to-time.

It is not possible for the company to predict all such factors.

All forward looking statements speak only as of the day in which the statements were made.

The company undertakes no obligation to update any forward looking statement to reflect events or circumstances after the date on which it was made or to reflect the occurrence of unplanned, unforeseen, or unanticipated events.

Statements expressing the beliefs and expectations of management regarding future performance or circumstances are forward looking and involve risks and uncertainties including, but not limited to, quarterly fluctuation in results and other risks.

Additional information concerning risks and uncertainties is set forth in our press release today and in the section titled, Factors That May Affect Future Results in the company's periodic reports filed with the Securities and Exchange Commission including the company's most recent form 10Q.

The company believes that the pro forma results described in this call are useful for the understanding of the ongoing operations because GAAP results include expenses unrelated to the company's ongoing data integration business as well as non-cash charges associated with the amortization of purchased intangibles.

Management of the company uses pro forma results to compare the company's performance to data in prior periods for analysis of trends and to evaluate the company's financial strength, develop budgets, manage expectations, and develop a financial outlook.

However, pro forma results are supplemental and are not intended as a substitute for GAAP results.

Relative to GAAP all pro forma results described in the release exclude the following items net of associated taxes - amortization of purchased intangibles such as developed technology and customer lists, amortization of stock-based compensation, a litigation settlement, merger, realignment and other costs primarily related to employee severance and the closing of idle facilities, in-process research and development charges, non-recurring acquisition-related transition expenses, loss on long-term investments, non-recurring tax credits, and revenue, expenses, and other items related to divested business operations.

An assumed tax rate of 30% has been used in calculating the tax provision related to pro forma results, which excludes a non-recurring tax benefit included in the GAAP tax provision.

Now let me turn the call over to Mr. Peter Gyenes.

Peter.

Thanks a lot Dave.

Welcome everyone.

Thanks a lot for joining us this evening.

We are very pleased to report our seventh consecutive quarter of sequential revenue growth and sixth consecutive quarter of year-over-year growth as well as continued advancement and profitability and especially growth in operating income.

The fourth quarter was the first full quarter of operations with Mercator integrated into Ascential Software.

I am pleased to report that the outcomes and the metrics and financial as well as operational milestones, which we outlined to you in our October call, have been achieved and in some cases over-achieved.

As you can see from our press release and the financial statements that are attached to it, our revenue has been growing noticeably quarter-to-quarter, year-over-year, and year-to-year as has our license revenue, which we view as the key indicator of market penetration and market share progress.

As you know, in the enterprise software business, leverage is a key determinant of the level of profitability that a company can achieve.

That leverage is evident in our escalating revenue, which has driven a sharp increase in our operating margins, which more than doubled this past quarter.

As we've described to you previously, our step-up in size and scale accelerates the point at which we enter the long-term operating margin range of 17% to 25% that we have targeted.

We've stated previously that we believe that we can enter that range at around 75 million or so of quarterly revenue level.

You can see our progress toward that milestone.

Our strategy centers around providing an end-to-end data integration platform solution whose differentiation is based upon its completeness, its scope of functionality, and its scalability all available from one strong vendor in the form of an integrated but modular suite.

Our growth can only come from customers' adoption of our approach in favor of other alternatives.

Surely our growth reflects that adoption.

In 2003 through a combination of internal product development and then acquiring Mercator and incorporating its key data transformation product attributes and talented people into Ascential, we've been able to expand the positioning and reach of our data integration solutions to address not only the operational and analytical environments that Ascential has traditionally addressed, but also transactional environments as well.

The ability to integrate all enterprise data off of one common platform is very much in line with the developing customer inclination to bring closer and closer together their full range of business processes including real-time transactions, front and back office operations, and analytical and business intelligence capabilities.

As the so-called real-time enterprise begins to take tangible shape customers want to be able to capture what's going on in their varied business processes and respond to business events instantaneously as they occur.

Also, the ability to get a broader solution from one strong and credible vendor specialized in expert and well-resourced data integration is also well in line with customer's preference for fewer but more strategic vendor relationships as opposed to several fragmented point products from multiple vendors with varying strategies.

We believe that what we offer and how we deliver it translate into superior value to our customers.

Our revenues are the best validation of how well our differentiation has been recognized and popularized by our customers and by our partners.

As we look at our business, we're offering our customers the unique capability to deploy data integration end-to-end solutions within any business process and any application environment be it transactional, operational, or analytical.

We are not providing EAI solutions.

Our data integration offerings interoperate with any complementary technology be it from IBM, from Pitco, from WebMethods, from Vitria, from Cipion, be it home-grown or from wherever.

All of it is available from a single vendor all on a single integrated highly scalable platform.

It is all available right here, right now today.

You've heard us say fairly consistently we believe it's not about segmenting our revenue by product component.

To us it doesn't make any difference which component the customer buys first because that initial purchase is more and more the first step on the way to deploying multiple components of our suite.

To us it's the aggregate level of license revenue that we generate and the extent of our penetration and footprint within a customers' environment that correctly measures the impact of our data integration solution on customers' strategic integration issues.

Nevertheless we do recognize that as we are now reporting on only the first full quarter since our acquisition of Mercator, it may be helpful to understand more granularly how the acquisition contributed to our results.

We detailed in the attachment to our press release the actual license and services revenues ascribed to the former Mercator product set and our results for quarter three and quarter four in 2003.

You will recall that we closed the transaction on September 12, 2003.

You can see from these numbers that without the Mercator contribution we grew 16% sequentially from quarter three to quarter four with 23% of license revenue growth.

We grew 39% year-over-year with 32% of license revenue growth.

Our growth for the full year of 2003 was 45% with 43% of license revenue growth.

We believe that these numbers clearly illustrate that our strategy and differentiation of solution has enabled very good growth in our business and in our market share.

Our continued program of extending the footprint of our offering and extending its applicability across all the business processes of the enterprise has simply expanded our addressable market and opportunities for our data integration offerings.

Any way you slice it, with or without the impact of acquisitions, Ascential Software is executing, growing revenue, and gaining market share.

Provision for the future of enterprise data integration is very evidently coming to fruition.

Data-related issues are rising to strategic significance in virtually all markets and industries.

Our unique end-to-end approach is now available to address even more of the customers' integration issues by virtue of the continued expansion of the capabilities of our data integration platform.

Based on our current license revenue level we believe we are the market share leader among enterprise data-integration focused companies, but we understand very well that there is a lot more market for us to go after.

Enterprise data integration has historically been a fragmented market with companies frequently taking an in-house half-coated approach to getting data from wherever it is to wherever it needs to be in order to accomplish their business information purpose.

Three quarters or more of the market is still that way today.

As data volumes continue to grow, as data types proliferate, as the timeframe for data access moves from hours to immediate the in-house approaches just don't cut it.

We believe that we are in the best position among all vendors to go after that unclaimed market and the newly developing market.

Because of the demonstrated and proven differentiation value our end-to-end data integration approach provides the customers combined with our strong family of strategic partners and combined with the demonstrated domain expertise and execution capability of our sizable resources in R&D and customer care and our worldwide operations.

Our profitable business model, our scale of customer base, our talent and resources-human as well as financial, and our rigorous focus on our core competency of data centric integration infrastructure we believe allow us to continue to innovate and to execute ahead of our peer companies.

I'd like now to turn the call over to Pete Fiore, who will give you more specifics on our operating results and also comment on our outlook.

Bob McBride will then review the financials and the related highlights.

Then we'll open it up for your questions.

Pete, please go ahead.

Thank you Peter.

Good evening everyone.

The fourth quarter was a strong finish to an excellent year for Ascential.

We achieved improvements in all key operating metrics including margins, DSO, average selling price, sales force productivity, and earnings.

We continued our record of sequential and year-over-year revenue growth and we took over first place in market share based on current revenues.

Along the way our operations have become solidly profitable.

We've extended our partner community.

We have dramatically increased our visibility and brand awareness, and we have expanded our product portfolio to one that is now the broadest and most scalable in our industry.

And we have significantly expanded our market opportunity to address the data integration requirements of any business process or application environment regardless of data volumes, complexity, or latency.

We believe our results reflect the superior value we offer our customers and the significant competitive advantage we have in the market today based upon the breadth and performance of our solution combined with the people, partners, and resources to back it up.

In our conversations with CIOs and IT executives, they all tell us the same thing.

They want fewer vendor relationships to manage.

They want to focus on partnering with a strategic vendor that can offer broad integration solution stacks and who have the vision and staying power to keep pace with their evolving business requirements.

This preference in evident in our revenue and market share growth and by the fact that nearly half of our license revenues in the quarter came from customers who are buying our entire suite or who are purchasing additional product components for an existing project.

New account business was strong in the fourth quarter as was expansion and new product business within our sizable and customer base.

A couple of examples of competitive wins during the quarter include Merrill Lynch who selected Ascential because of our ability to perform the data integration processing for their new wealth management console natively on their IBM mainframe systems.

Competing technologies required moving data back and forth between the mainframe and the UNIX-based offerings utilizing the gateway solution.

This approach is much less efficient and does not take advantage of the available processing power of the mainframe environment.

By combining customer information from the worldwide operating groups with external market data into a single application, Merrill Lynch expects to increase customer profitability by cross-selling products from a diverse portfolio of investment offerings.

Another significant win during the quarter was MGM Mirage who purchased our complete enterprise integration suite including our real-time integration services.

They are using our products to integrate customer data from across their various casinos, hotels, and other revenue sources including their newly launched players club royalty program.

This was a head-to-head competitive situation in which the customer selected Ascential because the integrated data quality capability of our suite was shown to be more flexible and more powerful than our competitors' multi-vendor approach and because we were the only vendor able to deliver web services support that could match MGM Mirage's plans for a services-oriented architecture enabling real-time integration and on-the-fly data standardization and matching.

MGM Mirage has deployed Ascential as the key component of its new customer relationship management application that provides an immediate single customer view across all their casinos and makes possible the very important ability to tailor promotional activity for their most profitable and active customers.

On an industry sector basis, we again experienced strong adoption across all key global and market sectors.

During the quarter approximately 28% of license revenue came from financial services with retail, telecommunications, health care life sciences, and manufacturing each representing approximately 10% of license revenue followed by the government, information services, and technology sectors.

From a geography perspective, we experienced growth in all major operating territories in the fourth quarter with North America accounting for 53% of total revenue and international accounting for 47% of total revenue.

Regarding the federal government sector, in Q4 we expanded our operation focused on the government business and expanded our presence within the US Air Force, the US Department of Justice, the IRS, and the FBI.

We are currently deployed in 25 federal government agencies including the US Army, the US Navy, the US Air Force, the Department of Justice, the Department of Transportation, and the Department of Commerce.

During the quarter our average selling price for direct new business in North America increased to approximately $234,000 in license revenue up from approximately $220,000 in Q3. [More expanding] blended average selling price, which includes license, maintenance, and services contracted for at the time of the sale was up nicely to approximately $296,000 compared with $275,000 in Q3.

During the quarter we closed 31 transactions with license revenue better than $250,000, 10 transactions with license revenue greater than $500,000, and one transaction with license revenue greater than $1m.

With the integration of Mercator into our company operations now complete we have expanded both the size and scope of our solution and our sales and marketing reach.

In each territory around the world we have completed cross-training on all products and we have the necessary resources ready and able to accomplish our goal of continued revenue and market share growth.

As a result we are very positioned to capitalize on a large market whose growth is being fueled by multiple drivers.

Business intelligence and data warehousing, enterprise application deployments, single view of customer, partner, supplier, application consolidation and migration, and new regulatory requirements are all high priority projects.

Each of them is dependent upon a comprehensive and scalable data integration infrastructure as their foundation.

We are benefiting from all this because of the unique capability of our product suite to provide this core data integration foundation.

This benefit is reflected in our sales force productivity as measured by quarterly license revenue per quota-carrying sales rep, which increased to approximately $390,000 in the quarter up 25% from the third quarter and up approximately 40% from the fourth quarter of 2002.

On the partner front we achieved a number of significant milestones during the quarter mostly notably the signing of an OEM with PeopleSoft.

This is a very significant competitive win that benefits Ascential in multiple ways.

It's an important endorsement and validation of our technology.

It will increase the visibility and image of our company.

It will expand our customer base and provide significant opportunities to up-sell all the other product components of the Ascential enterprise integration suite.

The primary drivers for PeopleSoft selection of Ascential as its OEM partner came down to technology and strategic business fit.

After an exhaustive product evaluation that lasted several months and that included hands-on testing of our products as well as a deep dive into our product roadmap, PeopleSoft felt that, because of the unique extensibility of our MetaStage product, it should serve as the core of their meta data offering.

They also recognized the power and performance capabilities of DataStage as well as the benefits of our approach to enterprise application connectivity.

They also felt that our openness with respect to business intelligence tools and other technologies was a natural complement to their strategy of including BI tools from the other leading vendors within their offerings.

Our agreement with PeopleSoft provides them with restricted use OEM versions of our DataStage and MetaStage products.

Due to the breadth of our product portfolio we have significant up-sell opportunity both in terms of PeopleSoft reselling some of our enterprise application connectors as well as our own sales force up-selling the full-use versions of DataStage and MetaStage and our data profiling, data quality real-time integration services products and our full range of enterprise connectivity offerings.

This expanded up-sell opportunity is also highlighted by the active field-level endorsement of PeopleSoft within their customer base and adds a lot of potential to this exciting relationship for us.

During the quarter we also continued our ongoing field-enablement programs with IBM and now have over 1,100 IBM field personnel educated on our product suite.

We are now included within the referenced architectures of IBM's Basel-2 [ph] and business intelligence solutions and we signed an agreement with IBM business consulting services who will use our data quality and profiling products for data quality assessments within the risk management engagements.

All of this is built upon our ongoing reseller relationship with the IBM software group, which continues to produce exciting common customers.

One notable new customer is IBM itself who purchased our enterprise suite to support their central customer management application.

From a revenue perspective, partner-influenced business in the quarter increased to approximately 45% reflecting the strong demand for our technology and the progress we're making in our program to expand our global network of partners.

On the technology front we continue our leadership in defining and shaping our market.

We are the first to extend the traditional view of data integration and EPL to include data profiling and data quality.

We are the first company in our market to support web service standards and to bring to market the means to invoke date integration through a services oriented architecture.

We are the first company on market to participate in the group computing forum.

Now we will lead in that market again.

At our Ascential world customer conference in October we unveiled our strategic product roadmap, which details our vision for applying these new technologies to offer data integration solutions that are ultra scalable, that are highly secure, that provide native support for emerging industry standards such as RFID, that significantly reduce the cost and complexity of deployment, and that dramatically increase productivity through automation expense-ability and reusability.

Our roadmap is designed to extend our leadership and differentiation by providing leapfrog benefits that leverage our customers' existing IT investments.

Some of this new functionality will begin making its way into our offerings as soon as the second quarter of this year with what we are calling our trinity release.

Incidentally, this is another example of the positive benefit of our getting together with Mercator.

The outstanding technical talent that joined us from Mercator along with our core competency in high performance transaction-oriented data transformation provides the additional resources and know-how to accelerate us along our path to our product vision.

We are very pleased with the results for 2003.

We are especially pleased with our position in the marketplace as reflected by our rapidly growing market presence and recognition.

As we continue to see increases in activity and interest in our offerings, we are gaining confidence that 2004 will present a better IT spending environment than 2003.

Our guidance for 2004 remains for the revenue in the range of $265m to $275m with GAAP profitability in each quarter of the year barring any unforeseen circumstances.

We do feel, however, that our environment overall has continued to improve since our last conference call with you in October of last year.

Therefore we believe that there is more likelihood that we could approach the upper end of that range.

We continue to expect total expenses to be between $61m and $64m per quarter.

These numbers include approximately $2.5m in amortization of purchased intangibles and stock-based compensation and up to approximately $0.5m per quarter for legacy expenses related to discontinued businesses.

For the first quarter we expect revenue between $61m and $64m reflecting some moderate seasonality in software sales generally and for some of our partners in particular.

Interest income, based on recent interest rates and expected cash balances, is estimated to be approximately $2.1m per quarter.

The tax rate plan for 2004 is 33%.

Bob McBride, our CFO, will elaborate more on our financial results and aspects of our outlook.

I'd like to emphasize that we believe that we have the right level of investment to continue to expand our differentiation, to achieve continued growth and further leverage on our business model in 2004, and to be well positioned for 2005.

We also believe we are in an excellent position to benefit very well from improving IT spending should it materialize beyond current expectations.

Now let me turn the call over to our CFO, Bob McBride.

Bob.

Thank you Pete.

Our bottom line performance in Q4 of 2003 was a GAAP net income of 17.3 million or 27 cents a share.

This income included a $16.5m tax benefit, which occurred in Q4.

As I've mentioned many times in the past, we have been carrying tax liabilities on our balance sheet mostly emanating from the legacy operations of the database business that we sold to IBM.

The credit to our provision in Q4 results primarily from adjustments in these tax accruals.

Certain tax issues have progressed to the point of resolution, thus giving rise to this tax accrual adjustment.

The credit to the tax provision in Q4 does not represent any significant cash movement, but rather an adjustment of our accruals.

Included in this adjustment is a provision for estimated 2003 domestic taxes related to the final installment received on the IBM sale and that of available NOL and tax credit process.

As I make reference throughout this discussion to both GAAP and pro forma results please refer to our description of pro forma in our earnings release for this quarter in the investors section of our website www.ascential.com/investors.

Income before tax of $900,000 less a tax provision at a pro forma tax rate of 30% yields net income of one cent per share representing a 10.8 million or 18-cent-per-share improvement from a year ago and 2.3 or a four-cent per-share improvement sequentially.

If you refer to the schedule that is attached to our press release you can see the items that reconcile our GAAP results to pro forma.

These are consistent with what we've previously articulated.

Without them, our pro forma net income was 5.6 million or nine cents a share.

This represented an improvement of 4.3 million or seven cents a share over last year's Q4 and 1.9 or three cents per share improvement sequentially.

Q4 was our fifth quarter in a row of positive increasing pro forma earnings.

Before further discussion of financials, let me introduce this conference call's theme.

That is leverage.

Certainly leverage in the sense of what flows from significant revenue increases, but also leverage that flows from a significant increase in our customer base, a significant increase in the number of business partners, and a significant increase in the people skill-sets that we are now able to deploy.

What better metric to typify the manifestation of leverage than operating income.

Our pro forma operating income of 6.1 million was the third quarter in a row of positive operating income and more than tripled our operating income of Q3 '03 in absolute dollar terms.

In percent of revenue terms more than doubled that of Q3 to 9%.

Q4's operating income also represents in improvement of 8.6 million from Q4's loss of a year ago.

Ascential's total revenue in Q4 was 64.5 million.

This represents a growth of 90% from Q4 of last year and 40% sequentially, both on a pro forma basis.

This is our seventh consecutive quarter of sequential revenue growth and sixth consecutive quarter of year-over-year growth.

License revenue in Q4 was 30 million representing a growth of 59% from last year's Q4 and 34% sequentially.

Given the recentness of the Mercator acquisition we have separately provided the revenue associated from that acquisition in a table contained in our earnings release.

Our growth without this revenue is very strong and reflects leadership growth.

From a geographical perspective, North America revenue contributed 53% of our worldwide revenue with the balance of 47% was generated internationally.

Both grew substantially year-over-year following our additional financial highlights from our results, which were major contributors to our continued positive operating income and profitability.

Our GAAP total gross margin of 72% for Q4 of 2003 improved year-over-year by four percentage points and improved from Q3 2003 by three points.

Our pro forma gross margin of 76% was also a four percentage improvement over Q4 of last year.

GAAP service margins were 60% this quarter, up from 51% a year ago and up from 56% in Q3 of this year.

This increase was fueled mainly by maintenance margins of 82%, an improvement from Q4 last year of eight percentage points and two percentage points sequentially.

These maintenance margin improvements resulted from the efficiencies derived from the integration of the Mercator maintenance base into our support organization, another example of leverage as we grow and expand.

Our total combined headcount at quarter end was 856. 302 of those were in sales and marketing, 215 in services and support, 228 in R&D, and 111 in G&A.

We anticipate an approximate 10% headcount growth phased in through 2004 primarily in revenue-producing sales and services as well as some in marketing and R&D.

The pro forma effective tax rate for Q4 was 30% excluding the tax benefit that I described to you earlier.

We are currently planning the 2004 tax rate to be 33%.

Cash and marketable securities totaled 516 million at the end of Q4.

As we indicated in our press release and we projected in our October conference call, the major cash outflows in the quarter were a little bit less than 28.5 million associated with paying the remaining outstanding shares of Mercator as well as paying for the cost of the transaction in the legacy payments of 3.4 million related to divested business operations.

Offsetting this was a cash inflow of 20.3 million from the exercise of employee stock options.

Excluding these items, Ascential was cash flow positive from ongoing operations during the quarter.

Going forward we expect our cash to be relatively flat in Q1 of next year-of this year of '04 and build throughout the remainder of 2004.

Accounts receivable at the end of Q4 was $42m reflecting a DSO of 59 days, an improvement of 13 days from Q4 of last year.

In 2004 we anticipate being within our targeted range of the low 60s for DSO.

One final word.

From a macro economic environment viewpoint, we still remain cautious toward seeing significant improvement in IT spending.

However, there are definite signs that customers are becoming more open to invest in solutions than offer a reasonably short time to return value.

With this macro economic backdrop in mind, our outlook for Q1 and the remainder of the year has been described in our press release and reiterated by Pete.

I would like to emphasize, however, that we believe we are poised to leverage our business model as we capitalize on our growing popularity and momentum as reflected in our results at a time when demand for strategic data integration solutions is clearly on the upswing.

We believe we are at the right investment levels for the current environment and we are in a position to prudently increment our resources and investments to benefit from continued improvement in IT spending as it materializes.

As a result of all these things, we are in a position to achieve what we have been consistently targeting over the last two years - profitability through operating margins that place us firmly in the 17% to 25% range.

This is the beauty of how leverage based on revenues that provide superior value to our customers can mold an attractive financial model that drives long-term value to shareholders.

I'll now turn it back to Peter.

Thank you Bob.

Thank you Pete.

Operator, we are ready to open it up for questions.

Thank you sir.

Participants on the phone, if you would like to ask a question, simply press star one on your phone keypads If you hear your question is answered and wish to withdraw, then you would press star two.

Once again that is star one to ask a question and star two to cancel.

One moment while questions are registered please.

Our first question comes from Imran Khan of Fulcrum Global Partners.

Good quarter, congratulations.

You executed our number again.

A couple of quick questions.

Could you please remind us what the split between direct revenue versus indirect revenue was in the quarter.

Direct revenue-partner-influenced revenue this quarter was about 45%.

I think you were taking some initiative to expand your SI influenced revenue.

Could you talk about that.

Also, how much was IBM as a percentage of revenue this quarter?

The last couple of quarters as we've reported, our partner influenced business was I think in the neighborhood of 30-35%.

This quarter we saw a reasonably significant up-tick in that.

We think that signing PeopleSoft is a move in the right direction to continue to build our partner-influenced revenue.

We have a very aggressive ongoing program to continue to partner not only with the global ISVs, but all of the large global systems integrators as well.

Our goal is to continue to drive that partner influenced business up and up and up.

We market the global 2000.

All these large global IT providers are prevalent in virtually every [inaudible] we're in.

With respect to IBM, they were indicated as a 10% customer.

We had one 10% customer.

You can guess who that was.

Great, thanks.

Our next question comes from Charlie Chen of Needham & Company.

Thanks and congratulations on a nice quarter.

Can you elaborate a little bit more about some of the signs you are seeing in improvement in sentiment as far as IT spending is concerned?

Particularly what you've seen in January, understanding that it is early in the year.

Can you provide more specifics?

Probably the most significant measure for us-there is a quantitative measure and a qualitative measure.

The quantitative measure for us is the aggregation of qualified activity that we are engaged in all around the world.

That is very, very substantial.

That indicates customers who have identified requirements that fit our capabilities and who have demonstrated some level of interest in learning more about our capabilities with a possible view toward investing in a solution for those requirements.

I am using these words purposefully to indicate that all the activity we're seeing quantitatively reflects what we hear when we talk to customers, when we go to trade shows, when we meet with our customer advisory board, and we meet with IT executives, which says that there is an atmosphere of looking for capabilities that provide leverage on existing investments and that provide the means to get that leverage quickly.

All of that says that people are looking for where they should make investments.

To go from there to getting a purchase order, I think that the lessons learned over the last couple years-I think they are permanent lessons.

I think customers are being prudent.

Customers are being critical.

Customers are being selective.

Customers will look to spend a few hundred thousand dollars before they commit to spend a few million dollars.

That is part of the environment as well.

For us, we view this as more positive than problematic, first of all because we get a chance to show customers how they can get some significant tangible value in a fairly straight-forward fashion.

We show them how they can get it in modular pieces rather than in enormous chunks.

We welcome them to be very critical and to put us to the test and put others to the test and give us a chance to demonstrate the differentiation that we believe we have.

A couple questions on Mercator.

Can you talk about the thoughts on the ramp of cross-selling.

Have there been any changes to your expectations on the timing of that opportunity?

Then I have a couple more after that.

We began to see the impact of some cross-selling in Q4.

Keep in mind, I think as we indicated in our call in October, our strategy with respect to our sales force in Q4 was to continue for the fourth quarter the focus of the Mercator and essential sales organization.

The primary focus in that period was closing out the year and beginning the cross-training.

Through the end of the quarter and finishing the kickoff we have now completed all the cross training.

We are now beginning in earnest to go after this one unified Ascential customer community.

As we described in the past, we're expecting to see that build through the first part of the year.

We would expect to see the significant part of the impact happen in the second half of the year.

It is happening now.

We have customers where we're successfully cross-selling today.

Where do you feel the most immediate opportunities are whether they are in the Mercator or the Ascential install base?

What are your expectations for what ASPs will do when the cross-selling gains traction?

Yes.

An immediate opportunity we're seeing where we're getting some benefit is, if you think about the DataStage TX customer community, up until now they haven't had the benefit of real-time data standardization, data quality, and data matching.

Those are applications - like health care claims processing and financial-related information where the impact of that data is very high.

That is an immediate area where we can-where the products are already integrated and where we can bring a high-value offering into our new customer community.

On the other hand, we have traditional Ascential customers who have been deploying in data warehouses.

Now we want to begin to include real-time transactional information within operational data stores.

That is another opportunity for some immediate targeting.

I think both customer bases are fairly well primed for these respective technologies.

Our expectation is that our ASPs will continue to rise as we've been saying all along.

I don't think the cross-selling or the inclusion of DataStage TX will change our expectation with respect to our selling price.

OK, thanks a lot.

Thank you.

Our next question comes from Brent Williams of McDonald Investments.

First a housekeeping question.

The currency impact on the international revenue line?

Q4 measured from Q3, the revenue impact was about 1.2 million.

I must say very quickly that you also have to look at the foreign currency impact on expenses as well.

That was roughly 800,000.

Net impact to the operating income line before tax was just a little less than 400,000 in Q4.

OK.

Within the international front, any particular countries or general regions that seem to be picking up particular momentum that is of interest or surprising to you?

I think each of the geographies were within the range of our expectations.

Some of the really, really large economies like Japan and Germany are ones where we feel our positioning is very strong based upon product, based upon partners, based upon resources on the ground, and based upon reference-ability of customers.

What we're anticipating eventually is a little bit of an improvement in the local environment and the local economies that I think will be very helpful later on during the course of this year.

OK.

You had talked about gross margin improvement on maintenance following the Mercator acquisition.

Is that due to simple mechanics of the combination of staff and the staffing levels that you have put in place?

Or is there some aspect of Mercator-in other words, is there lower call volume per customer contracted for?

Is there some other productivity issue that is going on?

I think it is another example of what leverage can do.

When you add that size operation to an existing operation of equal size, you don't need to duplicate the management levels.

You gain a lot of efficiencies in that kind of increase in scale.

I think that is what we're seeing.

OK.

Lastly, on the PeopleSoft deal, I want to clarify-I may have misheard this either on this call or something recently.

Was the PeopleSoft deal a rip-and-replace from another data integration vendor that had an earlier OEM agreement?

Or is this putting the product in different functionality like that?

This is a replacement program.

OK, great.

That's it for me.

Thanks.

Our next question comes from David Beck of RBC Capital Markets.

Good evening gentlemen.

Another good quarter.

Just a little bit further on the PeopleSoft situation.

There had been some suggestion made that you had won that deal on price.

I want to get your sense-your side of that story.

As we described, in the end with PeopleSoft it came down to two factors I described, which were technology and complementary strategic business fit.

In those areas we worked closely with PeopleSoft.

They determined through some exhaustive evaluations that what we could offer from a technology point of view was more complete and better aligned with their vision for where they wanted to take their offerings.

Economics are a part of any transaction.

They are rarely, if ever, at the top of the list of making any business decision.

We found that working with PeopleSoft it came down to would the technology allow them to accomplish what they wanted to accomplish and would we be the kind of partner they could work with over a long period of time.

Great.

This provides the same kind of selling opportunity into the PeopleSoft install base as you develop this relationship with them, I would expect.

Absolutely.

We are already engaged in a number of PeopleSoft accounts where they have begun shipping our product on a ongoing basis.

They are engaging with our services organization.

There will be opportunities for up-selling.

One of the opportunities we have, which may be unique to us, is that we have a very, very broad partner portfolio.

The fact that a customer may use a limited version or a restricted-use various of our product specific to an EPM environment, they will eventually need data quality.

They will need data profiling.

If the data volumes get big enough, they will need high performance parallel computing.

All those things provide up-sell opportunities.

All this is done with the cooperation and endorsement and side-by-side working aspect with PeopleSoft and the PeopleSoft sales force.

This was an important element of the agreement for both us and for PeopleSoft.

On the pro forma charges [unclear], when are we going to see the pro forma expenses adjustments no longer around?

You have commented on this in the past.

I want a little update.

I think you have to look at it in classifications.

As an example, the amortization of intangibles is running at a quarter level of about half million. 1.3 million of that is what we had been running prior to the Mercator acquisition per quarter from the Torrent and Vality acquisitions.

The Mercator acquisition added about 1.2 million to that.

That is what we anticipate the run rate will be going forward.

The other big hunk of transition expense was the 3.5 million of transition expenses relating to the Mercator acquisition.

We anticipate-I know-at this point we don't have to anticipate anything.

Those folks are gone.

Those expenses are not going to occur going forward.

That leaves what we affectionately call the legacy database expenses, which could run as high as $0.5m a quarter-in that neighborhood.

We would expect that to taper down as we go through the year.

So we're down to results.

The big hunk that is left is the amortization of the purchased intangibles.

OK, very good.

Great.

Thanks.

Thank you.

Our next question comes from John Torrey of Adams Harkness & Hill.

Nice quarter.

A point of clarification.

You have talked for several quarters about partner-influenced revenue.

That is not pure indirect revenue.

It's [seven] direct revenue and also influenced revenue.

Is that fair to say?

That's right.

Are you happy to disclose the indirect piece separate from that, or not at this point?

We don't.

The reason we don't is because it is variable.

IBM is always resold revenue.

Other relationships are sometimes resold, sometimes not resold.

SAP, for example, resells our products.

Frequently we will be engaged in substantial transactions.

We will be working side-by-side with SAP.

The transaction will occur directly between us and the customer.

This also happens frequently with just about each of the major systems integrators.

Sometimes it is resold and sometimes it isn't.

It isn't particularly significant to us whether it's resold or not resold.

We focus on making sure that our solution is the solution chosen by the end customer.

Sometimes it is a matter of customer preference.

Sometimes it's [time].

Sometimes it's a matter of partner preference at the transaction level.

It varies.

OK.

With respect to the PeopleSoft deal, I know you have talked about this a little bit.

Is there a way to balance for us the opportunity you see in the OEM side of the business versus the opportunity you see in the up-sell side of the business.

Where do you see the larger opportunity?

I would say that over time, the larger opportunity is the impact and the outcome of the up-sell process.

Keep in mind that the real outcome of the up-sell process in a given customer situation is the eventual pervasiveness of elements of our platform throughout the customer's enterprise.

That could get there both through us or through PeopleSoft selling other parts of our product line or through members of the integration community who work with us and/or with PeopleSoft.

There are a lot of different ways it can get there.

All of it represents continuing revenue for us.

OK.

Last question.

This week Oracle hosted its Apps World and seemed much more friendly than in the past about its discussion of data hubs and data integration.

Can you talk about that a little bit and how you have those discussions with customers.

What did they talk to you about this week with respect to that?

It's a terrific chain of events, I would say.

For us this is, in many respects, validating the strategy that we've been pursuing that recognizes that within a typical enterprise environment there are all different kinds of data sources and all different kinds of platforms and all different genealogies of applications.

That is very difficult to centralize all of that on one application and eliminate all other aspects of the environment.

People are beginning to refer to this type of approach as master data management.

We have many customers who are working with us on master data management projects.

We have Oracle customers in this area as well.

For us on the one hand it's a validation.

On the other hand we're looking forward to working more closely with Oracle now because we think they need quite a few of our capabilities to deliver on what they are now bringing to market.

OK, fair enough.

Thanks very much.

Our next question comes from Phil Rueppel of America's Growth Capital.

Thanks very much.

First of all, driving the average license per customer increase, it looks like a nice increase in large and very large deals.

Was that seasonally related-a seasonal event or is it something that could continue.

Was it related to the fact that you are seeing more partner-influenced revenues?

Is it something that could point to signs of general recovery in the marketplace?

It's a number of factors.

I don't think it is just seasonal.

First of all, we have a lot more to sell today than we did a year ago.

If you think about how we engage a customer today, with the breadth of functionality we have, we can engage a customer in a way that we can address a wide range of their integration requirements.

In doing so, there is a big opportunity for us to become pervasive inside an organization.

Once the customer begins to deploy us that way, they begin to see the need and the requirement for having all of the capabilities of our product set.

For sure, a big driver is the fact that we've got a very broad product offering.

The second thing is we've been continually training and educating our sales force.

Over time our sales organization is becoming much more effective and much more knowledgeable on how to position our products and how to identify the appropriate individuals inside the organization who have an enterprise view of the world where they recognize the requirement for a full-suite approach.

Although this increasing visibility, increasing recognition of the types of problems we solve, it's not just business intelligence and data warehousing.

Now it is CRM and enterprise application deployments.

It is single view of customer or partner or supplier, master data management, SAP, consolidation.

One of the customers we signed up last quarter was a new customer, Tyson's Foods.

They signed a three-year, $370m project to consolidate about 80 systems down to a single SAP instance with an SAPBW implementation.

They selected us because when they did their review, we were the only company that could provide all of the upfront data profiling that they are going to need as they investigated these 80 systems.

They provided the data quality to do all the standardization and matching and who has the transformation power and capabilities to merge all this information into this large SAP environment.

The fact that we had tight integration with SAP was also an important factor.

All those things are-in that we are now attracting some of the large global IT providers like the big SIs who see the value of what we provide and bring us into larger opportunities.

To follow up a little bit.

You mentioned training of the sales force and how it was important.

As I recall last quarter you had a goal to add some 10 or so direct sales folks.

Is that something you have been able to do as you head into 2004?

Where are you in terms of employee count on the quota-carrying sales reps?

I think we're well on track with respect to hiring of our sales force.

We'll be about 90 sales reps.

We are going to add sales people throughout the course of the year.

Great.

Thanks very much.

Our next question comes from Peter Cooper of SG Cowen.

Thank you very much.

On the sales rep topic, gentlemen.

We are talking about $390,000 per average rep, up very strong sequentially and year-over-year.

Are there for '04 any type of thresholds or kickers for their compensation?

It could be half a million or things like that?

Are we expecting more from the sales folks?

Allow me to make a brief comment on that.

I think as the lower productivity we achieved in Q4 was in our targeted range of around $400,000 of license revenue per quarter.

In 2004 as we add early on sales reps, they don't become immediately productive.

It usually takes two quarters to ramp up to become completely productive.

What you will see in the early part of next year, I believe, is that our productivity may optically come down a little bit from what it was in Q4.

That is the price you pay for bringing on additional sales reps going through the training regimen and getting productive so they can deliver revenue later on in the year.

You are going to see a little fluctuation whereas in the past you have seen a steady upward climb in that metric.

You are going to see a little fluctuation in 2004.

That is because of this phenomenon of hiring sales reps and making them productive through time.

OK, definitely fair enough.

One point of clarification on the deferred revenue line.

Down a little bit more than we had modeled, yet revenues were very strong and even I think you talked about a gross improvement on the maintenance contracts.

Any quick thoughts there?

Sure, a real quick thought.

I saw that optically too.

I became alarmed for a second and then I did some evaluation.

What happened is that we inherited a large maintenance stream from Mercator.

The good news is that the renewal rates on that maintenance stream have been high, almost as high as ours, which have been in the 95%-plus range.

The bad news-I don't think it's bad news.

It's just the phenomenon is that the stream that we inherited-the renewal timing of that stream is at the beginning of the year.

That is the way they structured their contracts.

So what we see in Q4 is a rundown of deferred revenue on the Mercator maintenance stream, which will regenerate itself as they renew-as we anticipate they will renew at the high rates that we have historically seen, in 2004.

It is a demographic phenomenon.

Q1 - I am sorry - Q1.

So it's a seasonality issue that [inaudible]?

Yes, it is.

OK, thanks very much.

Our next question comes from Mark Verbeck [ph] of Smith Barney.

Thank you.

Good quarter.

Can you tell me what your new versus existing customers were in the quarter - revenue contribution?

It was about 70% existing customers and about 30% new customers.

Sorry, about 65% existing and 35% new.

OK.

On your longer-term operating margin, if I do the math and take the mid point of what you talked about your operating cost being-the 61 to 64 on the 75 million, it doesn't quite get me to your 17 to 25.

Are there some costs that are coming out over time?

Is your depreciation going down?

Is there something going on there?

Could you help me understand that a little bit better.

Could you express your question one more time?

Sure.

If I take 62.5 million in expenses on 75 million in revenue, it gets me to a high 16s operating margin.

You had talked earlier in the call about still sticking with the thought that you would be at 17% to 25% operating margins on 75 million.

What I tried to say and hopefully did say is that we would be entering that range at about 75 million or so a quarter.

We would expect to be marching to that target.

If I could express it another that maybe would also be helpful.

Our model for our type of enterprise software company, which combines products with services offerings ultimately results in a mix that is somewhere between 50/50 license-to-service or a little bit more than 50/50 license-to-service as you get to a particular critical mass level.

We think that it is the run rate neighborhood of 300 million plus.

When you run all those numbers, you get into the high teens of operating margin, then leverage starts to take over.

Then going up from there?

Is that the way to look at it?

That is correct.

OK, excellent.

Thank you very much.

Thank you.

I apologize for that break in my voice.

I've been handed a little bottle of water and I am ready to roll.

Our next question comes from Kevin Buttigieg of Kaufman Brothers.

Thank you.

Along those lines of the margin question and 300 million in revenues.

In the past you have talked about an anticipated split between license and services revenues.

I believe you talked about 60/40.

Could you update us on that and what you might expect within that split for 2004.

I think 2004 is not going to be the year to be at 60/40.

By virtue of bringing on Mercator we benefit from a strong customer base that is loyal to the technology, that brings with it good recurring maintenance revenue.

That brings our mix of service to license-right now it is below 50/50.

As we build up on that, it is going to take a little while to cross the threshold.

It depends also on just how steep our growth rate can be during '04 and '05.

We think we have the appropriate plan for the environment as we see it.

We think we have a lot of leverage available to us.

We're confident we'll be able to go just as rapidly as the environment allows us to go based upon the strength of our offer.

OK.

Thank you very much.

Our next question comes from Bob Resaag [ph] of Mike Morgan & Co.

Congratulations on a good quarter.

I have a question or two.

A point of clarification on PeopleSoft choosing you as a product displacing Informatica as you became the vendor of choice for them.

To reiterate what you said, this was not a business that you bought.

You won it because of the functionality.

I think we've been clear on all that, as to not only what we believe PeopleSoft determined to be their criteria, but what PeopleSoft said were their criteria.

Very good.

You've been on steady growth phase for some eight or nine quarters.

Initially I think there was some skepticism of your capabilities in competing against Informatica.

You seem to be on top of your game.

Clearly you compete directly head-to-head with Informatica most often.

Can you share with me your perspective and your perception of percentage of times that you win head-to-head.

It clearly seems that you are breaking away from them.

Could you share with us some of the anecdotal observations that you may have.

The way that we look at this is that we work very hard to understand very well what the customer's requirement is and to help the customer understand how we can meet that requirement.

If we do that job well, if we qualify well, if we present ourselves and our products, and our capabilities well, and if we can do it inside the bounds of the customer's priority, timetable, and budget we would expect to win rather frequently.

I am pleased to say, we do.

Thank you.

Thank you.

This does conclude today's question and answer session.

At this time I'd like to turn the conference back over to David Roy.

Thank you all again for being with us today.

Certainly 2003 has been eventful.

It has been gratifying.

It has also been very energizing for everyone in and around our Ascential family.

I do want to take this opportunity to thank publicly our entire team of outstanding and dedicated employees all around the world whose tireless hard work, excellence, and commitment to delivering value to our customers and to you our shareholders have produced these outstanding results.

As this is our first call together in 2004 I would also like to take the opportunity to wish you all a healthy, safe, fruitful, and rewarding 2004.

Thank you again for your continued interest and support that we strive to continue earning each and every day.

Thanks a lot and good evening everyone.

Thank you.

This does conclude today's conference.

We appreciate your participation.

You may disconnect at this time.