International Business Machines Corp (IBM) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Corio first quarter 2004 conference call.

At this time, all participants are in a listen-only mode, and later we'll conduct a question-and-answer session with the instructions being given at that time.

If you should require assistance during the call, please press star then zero.

And as a reminder, this conference is being recorded.

I would now like to turn through conference over to our host, Chief Financial Officer, Mr. Brett White.

Please go ahead, sir.

Okay.

Thank you, operator.

Hello, everyone, and thank you for joining us to discuss Corio's first quarter of fiscal 2004 financial results, which are for the period ended March 31st, 2004.

If you don't currently have a copy of today's press release, feel free to go to the Corio website at www.corio.com, where it's presently posted.

On the call with me today is George Kadifa, President and CEO of Corio.

George will report on our financial results, review our business performance for the last quarter, and I'll discuss our financial results in greater detail and provide financial guidance for the second quarter of 2004.

George will then come back and -- for some closing remarks, and we'll open up the call to questions.

First I'd like to preface the discussion with our Safe Harbor statement.

All forward-looking statements made during the course of this conference call are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

We are including as part of this conference call a discussion of targets for the financial and business performance of Corio for the second quarter of 2004.

All of this discussion constitutes forward-looking statements regarding future events or future financial performance of the company.

The risks and uncertainties that could cause actual results to differ from those expressed or implied by forward-looking statements include, but are not limited to, the risk factors noted in the company's filings with the Securities and Exchange Commission, including the company's registration statements on Forms S1, S3, it's prospectus, it's quarterly reports on Forms 10Q and it's annual report, Form 10K.

The company assumes no obligation to update the outlook information that we are providing today.

With that, I'll turn the call over to George.

Thank you, Brett.

And welcome everyone.

Today I'm pleased to update you on two key topics.

First, our solid Q1 performance, which exceeded the guidance we provided you 90 days ago, and second, the Demand momentum and operational achievements that produced such results.

Regarding our Q1 performance 90 days ago, we set the following objectives: One, total revenues were targeted to be in the range of 16.4 million to 17.2 million for Q1, investments in Q1 in professional services at sales and marketing were targeted to grow to take advantage of the business opportunity we saw.

Three, start-up costs were targeted to grow for activating new customers that we gained.

And four, Earnings Before Interest, Tax, Depreciation, Amortization, EBITDA, was targeted to be in the range of negative .5 million to negative .9 million.

As shown in our earnings release today, we have exceeded all of these targets: One, revenues were $17.6 million, which was greater than the upper range of the guidance, and a 3% sequential increase over Q4 revenues of 17.1 million.

Two, EBITDA was a positive $.2 million, nicely beating our guidance, with Q1 being our fifth consecutive quarter of positive EBITDA.

Three, total cash balance was $44.7 million, which was $2 million greater than our ending balance in Q4.

And four, we achieved all the above results and exceeded our guidance while still making significant investments in sales and marketing and activating new customers won last quarter.

Second, our Demand momentum in Q1 was very strong.

Corio won seven new customers in Q1, and major bookings were also achieved within our current customer base.

We are very pleased that Q1 registered our largest bookings quarter since the year 2000, equally balanced between our product lines and the size of customers.

This momentum is showing very good returns on our investments in sales and marketing, and confirms the continuing adoption of our applications on Demand platform and services model.

We expect this momentum to continue, and we are now focusing on building relationships with third parties to expand our market reach and alliances.

To expand on our Demand momentum, I wanted to share with you more details on our strategy and execution.

Corio is targeting a base of 50,000 customers of large enterprise applications, in addition to new customers who acquire such applications.

According to a March 2004 study conducted by the Gardner Group, the Global Services market for such customers exceeds $35 billion currently, and is expected to reach $50 billion by 2007.

Corio's value proposition is new and unique in this marketplace, which is traditionally being served by integrators, outsourcers and offshore companies.

Our advantage is the best value proposition, characterized by higher service levels, better economics, on Demand flexibility and innovation.

Companies select us, not just when they want to implement new systems, but also when they want to upgrade current systems, re-architect their software deployment, lower costs or increase their service levels.

According to IDC, our on Demand model is now being considered in about 50% of all such decisions.

This in sharp contrast to the 10% ratio we use to see a couple of years back.

Within this overall market, we made a decision in Q4 to focus our business development efforts on the ecosystems of the enterprise software companies we service.

This means that we have aligned our business development organization with such ecosystems where Corio has today a leader with a team of senior-level solution architects, focused on working with the ISV, it's user base Ace Technology Partners.

Such alignment has produced immediate results as we witnessed in Q1.

Based on such success, we will continue to focus throughout the year and beyond.

Operationally, we have kept the service levels to our customers very high, and our customer satisfaction is second to none.

Since last year, we have been operating a customer service organization with senior-level managers responsible for servicing our customer base and focusing on customer satisfaction.

This organization conducts regular customer satisfaction surveys, and is engaged deeply in managing and expanding the relationship between Corio and our customer base.

We are pleased that our investments in this area have produced high customer satisfaction, as well as significant add-on business.

In Q4 and Q1, we carried the required investments to bring the new customers to production status, and this will continue in Q2.

Such investments are primarily in equipment and labor to activate and migrate these customers to Corio's production environment.

The expenses to such investments are taken as incurred and upfront, while the revenues are recognized throughout the term of the contract.

Despite such upfront expenses, we are pleased that we have maintained and improved our gross margins since Q3 last quarter -- last year.

In addition, we have taken a decision to streamline our data center operations and concentrate our activities in the smaller number of sites.

Such streamlining has started this quarter, and is expected to conclude by Q4.

Throughout such exercise, we expect to increase our operational flexibility, lower our costs, and have a completely consistent delivery model throughout the organization.

Technologically, we will be releasing versions 4.0 of our iSRVCE operational platform in the next 90 days or so.

New automations, self-service web services, workflows, provisioning and more reporting will be provided.

We are very pleased by the progress we have accomplished in [indiscernible] such platform, and our objective is to have the industry's most advanced operational platform to service our customers enabled by the intellectual property we are building, and we are close to achieving such objective.

Finally, we have started a new strategy to build alliances with organizations that have significant presence in the marketplace we serve, and we will provide you with more updates on progress in this area in subsequent announcements.

At this stage, I would like to turn the call over to Brett for the detailed financial information.

Brett?

Thanks George.

We're very excited to share with you today our financial results and accomplishments for the first quarter, and our outlook for Q2 '04.

Total revenue for the first quarter was 17.6 million, which is a 3% increase from the prior quarter.

Applications management revenue was 14.9 million for the first quarter, which is an increase of 4% from the prior quarter.

The first quarter includes nonrecurring customer settlement fees of approximately $1 million, versus approximately $.7 million in Q4.

Professional services revenue was 2.7 million in the first quarter.

Total cost of revenue expenses, which includes application management services and professional services was 13.7 million, resulting in a total gross margin for the first quarter of 22%, compared to 20% last quarter.

The cost of application management services revenue in Q1 was 11.3 million, resulting in a gross margin of 24%, compared to 21% last quarter.

The cost of professional services was 2.4 million in Q1, resulting in a gross margin of 12%, compared to 17% last quarter.

During Q1, as we told you in the previous call, we made investments in new leadership in the professional services organization.

Indirect operating expenses, which include R&D, sales and marketing, and G&A in total were 5.6 million in the first quarter.

R&D expense was .6 million in the first quarter.

Sales and marketing were 2.7 million, an increase of 31% from the prior quarter.

As of March 31st, we had 11 quota carrying reps.

The increase in sales and marketing cost was primarily due to our focus on a line of business sales and marketing strategy, where each of our offerings, ASP, Oracle, PeopleSoft and Siebel has a dedicated sales and marketing team, and it's also due to increased commission expense from the prior quarter.

G&A expense was 2.3 million for the first quarter, a decrease of 11% from the prior quarter.

Our GAAP loss in Q1 '04 was 2.2 million, or 4 cents per diluted share, a 56% decrease from 5.2 million last year, and a 10% decrease from the prior quarter.

EBITDA, which is Interest Before Interest, Taxes, Depreciation and Amortization, in Q1 '04 was a positive .2 million.

This marks our fifth consecutive quarter of EBITDA profitability.

On the balance sheet, we finished the fourth quarter with 44.7 million in cash, cash equivalent, short-term investments and restricted cash, and operating cash flow was the use of 500,000.

During Q1 '04, we finalized a $7 million equipment credit line and drew down a total of 3.9 million to finance Q4 '03 and Q1 '04 capital expenditures.

Day sales outstanding was 30 days versus 34 days in the prior quarter.

We're targeting approximately 30 days going forward.

We had 326 employees on board at the end of the fourth quarter, a net increase of 12 employees from the last quarter, and included in this number are 64 employees in our Bangalore India office.

On metrics, our MRR or Monthly Recurring Revenue, was approximately $45,000 a month,

And onto other matters, regarding -- as we disclosed in our press release, [Exfinant], Inc., a customer that accounted for 12% of our total revenue for fiscal 2003 was acquired by Avaya, Inc. in November of 2003.

Avaya System is on a different software platform than [Exfinant] System, and Avaya has been migrating [Exfinant] System onto it's own.

Consequently, Avaya recently notified Corio that it would terminate it's customer contract associated with supporting this platform at the end of July, 2004.

At the time of the notification, and at a subsequent meeting between the parties, however, Avaya expressed an interest in continuing the relationship beyond the end of July, and the contract requires Avaya to pay Corio certain fees if Avaya were to terminate in July.

We are currently discussing with Avaya a number of different potential service offerings, and will not be able to assess the impact on our future revenue, or even determine if the impact is material until these discussions are finalized.

Onto Q2 guidance.

Historically, it's been the case that bookings translated into revenue within a month or two after booking.

What we have seen in some of the larger bookings over the last two quarters is that a longer time lag between booking and revenues than historically has been the case.

We expect total revenue in Q2 '04 to be in the $16.4 to $17.2 million range.

We expect settlement fees in Q2 '04 to be approximately 500,000.

So adjusted for settlement fees, the top end of the range of our guidance is showing slight growth over Q1 '04.

We are making investments in Q2 in both professional services and sales and marketing to go the business, and expect these expenses to increase.

The company also implemented a company-wide 4% pay increase effective April 1st.

We expect to have increased costs in G&A due to Sarbanes-Oxley compliance costs.

We are expecting the result in EBITDA in Q2 '04 to be in the range of negative 1.6 to negative 1 million.

On that, I'll return the call over to George for his closing comments and Q&A.

We have started the year with excellent momentum on Q1.

Building on the very successful quarter, we are looking forward to another good performance in 2004.

This year, we see the Demand environment getting firmer, and decision making more predictable.

We expect that such macroeconomic trend will be beneficial for us.

Our offerings are being considered more frequently by mainstream organizations, which should result in increased customer adoption of our services.

Within this positive environment, Corio's industrial leadership position is allowing us to be considered more frequently and to be selected against the competition.

Today, we see our main competition coming from large traditional integrators and outsourcers.

Corio's advantage is a superior value proposition characterized by high service levels, better economics, on Demand flexibility and innovation.

We will maintain the cash strategy we have deployed in sales and markets, which is producing very good results.

We are also starting to consider building deep strategic alliances with third party providers.

Our R&D efforts will continue to be directed at enhancing our customer interaction, and further streamlining our internal processes.

Such efforts will focus on improving our gross margins and achieving the highest levels of the customer satisfaction.

In conclusion, I would like to take this time to thank the contributions of our customers and partners, and all the efforts of our Corio employees.

With that, I would like to turn the call over to the operator for questions.

And ladies and gentlemen, at this time, if you would like to ask a question, please press star then 1 on your touchtone phone.

You'll hear a tone indicating you've been placed in queue, and you may remove yourself from the queue by pressing the pound key.

If you are using a speakerphone, please pick up your handset before pressing the numbers.

Once again, if you have a question, please press star then 1 at this time.

One moment please for the first question.

Our first question is from the line of John Tory with Adams, Harkness and Hill.

Please go ahead.

Hey, guys.

Nice quarter.

Hey, John.

Thanks.

Couple questions for you.

George, did you say in your prepared comments that Q1 was the best bookings quarter you've had since 2000?

And if so, can you -- or I guess, notwithstanding that, can you talk about the level of existing customer business that you did during the quarter?

Sure.

I did mention in my comments that Q1 was our largest bookings quarter since the year 2000, so I'm confirming that.

And regarding how much of it was new versus add-ons, I think if I look at this -- I'm just looking at the numbers here, John, very quickly.

The add-on was about -- you know, in the add-ons, there was a large customer, which is a large division of a multinational company, so we included that, since the multinational company was already a customer, included that booking in it.

If that's the case, it was roughly 60/40. 60% or so installed base, 40% new, roughly, in terms of the rough numbers

Okay.

And I guess, going forward --

And just for -- you know, we break down selling into the existing base different than renewals.

So this is truly new business with an existing customer, so this is incremental revenue.

And I think you hit it on the head, you know, you kind of looked at we had 7 new customers this quarter, 12 new customers last quarter, what you don't see is the significant new business with an existing customer.

Okay.

And that was -- that was the question.

And going forward, it sounds like -- I mean, I would imagine that you don't expect to maintain that time of kind of existing to new mix, you know, maybe long term, but certainly, not now.

Is that -- is that a fair statement?

It's hard to characterize it, because on one hand, John, the more customers we have, because we are above 120 customers right now, so, you know, that is a great installed base that we're doing a lot of good work in it, and our customers are rewarding us with additional services.

So we -- hopefully, we'll maintain that momentum.

In addition, we are always picking up new customers.

I think for this quarter already, for the first month, we --I think we have gained two additional new customers, brand-new customers, just as an example.

Okay.

And then just one other quick question.

The settlement fees that you've guided to for Q2, are those related to a relatively recent set of terminations or termination, or are those part -- already part of existing arrangements with customers who would have terminated in 2003 and prior.

Yeah.

Those are scheduled out.

I think all of them are from 2003, at least.

Okay.

Yeah.

So those, you know, some of the customers we had arrangements where they'd pay, say, 100K a quarter for the next four quarters.

So I'm pretty sure that all of that is scheduled out and it would have been 2003 or prior.

All right.

Thanks very much, guys.

Sure.

You're welcome.

And ladies and gentlemen, as a reminder, if you do have questions at this time, you may press star then 1.

Our next question is from the line of Mike Crawford with B. Riley.

Please go ahead.

Could you give the customer count at the end of the quarter, as well as your adds and drops during the quarter?

Sure.

The customer count at the end of the quarter is about 120.

We had 7 new adds, so that would be probably -- maybe 4 drops.

And one thing to keep in mind, on the customer count, is it includes hosted customers, which are usually three-year gigs, and also consulting customers.

So a consulting customer may roll in for a project.

They may be in the count for a month, and then disappear.

So it's possible to have customers coming in and leaving through the customer side -- through the consulting side that makes that number hop around pretty -- pretty actively.

Okay.

Great.

And then the other question relates to the new organization around the different enterprise softwares with the different teams.

Uh-huh.

So are you seeing -- are you able to cross-sell the other applications, given more of the dedicated nature of these teams?

Yeah.

Yeah.

Because these teams are a support organization to the main sales force.

So our main sales force, the 11 quota-carrying reps, you know, have, you know, the capability and do sell all our services.

So from a customer contact perspective, the -- you know, if you can claim -- you can say the ownership of the account is based with the sales force, with the quota-carrying reps, who have the opportunity to cross-sell all these services.

Okay.

Great.

Thank you.

You're welcome.

Thank you for your questions.

And Mr. White and Mr. Kadifa, at this time, I'll turn the call back to you.

Brett?

Okay.

Well thank you all very much for joining us today.

I hope you're as excited as we are about the performance in the quarter, and look forward to continuing to grow the business and be very, very successful in this space.

Okay.

Thank you.

Ladies and gentlemen, that does conclude our conference call for today.

Thank you for your participation, and for using AT&T Executive Teleconference Service.

You may now disconnect.