International Business Machines Corp (IBM) 2004 Q3 法說會逐字稿

Welcome to the Corio third-quarter results conference call.

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

Later we will conduct a question-and answer-session.

Instructions will be given at that time. (OPERATOR INSTRUCTIONS).

As a reminder, today's call is being recorded.

Now I would now like to turn it over to your host, Chief Financial Officer, Brett White.

Thank you, operator.

Hello everyone and thank you for joining us today to discuss Corio's third-quarter fiscal 2004 financial results, which are for the period ended September 30, 2004.

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

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

George will report on our financial results and review our business performance for the quarter.

Then I'll come back and discuss the financial results in more detail, providing financial guidance for the fourth quarter and 2005.

Then George will come back with some closing remarks, and then we will open up the call for questions.

First, of course, I would like to preface our 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 fiscal financial business performance of Corio for the fourth quarter of 2004 and for 2005.

All of the discussions constitute forward-looking statements regarding future events and future financial performance of the Company.

The risks and certainties 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 and S3, its prospectus, its quarterly reports on Form 10-Q, and its annual report on Form 10-K.

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

With that, I will turn the call over to George.

Thank you, Brett, and welcome everyone.

Today I'm pleased to update you on 5 key topics.

The first one is our solid Q3 performance where we exceeded the guidance we provided you 90 days ago on all major elements.

Two is the demand momentum for our offerings; 3, the launch of a new version of our Applications on Demand platform and new product offerings; 4 is our operational achievements; and 5, I will provide you with some projections for our business for the rest of 2004.

First, regarding our Q3 performance, as you have seen in our press release, the revenues were $17.8 million which well exceeded the upper range of the guidance we provided you 90 days ago, which was 16.5 to 17.2.

These revenues grew at an annual rate of 15 percent over last year's Q3 revenues which were $15.5 million.

EBITDA was a -1.1 million, excluding non-cash restructuring, well below the lower end of the range of the EBITDA guidance of -2.7 to -3.0 million that we provided you.

Our bookings in Q3 continued to be strong.

We closed about 110 transactions this quarter, winning 7 new customers, as well as achieving additional bookings within our customer base.

Our positive results above have resulted from the growth of our revenue base that registered a 20 plus percent annual growth rate in Q3 by the resolution of the Avaya negotiations and by improvements in operational efficiencies.

In the last earnings call, we guided the growth of our installed customer base to be a quarterly sequential rate of about 4 percent for Q3 or about 15 percent on an annual basis.

Our actual growth rate exceeded such guidance and was 20 percent on an annual basis.

As we have filed an 8-K on October 5th, we have reached an agreement with Avaya where Corio received 2 payments regarding the conclusion of our contract with them.

The 2 payments of $1.3 million each have been received in September and in October respectively.

Finally, our operational efficiencies have produced an increase of 2 percentage points of our gross margins from Q2.

Second, our demand momentum continues to be strong.

In Q3 we registered solid bookings that increased our backlog.

We won 7 new customers, closed more than 110 transactions, and obtained additional business from our installed customer base.

The market for our services is stable and sustained.

Pricing pressures that we have experienced in the 2002-2003 time frame are not present any more, and prices have stabilized overall.

Our competition is predominantly large corporations who do not possess the agility and efficiencies that we hold.

Going forward, our pipeline for Q4 is strong, and new opportunities are emerging in the government space as well as with marketing alliance partners.

We look forward to update you on further progress in these areas during this quarter.

Our current base of customers continues to be solid, diversified, and offers a strong basis for our continued growth momentum.

Going forward into Q4, our customer base enjoys the following advantages.

We have a total of about 128 customers with 114 being AMS recurring customers.

We are servicing about a quarter of a million business users for such customers. 60 percent of the installed base revenue roughly comes from companies with more than $1 billion in revenues.

Our customer base gross margin is projected to be between 25 and 30 percent, and two-thirds of that installed base are doing additional add-on business with us.

In terms of diversification, no customer accounts for more than 5 percent of our total revenue, and our top 10 customers account for less than 30 percent of our revenues.

We are increasing the focus of customer satisfaction and account penetration with such a strong customer base, and look forward to augmenting such base with 7 to 10 new customers every quarter going forward.

Third, we have released a new version of Corio's operational platform, Applications on Demand 2005.

This release occurred at the Outsource World Conference in New York on October 5th, and was covered by major industry analysts from Gartner Group, IDC, and AMR research.

Applications on Demand 2005 is the combination of 5 years of experience to deliver the industry unique operational platform for managing enterprise applications.

With this operational platform, we have expanded our products, processes, automation, security, technologies and SLAs, and have achieved the most superior capability in the marketplace.

Our resulting value proposition provides the best results in lowering cost and complexity for managing enterprise applications for our customers, while ensuring compliance with new regulations.

This platform is core for us to compete and win against the largest providers in the marketplace.

Fourth, operationally in Q3 we have performed about 100 projects, activated more than 100 environments for current and new customers, managed more than 100 terabytes of storage, and processed about 30,000 service requests.

We did so while delivering high levels of availability, security and response time.

In operational support, we have been executing on 3 major programs in Q3 that will result in continued investment expenses for Q4.

We have established a global integrated operational delivery model with staff delivery present in the U.S. and in India.

We have initiatives in infrastructure optimization and asset management improvements, and we are continuing our Sarbanes-Oxley compliance project.

Despite such expenses, these programs have already produced positive results with our gross margins increasing by 2 percentage points in Q3 to 18 percent, and are expected to reach 20 percent in Q4.

We also foresee additional cost savings into Q1 of 2005, as the result of such programs.

Fifth, we are raising our guidance for Q4 from what we provided you 90 days ago.

For Q4 we expect revenues to now range between 17.4 million and 18.1 million and EBITDA to significantly improve from the current guidance of -1.8 to -2.5 million towards a new guidance of -0.6 to -1.3 million.

We are confirming our guidance for 2005.

We project revenue to grow by 16 to 23 percent, ranging from 81 million to 86 million, and we do expect a return to profitability in 2005.

Now I turn the call over to Brett for the detailed financials.

Thanks, George.

As George already mentioned, we are very excited today to share with you our results and accomplishments for the third quarter and outlook for the fourth quarter and 2005.

As George mentioned, total revenue for the third quarter was 17.8 million, which is a 1 percent increase over the last quarter and a 15 percent increase from the same quarter last year, and exceeded our guidance that we gave you 3 months ago.

Application management revenue was 14.4 for the third quarter, and this included non-recurring customer settlement fees of 1.9 million, of which 1.3 million relates to Avaya, compared to approximately 0.4 million in Q2.

We announced earlier this month that Corio had concluded its contractual relationship with Avaya, resulting in a $2.6 million fee to be paid to Corio. 1.3 million of this fee was received in September and is included in application management revenue for the third quarter.

The remaining 1.3 million of this fee was received in October and will be included in application management revenue for the fourth quarter.

Professional services revenue was 3.4 million for the third quarter, a 177 percent increase from last year.

Total cost of revenue expenses, which include application management services and professional services, was 14.7 million, resulting in a gross margin for the third quarter of 18 percent compared to 16 percent last quarter.

The cost of application management services revenue in Q3 of '04 was 11.8 million, up approximately 0.2 million from last quarter and resulting in a gross margin of 18 percent, compared to 16 percent gross margin last quarter.

Included in this $200,000 expense increases was approximately half a million dollars spent on our data center consolidation project, which we expect to start bearing fruit this quarter in the form of lower quarterly data center operating costs.

We expect Q4 '04 data center costs on a steady-state basis to be at least $300,000 less quarterly than Q3 '04.

The cost of professional services was 2.9 million in Q3, down approximately 0.5 million from last quarter, and resulting in a gross margin of 17 percent compared to 14 percent gross margin last quarter.

Indirect operating expenses, which includes research and development, sales and marketing, and general and administrative expenses, in total were 6.3 million for the third quarter.

R&D expense was 0.6 million in the third quarter, slightly up from the prior quarter.

Sales and marketing costs were 2.4 million, down approximately 0.3 million from the prior quarter.

As of September 30th, we had 10 quota-carrying reps.

G&A expense was 3.3 million in the third quarter, an increase of 11 percent from the prior quarter.

During Q3 we continued to incur significant costs associated with Sarbanes-Oxley compliance, and expect these costs to continue through the rest of the year and then tail off next year.

Our GAAP loss for Q3 was 4.3 million or 0.7 diluted share, and our EBITDA loss which is earnings before interest, taxes, depreciation, and amortization for Q3 was 1.8 million, which is significantly better than the guidance we gave you 3 months ago.

Included in the net loss is a onetime non-cash restructuring charge of 0.7 million for the disposal of some leasehold improvements associated with our Phoenix office and a onetime non-cash $0.3 million other expense item resulting from a book to physical asset inventory conducted during Q3 '04.

Excluding these 2 onetime non-cash charges, our GAAP loss was 3.3 million and our EBITDA loss was 1.1 million.

On the balance sheet we finished the fourth quarter with 36.1 million in cash, cash equivalents, short-term investments and restricted cash, and operating cash flow with a use of 1.5 million.

DSO was 43 days versus 40 days in the prior quarter.

We're targeting DSO in the low 40s going forward.

We had 362 employees on board at the end of the third quarter, a net increase of 16 headcount from last quarter.

Included in this number are 95 employees in our Bangalore, India office.

Our MRR or monthly recurring revenue is approximately $40,000 a month.

Our total product mix for total revenue for the quarter was 35 percent PeopleSoft, 26 percent Oracle, 23 percent SAP, 8 percent Siebel, and 8 percent other.

We had a total of 7 new customers, 4 new customers in application management services and 3 in professional services.

Regarding our guidance, as George mentioned, we are increasing our Q4 '04 revenue guidance to a range of 17.4 million to 18.1 million.

Included in this range is 1.3 million of fees, which represent the October payment from Avaya which have already been received.

We are increasing our Q4 '04 EBITDA guidance to the range of -0.6 million to -1.3 million.

With that, I will turn the call back over to George for closing comments and Q&A.

We're very pleased by the progress we have accomplished in Q3, and we look forward for our improved performance in Q4 and beyond.

To summarize, our Q3 actual performance significantly exceeded the provided guidance across both the revenue and EBITDA dimensions, based on strong execution as well as resulting the Avaya situation positively.

Our Q4 guidance has been raised from what was provided 90 days ago, and we are reconfirming our fiscal year '05 guidance.

Our demand momentum continues to be strong, prices have stabilized, and the market is promising.

New opportunities are emerging in the government space, as well as with major alliance partners.

Our customer base continues to be strong and growing at more than 20 percent in Q3, and with similar growth expectations in Q4.

Our operational scaling continues to improve with gross margin percent expected to reach 20 percent in Q4, and our cost of goods sold for application management services will decrease in Q4 and will also decrease in Q1 next year.

This is based on a global delivery capability, more optimized infrastructure, and better asset utilization.

Finally, our announcement of Corio's operational platform, Applications on Demand 2005, is a culmination of 5 years of experience to deliver the industry unique platform for enterprise applications management.

This is making our value proposition the most superior to our current customers and future prospects, and allowing us to compete and win against the largest providers.

We have a large opportunity in front of us, and we are uniquely positioned to take it.

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

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

(OPERATOR INSTRUCTIONS) Peter Schleider from Peninsula Capital.

Nice quarter.

You guys are certainly getting the business pointed in the right direction without a question, particularly given that you lost a 10 percent customer during the quarter, correct?

Correct.

I am curious about what in '05 you see going on.

The last quarter and this quarter -- last quarter being September and the December quarter -- we are going to have the benefit of the 1.3 million to help offset some revenue and expenses.

As you start into '05, are you going to see any downtick in expenses or uptick in revenue that is just from the contracts that you've got in the backlog right now?

We reaffirmed the guidance for next year, so we provided -- right now, we're giving you the same numbers that we provided 90 days ago for 2005.

In addition to that, I mentioned that for the cost of goods sold for application management services, we expect a decrease in such costs in Q4 and also an additional decrease in Q1 in the first quarter of 2005.

Okay.

The cash from Avaya, you have both payments?

Correct.

Correct.

What has been the trend -- I don't have the notes from the last quarter -- what has been the trend in the PeopleSoft, Oracle, SAP segments, in terms of which one of those areas is growing more rapidly than the other?

Right now, it is hard to do it just quarter-by-quarter because you have such installed base that even in increments on a marginal basis won't show up until more or less through more of a year time frame.

But for this quarter and Q3 as an example, we had a very, very strong SAP bookings performance, to give you an example on that.

We did have good actually Oracle performance and PeopleSoft was fine also, but SAP was definitely the largest bookings component of our business.

Okay.

Then finally, what is going on in the competitive front?

Who are you running into the most in terms of some of the bigger companies out there?

We are running into kind of 3 lesser worth companies at this stage; that is kind of what we are seeing.

So it is system integrators and large outsourcers, and our unique positioning is our operational platform today that we have announced.

We believe that there is no one out there who has even something close to it, and that allows us to have higher customer service, very good response time and customer service response time, and lower cost simultaneously.

And quicker implementation?

Correct.

Great, thanks a lot.

(OPERATOR INSTRUCTIONS) Eric Svertold (ph) from Gruber McBain.

Congratulations on re-establishing your growth trajectory.

My question is, you've had 4 quarters in a row roughly 17 million in revenue creeping up slowly here, and you're projecting an acceleration into 2005.

Could you may be outline for us the 3 or 4 major bullet points that give you confidence in that accelerated growth trajectory of the top line?

Thanks.

Sure.

The first one, again we mentioned some of them here in this script, but the first one is the core business is growing at a healthy number.

Our current growth rate again has been between 15 percent, and the core AMS is about 20 percent right now.

The drivers behind it are 1) is prices have stabilized in this marketplace.

Because what we saw in the past we are not seeing any more, so there is a good stabilization in terms of pricing.

The second piece is there is more and more customer adoption of our business model, so we are seeing the leads basically have doubled from last year.

Three, obviously from a customer renewal and maintenance, we are actually doing quite well in that area.

So the base revenue is being maintained while we are adding to it.

Four is we are building alliances now that are contributing to our business.

We just concluded an alliance where we just had a couple of customer wins together from that alliance, and we hope to do more next year on that.

In the government space, depending on how the election goes, we might actually have significant opportunities in that area also.

Then following up on the last of those points, the alliances, could you be specific as do you have aligned with?

We are planning on making more announcement in that area in the next to 6 weeks.

So my suggestion or my preference at this stage is allow us to do that opportunity.

Would any of those alliances be exclusive?

No.

Okay, thanks very much.

At this time, I would like to turn it back over to your host, Mr. White.

Please go ahead.

Well, thank you all for joining us and we look forward to talking to you in this forum in the next 90 days, but hopefully, we will have more things to discuss with you and share with you in press releases and the sort in the very near future.

Thank you all very much.

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