使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Welcome to the Ascential Software fourth quarter 2004 earnings release call.
This conference is being recorded for replay.
Today's presentation will be in listen only.
There will be a question and answer following the presentation.
Instructions will be given at that time.
Now, I will introduce the host of the call, Mr. David Roy, Vice President of Investor Relations.
Sir, you may begin.
David Roy - VP, Investor Relations
Thank you, operator.
Welcome everyone.Thank you all for joining us for our fourth quarter 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, our Chief Financial Officer.
Before we begin the call, we need to point out this 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, and it is not possible for the company to predict all such factors.
All forward-looking statements speak only as of the date 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 in which it is made, or to reflect the occurrence of unplanned, unforeseen or unanticipated events.
Statements expressing the beliefs and expectations of management regarding future future performance or circumstances are forward-looking and involve risks and uncertainties, including but not limited to quarterly fluctuations and results and other risks.
Additional information concerning risks and uncertainties is set forth in our press release in the section entitled, quote factors that may affect future results unquote, and the company's periodic reports filed with the Securities and Exchange Commission, including the company's most recent form 10-Q.
The company believes that pro forma results described in this call are useful for the understanding of the company's ongoing operations, because GAAP results include expenses unrelated to company's ongoing data integration business as well as non-cash charges associated with the amortization of purchased intangibles and stock based compensation.
Management of the -- of the company uses pro forma results to compare the company's performance to that of 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 exclude the following items net of associated taxes: Amortization of purchased intangibles, in process research and development, amortization of stock based compensation, non-recurring acquisition related transition expenses net of any associated credits, a litigation settlement, non-recurring tax benefits and revenue expenses and other items related to divested business operations.
An assumed tax rate of 2 -- 24 percent for the fourth quarter of 2004, and 30 percent for the fourth quarter of 2003 has been used in calculating the tax provisions related to pro forma results which excludes non-recurring tax benefits included in the GAAP tax provisions.
With that, let me turn it -- turn the call over to our CEO and Chairman, Peter Gyenes.
Peter Gyenes - Chairman, CEO
Thank you, Dave.
Good evening everyone, thanks a lot for joining us.
We're delighted to report a strong quarter, which is a very strong conclusion to what we view as an overall successful and very growth oriented 2004, with solid progress strategically and operationally, and therefore we're also very pleased to be reporting a positive outlook for our company for 2005.
Pete Fiore and Bob McBride will elaborate in a moment on the specifics of the fourth quarter.
I would like to begin by putting 2004 into perspective.
2004 was a year that was exemplified by strong revenue growth, $271.9 million, which is up 46 percent over 2003, increased profitability, and the delivery of innovative new products and services that are unmatched in the marketplace.
The first half of 2004 was obviously a little more challenging than we might have anticipated at the outset.
But, we had strong second half performance, and this allowed us to regain the kind of momentum that characterized our business when we entered the year.
License revenue in 2004 was a solid 110.2 million, up 19 percent from the prior year.
We were solidly profitable for the year.
And operating income, in particular, has been growing at a noteworthy pace, both sequentially and year-over-year.
2004 is the third full fiscal year of Ascential Software as a stand-alone software company that is fully focused on data integration.
Each year has been marked by substantial progress and significant milestones. 2002 was the year in which we launched our end-to-end enterprise integration suite, which for the first time made available under one vendor the combination of data profiling, data quality and data transformation on a single platform, with virtually unlimited scalability and processing capability.
We were the pioneer in enterprise data integration.
But, we were little more than $100 million revenue company that year and we had sizable operating losses. 2003 was the year in which we expanded to include real-time data integration in real-time transaction environments, and to encompass in our offerings all data integration environments, analytical, operational and transactional.
And 2003 produced much growth in both revenue and in profitability and it also produced major gains in market share and in momentum.
2004 was marked by deliberate investments in sales and services and marketing and research and development.
And we made these investments because of our conviction in the market potential and our conviction in our ability to continue to capture market share for the years ahead.
We again grew substantially in 2004.
We continued to gain market share, especially in the third and fourth quarter when we began to see the impact of our investments and additional resources on creating more business, and as you can see, we've also continued to expand profitability.
Our view of our environment and of our situation continues to be pretty positive.
Customer focus on data integration, as a matter of strategic priority, continues to produce substantial pipelines of sales opportunities.
And even though, in our view, IT spending does continue to be cautious and conservative, data integration does emerge as a strategic priority.
We're also really pleased with our track record of specific customer successes with our differentiated approach of the only end-to-end platform solution for enterprise data integration.
And that track record continues to build our popularity and it continues to produce customer preferences of our approach over other competitor alternatives.
Our value added professional services are in very high demand by both customers and by partners.
Our partner-influenced business continues at a high pace, and is as strong as ever.
And we're also very pleased with the execution produced by all of our operations.
Our employee population is a healthy mix of Ascential veterans and newer team members.
And it's led by a highly experienced and deep management team all around the world, most of whom have been working together to build Ascential Software for some time now.
Now, of course, as we see the market for data integration expand, others see this as well.
And this is good for customers, it's good for -- for our market segment, and it's also good for Ascential Software.
And the significant dynamic here is that customers want enterprise-scale data integration solutions that can be pervasive throughout all their business processes, transactional, operational and analytical, and that can tie these environments together into holistic views and optimize real-time operations.
And therein is the special differentiation of our offerings, therein is the basis of our growth now and going forward.
And therein also is the major challenge and the hurdle for competitors with limited product scope and limited product robustness.
At the same time, the more chatter there is about data integration, the more we get the opportunity to demonstrate the differentiated value of our solutions.
It all all builds growing pipeline, which builds a growing business.
So, we enter 2005 with momentum.
Momentum coming from profitable market share growth, momentum coming from the evident market impact that we've had, and that we are having, on the shape and on the development of data integration demand, momentum coming from the active support of strategic partners, and momentum -- and momentum coming from the execution capacity of an expanded and proven company population and management team all around the world.
We expect this momentum to be further enhanced by the product additions that we launched last quarter and by the major new product cycle that is code named Hawk, which we introduced at Ascential World last quarter, and which will begin shipping in the third quarter of this year.
Our outlook for 2005 of 10 to 15 percent total revenue growth, 15 to 20 percent license revenue growth is based on this momentum.
And it's also based on our conviction and the continued expansion of fundamental demand for data integration enterprise solutions, as well as the continued differentiation of our solutions.
In Q1, of course. we expect to be subject to the familiar seasonality that is relative to Q4, so we're planning on revenues of 72 to 74 million, which compares to 61.4 million in the first quarter a year ago.
And with license revenue of about 29 to 30 million in the first quarter, which represents license revenue growth of about 18 to 22 percent year-over-year.
Beyond the first quarter, we do expect continued margin expansion throughout 2005 as we continue to get leverage from growing revenue and also from a more profitable mix of revenue, as planning license revenue to grow at a somewhat faster pace than services revenue going forward.
So, Pete Fiore will elaborate further on the specifics on the quarter, on our views of the development of our market and our competitive positioning.
Bob McBride will cover the financials of the quarter and further comment on our outlook and on our guidance.
And then we'll open it up to your questions.
Thanks a lot for your attention.
And Pete, please go ahead.
Pete Fiore - President
Thank you, Peter, and good evening, everyone.
The fourth quarter was a very good quarter for us.
Our [INAUDIBLE] increases over the past several quarters in revenue and market share and average selling prices in new customer adoption and in sales force productivity reflect the unique advantages of our product suite and enterprise scale data integration products.
Our customers are looking to bring together their systems and application and data in order to get a single, accurate and comprehensive picture of their business.
This type of enterprise scaled integration simply cannot be accomplished by piecing together the various point product offerings in the market, or by the more traditional hand coded approach to data integration.
It requires the ability to translate and transform transaction-oriented data in real time and to route it intelligently based on content.
It requires in-flight data matching, cleansing and standardization.
It requires current and historical information to be intelligently combined in a real time basis with the ability to dynamically assemble information from many different sources.
It requires data be -- to be synchronized across applications to insure consistency and accuracy.
It also requires extreme levels of performance and scalability that enable masses volumes of data to be captured, transformed, aggregated, cleansed and distributed to any application, business process or end-user that require -- quires it.
These are the requirements that we uniquely address in a single integrated platform based solution, and this is what is driving our strong revenue and market share growth, as well as the continued marked improvements in the key operating metrics of our company.
On a year-over-year basis total revenue in the fourth quarter grew 21 percent, while license revenue grew 12 percent.
And on a sequential basis, total revenue increased 16 percent and license revenue increased 23 percent.
So, on a market space that IDC estimates to be growing 8 to 10 percent annually, our growth rates really stand out.
And they underscore continued and tangible market share gains, and our ability to generate superior financial performance.
And this growth is now completely organic because of our acquisition of Mercator Software in September of 2003 was anniversaried in the third quarter of 2004.
We ended the fourth quarter with 91 total quarter carrying sales reps, with 82 of them productive.
Meaning that they were in at least their second full quarter with our company.
Sales rep productivity, measured by license revenue per productive rep per quarter, was $408,000 in Q4.
Meaningfully fee -- meani -- meaningfully higher than in the third quarter prod -- productivity of $344,000 and an improvement from last year's already strong productivity levels of $390,000.
Our current sales head count now stands at 93 reps.
Of which 82 are productive.
And our plan is to increase sales rep head count to 100 quarter carriers in the first half of the year, with further additions based by business levels.
We have today an experienced and stable field leadership team around the world, with most of our key managers now having been in place for 3 years.
Many longer than that.
We have an experienced sales force that is now well up to productivity curve.
We have a highly experienced worldwide services organization with deep and proving domain expertise.
And we have a grow -- growing, improving global partner network, that amplifies their visibility in the market and enhances our our ability to execute and support customer commitments.
As a result, we continue to benefit from high win rates in competitive sales situations.
This is underscored by the strong license revenue contribution to new customers in the quarter.
In Q4 we added 79 new customers to our already sizable installed base, representing 40 percent of our license revenue in the quarter.
The differentiation of our suite approach to data integration is a major factor in our ability to compete for and to win enterprise scaled projects.
This is reflected by the fact that during the quarter 40 percent of our license revenue came from enterprise suite related sales, and approximately another 10 percent of our license revenue came from multi-product sales.
And at the same time, we're also seeing the positive impact of upselling and cross line efforts in our installed base, as we expanded our deployments with 170 existing customers.
From an industry sector perspective, the financial services sector continues to be a very strong vertical market for us, comprising about 40 percent of our licensed revenue in the quarter, followed by the health care, government, manufacturing, technology, and telecommunications sectors.
Regarding transaction sizes, during the quarter we closed 3 transactions with $1 million or more in current quarter license revenue, 18 transactions with license revenue over $500,000, and 36 transactions with license revenue over $250,000.
This compares to the fourth quarter of 2003, where we closed 1 transaction greater than $1 million, 10 greater than $500,000, and 31 transactions greater than $250,000.
We also recorded this quarter, 7 transactions valued at over $900,000, when including maintenance and professional services contract values, along with a re -- recognized licensed revenue.
Our advantages at the enterprise level are not only reflected in increased productivity levels and larger transaction sizes, but they're also positively impacting our average selling prices.
In Q4, our blended average selling price, which includes license, maintenance and services contracted for at the time of sales for new business and new projects, was $335,000, which compares to $353,000 in Q3, it's up 13 percent from $296,000 in the fourth quarter a year-ago.
Our blended average selling price per transaction is greater $100,000 was $415,000 in the quarter.
And the license only component of our average selling price was up 4 percent from Q3, to $263,000, and up 12 percent from a year-ago to $234,000.
I think a few examples here will illustrate how we're benefiting and how our customers are benefiting from our end-to-end platform based solution to their data integration needs.
The first is Countrywide Financial, I think which is a great example of how our professional services capa -- capability can be a catalyst and a leading indicator for future license revenue growth.
As many you -- as -- as many of you may know, Countrywide is a number one residential lender in America and a member of the the S&P 500 and Fortune 500.
Countrywide first purchased our products in June 2004 as part of a major PeopleSoft EPM deployment.
Since then, they've been using our professional services to assist them in their implementation.
And through that our -- through that process, our technical architects were able to show Countrywide how our solutions could be used to address their data integration issues across their entire enterprise.
In this sort of professional services led effort, the result of this was that Countrywide in the fourth quarter selected Ascential as their enterprise standard for data integration, and they placed another order with us for additional products to be used now in their next new product.
Another example, which is a great competitive win for us in the U.K. during the quarter, was with Siemens in Europe.
After significant M&A activity in recent years, Siemens was experiencing problems consolidating their books across business units in country groups.
The solution -- and Siemens solution to this was a worldwide initiative to consolidate over 400 SAP systems into a small number of regional SAP instances.
And Siemens purchased the complete essential enterprise integration suite to cleanse and consolidate data from 18 business units in the U.K., Ireland, Holland, Denmark Sweden, Norway, Poland, and some of the Baltic States into just 3 SAP systems.
This was a competitive win, where Ascential was selected because in addition to the need for ETL, Siemens understood the importance of data profiling and data quality in consolidating their Legacy and SAP source environments.
And, they recognized the benefits of working with a single vendor that could provide all the necessary capabilities in an integrated end-to-end solution.
One last example is Winn-Dixie, one of the largest food retailers in the nation, and number 162 in the Fortune 500 rankings.
Winn-Dixie is a PeopleSoft EPM customer, and was introduced to us through our relationship with PeopleSoft.
Winn-Dixie selected Ascential to power a large-scale initiative to optimize their supply chain, inventory management, and pricing and margin management systems.
Winn-Dixie is now deploying the complete Ascential enterprise integration suite, including DataStage TX, to cleanse and standardize product and stock-keeping data, to integrate transactional supply chain data between supplier, distributer, warehouse and store operations, and to create a centralized platform to meet a real time transactional data for store and product level analysis.
And Winn-Dixie selected Ascential because we're the only vable -- vendor able to integrate data across their diverse set of applications and business processes, and because of the type product level integration we've developed with 2 of their strategic participates, PeopleSoft and Paradata.
Regarding IBM, we're very pleased with the ver -- further strengthening and deepening of our relationship with them and they continue to be a very productive partner for us in the quarter.
Our pace of activity with them is building and during the quarter we won projects together at leading organizations such as Amadeus Global Travel, Channel Construction Bank, National Bank of Canada, Wachovia in the state of New Jersey.
And going into 2005 we believe we're in a very strong position with IBM.
Based upon the strengths of our relationships across the IBM software, industry solution and BCS groups, the growing numbers of IBM personnel trained and experienced in our technology, the inclusion now of our products and several IBM reference architectures and market offerings and the active engagement between the IBM and Ascential field organizations has resulted in a significant and growing pipeline.
At PeopleSoft, we continue to gain important customer traction through our relationship.
As we've previously discussed, DataStage is embedded in PeopleSoft's enterprise performance management suite of analytic applications.
And this relationship will be further extended when our Meta Data technology is embedded and shipped with the next release of their applications, currently scheduled for general availability in the second calendar quarter of 2005.
Each shipment of EPM represents another customer relationship for us and another potential upselling opportunity.
And so far, hundreds of units of EPM have shipped with our products embedded.
During the change of control with PeopleSoft, we have maintained continuity with our key contacts in the organization.
And the people we have -- work closely with, and some of them you may have met at our analyst day in November, are expected to continue with the company.
We're also encouraged by Oracle's public commitment to support PeopleSoft applications for 10 years.
And our own discussions with them have confirmed their continued commitment to Ascential technology as an important component to the enterprise performance management suite.
In addition, as we are a PeopleSoft data integration partner, we're getting more visibility with the key people at Oracle as a company that can be helpful to their strategy of continuing PeopleSoft customer support.
So we look forward to the future opportunities this increased visibility can provide us.
Regarding SAP, we were an early supporter of SAP NetWeaver.
And our entire suite is now certified for SAP NetWeaver.
Our status with SAP as a co-development partner, insures that our products are at the leading edge of support for SAP's latest releases.
And we have achieved 7 different certified integrations with SAP products, more than any other other vendor in the states.
At the same time, SAP continues as an important strategic partner and reseller of our products, and we routinely work together on joint marketing programs that promote Ascential's value-add to the SAP customer base.
As far as our progress with -- with the global system integrators, the fourth quarter was another very busin -- busy and productive quarter.
Besides closing significant business together accounts such as AIG, MCI and Sony Pictures , we also conducted a number of high profile, sea level joint marketing activities, [INAUDIBLE] separately by Accenture, BearingPoint and Hewlett-Packard.
These events each highlight several joint customer successes and each produces nu -- numerous new opportunities that are added into our pipeline of sales situations.
We also saw again direct influence on Q4 transactions from our other strategic partners, including Paradata, Hewlett-Packard, Sun and Sybase.
And we added Ariva and McKesson's Health Solution division to our community of application providers who embed our products within their offerings, extending our footprints and creating additional up-sale and cross-sale opportunities.
As is common and in the past, we believe that the measure of merit with strategic partners is to be a visible and in popular with many of them as possible, in all regions worldwide.
Based upon continually building joint customer successes, we believe we've made very good progress in this area, reflected by the fact that in Q4 our partner influenced business increased to 65 percent of total license revenue.
Up from 45 percent in the fourth quarter of 2003.
On the product front, we made a multi-million dollar investment in 2004, to build on a large scale-computing environment that we call internally our enterprise test facility.
And this facility enables us to replicate the extremely large data volumes typically found within a large enterprise environment.
And using this facility, we will deliver as part our Eagle release, which is now shipping, further optimizations in our products that will deliver 3 to 5 times performance improvement in weal -- in real world customer data integration products, further extending our leadership and scalability and performance.
Our Hawk product, which was previewed during the quarter, will begin beta testing in Q1 and we expect and we expect general availability in Q3.
Hawk is our next-generation offering.
It's based upon a services oriented architecture that will make the functionality of the entire suite available to to any application or business process, supporting both real time event based applications, as well as batch and bulk load applications.
We've had a lot of customer exposure to this new product, and we expect high adoption rates when the product becomes available.
Regarding the overall market, we're seeing more and more businesses today that are looking to integrate data on demand, across their transactional, operational and analytical environments, to support initat -- initiatives for master data management, real time analytics, operational business intelligence, business performance management and data warehousing.
Some custors -- customers may tackle many or all of these at once.
Others may decide to undertake each of these initiatives as separate projects.
Either way, we're finding that they immediately recognize the benefits of a common enterprise and integration infrastructure from one vendor that will scale and that can easily be extended to span this range of requirements.
This is what is creating lots of new opportunities for growth for our company.
We're growing our business in the traditional data warehouse-style products, where our performance and scalability is a major advantage, where we're also growing our business from new initiatives where our ability to integrate data across the full spectrum of business processes and applications is unique and highly differentiated capability is we're the only vendor to offer an end-to-end solution to this growing requirements.
We believe the quality of our people, their tenure with our company, and therefore their depth of expertise are important parts of Ascential's Software's differentiation, in terms of capacity to execute, and also in terms of a unified and deep-rooted culture, that is very frequently recognized and appreciated by customers and partners.
We believe this is a key additional strength of our company that further underscores our progress and our expectations.
So, overall, we're very pleased with our progress and the impact we are having on the markets.
Our distinct product advantages and the growing importance of, and demand for, data integration, combined with our 2004 investments and sales and services and marketing, in R&D, position us for continued growth and continued leverage, for increasing profitability going into 2005.
I will now turn the call over to Bob McBride for a discussion of the Q4 financials and more comments on our outlook.
Thank you very much.
Bob McBride - CFO
Thank you, Pete.
Our bottom-line performance in Q4 of 2004 was a GAAP net income of 9 million, or $0.15 a share, including a tax benefit of 2.4 million, or $0.04 a share.
Last year we had a net income of 17.3 million, or $0.28 a share, but with a tax benefit of 16.5, or $0.27 a share.
So, excluding the corresponding tax benefit, in each year we grew GAAP net income year-over-year by $0.10 per share, from a penny in Q4 of '03 to $0.11 a share in Q4 of -- of 2004.
Sequentially from Q3, we grew GAAP income by $0.07 per share, without the tax benefit from $0.04 to $0.11.
Just a brief word about our tax benefit.
As I mentioned many times in the past, we have been carrying tax liabilities on our balance sheet, mostly eminating from the legacy operations of a database business that we sold to IBM in 2001.
The credit to our provision in Q4 results primarily from adjustments in these tax accruals.
Certain tax issues have been resolved, thus giving rise to this tax accrual adjustment.
This credit to the tax provision in Q4 does not represent any significant cash movement, but rather just an adjustment of our accruals.
If you refer to the schedules attached to our press release and information posted on our website, you can see the items that reconcile our GAAP results to pro forma.
On a pro forma basis our fourth quarter net income grew 48 percent year-over-year to 8.3 million or $0.14 a share.
And it grew 89 percent sequentially.
Operating income and margin continues to grow and expand year-over-year, as well as sequentially, with GAAP operating margin expanding this quarter to 6 percent from last year's Q4 of a negative 5 percent.
And break even in Q3.
Pro forma operating margin expanded this quarter to 10 percent from 9 percent last year and 4 percent in the previous quarter.
These expansions of operating margin, and growth and profitability, represent the leverage we now see from the continue -- continual growth of our business.
And these margin improvements occurred even with the substantial investments that we've made in 2004 to expand our resources that Pete outlined.
Total revenue in Q4 of 78.2 million represents a growth of 21 percent from Q4 of 2003 and is up 16 percent sequentially.
This is our 10th consecutive quarter of year-over-year revenue growth.
License revenue in Q4 was 33.5 million, representing growth of 12 percent year-over-year and 23 percent growth sequentially.
Geographically, North America revenue contributed 46 percent of our worldwide revenue and the balance of 54 percent was generated internationally.
All regions grew year-over-year as well as sequentially, but particularly noteworthy was our international revenue growth of 37 percent year-over-year and 29 percent sequentially highlighted by a particularly strong performance in our Northern European region, which includes the U.K., as well as the Netherlands and the Scandinavian and Nordic countries.
Less than 3 percent of our revenue increase was due to movement and exchange rates year-over-year.
GAAP gross margin was 69 percent, down from 72 percent a year-ago, but up from 67 percent in the previous quarter.
Pro forma gross margin was 71 percent, down from 76 percent a yea ago, but up from 70 percent in the previous quarter.
Gross margin was affected year-over-year primarily due to the especially strong growth of our professional services business, which as you know has lower margins than the license and maintenance revenue.
I think it's important to note that the strong growth in the professional services revenue was spawned from increasing demand from our added value services and methodologies of enterprise data integration design and deployment.
Gross margins increased sequentially primarily driven by license revenue expanding to 43 percent of total revenue.
Our total combined head count at quarter end was 970, reflecting the addition of approximately 45 software developers in India as a result of our acquisition of iNuCom in order to expand our R&D and professional services resources offshore.
At the end of Q4, we had 317 employees in sales and marketing, 229 in services and support. 291 in R&D, and 133 in G&A.
We anticipate head count levels in Q1 of '05 to increase slightly as we grow our field sales and services organization, as well as adding approximately 50 R&D engineers to our operation in Hyderabad, India.
Our Q4 pro forma tax provision had an effective rate of 24 percent.
Cash and marketable securities totaled 480.7 million at the end of Q4.
We generated over 9 million of cash during the quarter, even after including 2.3 million of legacy payments, primarily related to cash outflows of the associated with the restructuring actions from the acquisition of Mercator Software in September of 2003.
These legacy outflows are consistent with what we've announced previously and are expected to be approximately $2 million per quarter in 2005.
Going forward, excluding any stock buyback, we expect our cash to build throughout 2005, bar -- barring unforeseen circumstances.
Accounts receivable at the end of Q4 was 56.6 million, reflecting a DSO of 65 days, as compared to 63 in Q3.
Going forward, we anticipate being within our targeted range of low to mid 60s for DSOs.
We're very pleased with our results and feel we've built important momentum in 2004 carrying us into 2005.
This momentum, combined with the enterprise strength of our differentiated product offering, our strategic partner relationships, as well as the investments we made during 2004 - in 2004 in growing our field operations, should fuel revenue in 2005 in the range of 300 to 315 million, approximately 10 to 15 percent growth.
With license revenue growing at a higher rate of approximately 15 to 20 percent.
With the characteristic seasonality of the first quarter of the year, we anticipate Q1 total revenue to be 72 to 74 million, compared with 61.4 million in the first quarter of 2004.
With license revenue in the range of 29 to 30 million, compared to 24.6 in the first quarter of 2004.
Total cost of expenses in Q1 of '05 are anticipated to be 1 to 2 million below Q4 levels, barring unforeseen circumstances.
From this Q1 base, cost and expenses are planned to increase gradually through the year to approximately 3 million higher in Q4 of -- of '05.
Included in those costs and expenses are amortizations of purchased intangibles, stock based compensation and legacy expenses associated with divested business operations.
All together estimated to be approximately $2 million in the first quarter of 2005.
And expected to decline to approximately $1 million in the fourth quarter.
Of course, at this point this expense guidance ex -- excludes any impact due to applications of FAS 123, expensing stock options, and our expenses in Q3 and Q4 of '05.
Interest income, based on recent interest rates in cash balances, is expected to be approximately 2.5 million per quarter, and the effective tax rate for the full year of 2005 is expected to be 33 percent, barring unforeseen circumstances.
We anticipate the leverage provided by our planned revenue growth on this model will continue to expand our margins and drive operating margins to double digits for 2005, except for the seasonality effects of the first quarter.
And to give us continued momentum toward our long-term targeted operating margin range of 17 to 25 percent.
We firmly have the entry point into this range in our sights to reach during the course of next year, 2006.
I'll now turn it back to Peter.
Peter Gyenes - Chairman, CEO
Thanks, Bob.
Thanks, Pete.
Operator, we're ready to open it for questions.
Operator
Thank you.
And at this time if anybody does have and questions, please press star 1 on your touchtone phone.
Again, for any questions, that's star 1 on your touchtone phone.
And your first question will come from Charlie Chen from Needham & Company.
Your line is open.
Charlie Chen - Analyst
Hi, good evening, gentlemen.
Very impressive quarter.
Peter Gyenes - Chairman, CEO
Thank you.
Charlie Chen - Analyst
I was wondering if you're -- if there's some specific things you're seeing in the environment and sales cycle that give you comfort that the improvement that you're seeing is more than end of year seasonal strength and is susta -- susta -- sustainable, excuse me, into the start of '05.
You know, is there -- is some of the competitive pressure starting to die down?
You seeing sales cycle compression or less price pressure?
I wonder if you can talk about some of those factors?
Peter Gyenes - Chairman, CEO
You know, the -- the biggest factor is the focus of customers on the strategic issues that are affected by -- by the need to integrate and the need to integrate disparate data.
So, for us, it's -- it's much more about a continuing expansion of demand.
Fundamental demand for -- for the sort of solutions that we provide, and then putting ourselves in front of that demand through -- through our continued expansion, through our continued growth and visibility, through the -- the continued effect of our various, and now pretty extensive partner relationships, and then relying upon the differentiation of our offerings, relying upon the reference ability of our customers.
It starts with an expansion of demand and then it builds based upon our ability to execute into that demand.
Charlie Chen - Analyst
Can you provide some color on -- on the pricing environment as well as just some of the -- the fringe sources of competitive noise that you had been hearing, maybe in the first half of '04?
Pete Fiore - President
Yeah.
I think with respect to -- with respect to price pressure, I -- I don't think there's anything, you know, we're seeing unusual that's different from the past several quarters.
I think this is reflected in the fact our ISPs are continuing to climb, and we're selling larger transactions, more transactions where we're selling either the suite or multiple product components.
So, I think that's -- that's holding up pretty well, particularly given where we're -- we're really participating most frequently in these, what we're calling enterprise scale projects, where the -- the capability we bring is fairly unique.
And, so, we're able to maintain the differentiation and the value of our offerings.
You know, with respect to -- to the confusion you alluded to, there are -- as Peter alluded to, there are more players who are getting into the marketplace, but it does create more opportunity for us to get engaged, and I think once we get engaged we're able to help the customer understand the differences between the various types of technology and the differences in our approach to solving the integration problem.
Charlie Chen - Analyst
Terrific, thanks a lot.
Peter Gyenes - Chairman, CEO
Thank you, Charlie.
Operator
Your next question will come from Nathan Schneiderman from Wedbush Morgan Securities.
Your line is open.
Nathan Schneiderman - Analyst
Hi, thanks a lot.
Nice quarter, guys.
Good to see some license revenue beats this quarter.
Going into that, of the -- of the 33.5 million of license revenue, how much would you say was related to projects beyond traditional data warehousing?
Pete Fiore - President
Yeah.
I think the way you want to look at that, Nate, is if you look at our 3 7-figure deals in the quarter, all of them were, what I would characterize, as, you know, beyond the traditional data warehouse projects.
But I also think it's important to recognize that when customers are doing things like optimizing their supply chains or looking to create a complete 360 degree view of a customer, that many times those kinds of applications are underpinned by a data warehouse.
The difference we're seeing is these data warehouses become much more operational, much more real time, much more on demand.
And that's the kind of the big difference we're seeing now in these new projects, is the -- the -- the characteristics of the implementations are much mission critical, they're much more real time.
And much more operational.
And that's -- that's what is driving a lot of growth in our business, a lot of new opportunity.
Nathan Schneiderman - Analyst
Maybe if you could take that a step deeper, and if -- if you were to try to put a percent on it, if in the past maybe on this 100 percent of your revenue was around traditional data warehousing, what would you say it is now?
Pete Fiore - President
I would say it's a significant percentage.
It's probably, you know, an estimate would be 30, 40 percent of our revenue.
Particularly in larger transactions where they all have the characteristics of a --
Nathan Schneiderman - Analyst
Is outside traditional data warehousing.
Pete Fiore - President
Yes, yes.
But they are -- they're more and more they look like the Winn-Dixies that I described and the, you know, the Seimens example, where, you know, the customers are really trying to solve a strategic business initiative that requires lots of different types of data integration capabilities, including sometimes, you know, a data warehouse.
Peter Gyenes - Chairman, CEO
And Nate, I would add another comment.
Even in projects that have all the attributes and all the characteristics of what -- what, you know, what you might identify as a traditional data warehouse project, more and more of these projects are in context of a bigger strategic picture.
And we get a chance to view that bigger strategic picture and we get a chance to address it, and therefore, our capabilities to expand the -- the deployment of our platform into that bigger strategic picture becomes a significant piece of the customer's decision, even if the first implementation might be a traditional looking data warehouse, which ultimately gets-- gets applied to a -- to a bigger operational and -- and real time oriented environment.
Nathan Schneiderman - Analyst
Let -- let me also follow up on Charlie's earlier question.
If -- I -- I guess the key thing we're all trying to get our arms around here is, is the market for data integration really heating up, or -- or is it -- is it just that deal sizes are -- are getting bigger, but the -- the actual number of deals seems to be shrinking a little bit?
And if -- if you feel the market is heating up, what specific data can you point to help us understand that?
Or why you believe that to be the case.
Peter Gyenes - Chairman, CEO
Well, you know, I guess I would point to -- first of all, I would say that we definitely believe that the -- if the market heating up means that more people are more focused on data integration, then the market is absolutely heating up, without a question.
The metrics for us are, you know, we have more people out there, we're generating more working set, and as a consequence, we're generating more business.
Our -- our working set, or -- or pipeline, if you will, we'll use the term working set, of -- of opportunities that are active and engaged and -- and -- and qualified, are at this point in time, a little bit over 20 percent more than they were a year ago.
So, you know, these are tangible metrics.
We've-- we've expanded our sales force because we felt that by -- by putting more people, and more support infrastructure around those more people, in -- in various geographies that that would produce more business because it would put us in front of more opportunities.
And that's exactly the way it's turning out.
And more pipeline creates more -- more situations to close, and creates more revenue.
As we -- as we work with our partners, with the systems integrators, as we look at the demand on their resources and as we look at the demand on our resources, both from customers and through our partners, to get engaged, to get involved in the design and the deployment of -- of enterprise scaled projects into the architecture.
It's all about data.
And -- and it just -- all this, to us, just indicates continued elevation of focus by more and more enterprises across all the industries.
Nathan Schneiderman - Analyst
Final question for you.
Just, you -- you did mention pipeline coverage.
Last quarter I believe you said coverage ratios were 5 times.
Can you give us a similar number running into Q1?
Peter Gyenes - Chairman, CEO
It's -- it's in the same range.
Nathan Schneiderman - Analyst
Same range, about 5 times?
Thanks very much.
Peter Gyenes - Chairman, CEO
Thank you.
Operator
Your next question will come from Frank Sparacino from First Analysis.
Your line is open.
Mr. Sparacino check your -- please check your mute key or pick up the handset if you're using a speakerphone.
Okay.
Your next question will come from Dino Diana from UBS.
Your line is open.
Dino Diana - Analyst
Hi guys.
Drilling down deeper into the comments regarding your expectations to approach 17 (cough) oh, excuse me, 17 to 25 percent operating margins, it would seem like, even if you kept expenses kind of flat year-over-year, on an absolute basis and not on a percentage, it would mean significant year-over-year growth in license revenues.
I'm just kind of getting -- can you give us some color for what you can expect in '06?
Is there any kind of, you know, maybe a license revenue mix or a -- or a -- a run rate you think it'll take to get there?
Peter Gyenes - Chairman, CEO
Okay.
You -- you -- I'm going to repeat the question, because every other word was breaking up.
So I want to be sure that I understand the question.
Dino Diana - Analyst
Sure.
Peter Gyenes - Chairman, CEO
Is -- is your question as to how we visualize getting into that 17 to 25 percent range sometime during 2006?
Dino Diana - Analyst
Right.
E -- Especially considering that for me, it would take, you know, kind of flat reven -- flat expenses on a year-over-year basis, which it sounds like you're hiring, so it seems like a -- seems like a -- like an aggressive mark.
Just wanted to get your feed -- you know, your feelings for how that would take place.
Peter Gyenes - Chairman, CEO
Well, you know, I guess in our, you know in our view of the -- of the arithmetic, if you will, a -- a mix of license to service revenue that sort of gets about the 45ish percentage range in-- in a model of total revenue that's sort of in the mid 80s, starts to get you into that, you know, 15, 16, 17 percent operating margin.
Pete Fiore - President
The -- the other thing, Dino, that -- that I think is important to recognize, too, is that our professional services margin in Q4 was roughly 26 percent.
You know, that -- that's -- we're going to-- we're going to focus on that, and we have a major initiative to improve that as well.
Dino Diana - Analyst
Okay.
Can you get into -- give us some more color on that?
Pete Fiore - President
Well, the -- the -- one of the things that -- that because of the tremendous demand that I described to you for professional services, we've had to -- to outsource -- not outsource but contract, outside of our employee base, much of the work to deliver that service.
More than we traditionally have done in the past.
That -- that contractor, those outside contractors are inherently more expensive than having it delivered by employees.
So we're going to change that variable to fixed mix of how we deliver that service over the next X number of quarters, and that will improve -- that will help to improve margins significantly.
Peter Gyenes - Chairman, CEO
The other ingredient is that we've, in 2004, we've -- we've made investments to expand our ability to deliver services internationally.
And, you know, now we're -- we're almost at the point of having built some critical mass of that business, in the major European countries in particular, and we have a lot of demands for it.
So, as -- as all of that gets applied to -- to a more critical mass infrastructure that can be amortized over a higher level of business, then the margins will increase there as well.
Dino Diana - Analyst
Okay.
And just a minor point.
On interest in -- on interest income, looks like cash balances are increasing, so I'm wondering why interest income would decrease from the level that it ended last year?
Based on guidance.
Pete Fiore - President
A -- a -- a lot of that, Dino, has to do with -- with the -- the length of investments.
Out -- how far out on the investment curve we go.
And we -- we found ourselves in -- in Q4 in a pretty advantageous position, you know, relative to where invested and we turned those over rather short-term.
So, as course, as you move closer in -- closer near-term, the interest rates are a little less.
So, hey, I -- it's-- it's not an exact science, but somewhere in the neighborhood of 2.5, maybe a little bit more if we're lucky..
Dino Diana - Analyst
Right.
Lastly.
When -- when you look at the non-data warehousing deals, can you give us a sense for any trends you're seeing in -- I know you mentioned there's some big deals, but is it ERP consolidation, is it some other data migration initiatives that you're seeing?
What -- what are kind of leading the way?
Pete Fiore - President
Well, I think, you know, I think the Siemens example, where there was kind of a large ERP consolidation, we see a fair number of those.
Particularly, you know, M& A related activity that drives companies to have to consolidate multiple instances of ERP applications.
You know, talked about a couple of quarters ago about a same kind of project, we did a large scale project with Tyson's Foods that had merged with IOB prop -- processor.
So we see, you know, a fair amount of application consolidation at ERP instance consolidation.
We're seeing a lot of demand for what, in other words, market is referred to as master data management.
And, you know, the -- the way to think about that is just having kind of a single system of record around key data elements.
This is -- this is something that's -- a lot of companies now are looking to -- to push, particularly to respond to the -- the regulatory requirements like Bazel-2 (ph) in the financial services marketplace, where there's a big emphasis on risk management.
Examples I gave in retail were customers were trying to, you know, optimize the merchandising and profitability systems.
So, it's really runs the gamut where the -- what we're doing is tied to large, strategic initiatives of the company and where -- you know, getting the data right and integrated and -- and kind of single version of the truth, if you will, play a big part in the projects we're involved in now.
Dino Diana - Analyst
Great.
Thanks then.
Pete Fiore - President
You're welcome.
Peter Gyenes - Chairman, CEO
Thank you.
Operator
Okay.
Once again your next question will come from Frank -- Frank Sparacino from First Analysis Your line is open.
Frank Sparacino - Analyst
Hi, guys.
Sorry about that earlier.
Could I just get the breakdown on the services line between maintenance and consulting to start?
Bob McBride - CFO
Yeah, Frank.
Hang one second.
Maintenance was 24.6 million, and professional services was 20.1.
Frank Sparacino - Analyst
Okay.
And then second would be a cursory look at the -- the data warehousing business.
How much of the projects you're involved with are new date warehouses being built versus opportunities you're getting just to custom co-conversion to a package product?
Pete Fiore - President
Overall in the quarter, between new customers and new projects, about 70 percent of our license business came from new -- new customers and new projects.
With respect to data warehousing, I would say the bulk of our business is being driven by -- by new projects.
Now, sometimes a little bit different -- difficult to distinguish.
You have customers will rarely take something that's working and want to rework it with a new tool.
So, many times what's happening is, you know, there's a new project comes along that requires a -- an upgrade to the way the customer's operating or and upgrade to their infrastructure and they're using our tools for those kinds of things.
Yes, it's -- it's a little difficult, I think, to kind of give you a precise number.
I think most cases what's driving us are new projects.
In some form or another.
Frank Sparacino - Analyst
Okay.
Thanks, guys.
Nice job.
Peter Gyenes - Chairman, CEO
Thank you.
Operator
Okay.
Your next question is Patrick Mason from Pacific Growth Equities.
Your line is open.
Patrick Mason - Analyst
Yes, just trying to get a handle, you said your R&D, you're going to hire a few more software developers, 45 I believe you said in India -- I mean 50 or so, this next quarter.
How should we look at that just from an expense standpoint on --on a quarterly base?
Would that be -- a net bump up in cost in Q1?
Peter Gyenes - Chairman, CEO
It -- it will -- it would -- on the surface be that.
But, what's -- what's actually happening, Patrick, is that -- is that it's allowing us, because we now have our own in-house offshore development team, it's allowing us to reduce expenses on what we had previously subcontracted out.
So, and there's a little bit of an overlap, because you can't -- it's not a switch, it's not a binary switch, but the impact on expenses would not be as great as just hiring 50 people.
Patrick Mason - Analyst
Okay.
Thanks for the clarification there.
And then, you guys talked about, you know, the Oracle, PeopleSoft, you know what kind of impact you though, if -- if -- if any at all with you guys.
Can you talk about just how that relationship has performed with PeopleSoft on a waiting basis?
If you can put it to, you know, what kind of contribution you think that relationship helped yo guys out on the license component of this quarter, that would be -- that'd be helpful.
Pete Fiore - President
Yes, you know, we, as you know, we haven't broken out individual partner license revenue contribution, but, you know, 2 of the 3 examples I gave this evening were both large customer wins, where we -- we were engaged because of our relationship with PeopleSoft.
The first one at Countrywide, they had an EPM implementation in second quarter of last year and we en -- got engaged with that.
What we're seeing with PeopleSoft is -- is that any place a customer is a PeopleSoft customer, we now, pretty much by de facto, have become the first choice when it comes to using data integration tools anyplace in or around those application environments.
We'll get a lot of business that isn't just helping them to customer deploy PeopleSoft's EPM.
It's in place in a PeopleSoft environment where there's a data integration need.
So, it's dragged a lot of influence revenue along with it, that isn't necessarily part of the EPM product cycle.
Patrick Mason - Analyst
Could you -- would you describe it as you described it as you just kind of scratched the surface and that business is accelerating or -- or are that you guys at a steady state?
Pete Fiore - President
I think, you know, we're -- we're, you know, we're only a -- a few quarters into this, and I would say that there's a lot of penetration yet to go.
And, you know, I think we've seen a pickup each quarter in the contribution from PeopleSoft.
Patrick Mason - Analyst
All right Thanks a lot, great quarter.
Peter Gyenes - Chairman, CEO
Thank you.
Operator
Okay.
Your next question comes from Kevin Buttigieg from A.G. Edwards.
Your line is open.
One moment.
For some reason his line did not open.
Kevin Buttigieg - Analyst
Yes, I'm sorry about that.
Yes, I was wondering if you could compare for the fourth quarter the -- the coverage ratio and the closure rate for -- for that quarter versus -- versus the -- the earlier quarters, and --and -- and to what extent did either play a -- a -- a meaningful role in the fourth quarter?
Was it a significant improvement in both one or the other?
Peter Gyenes - Chairman, CEO
I don't think there was any particular improvement, you know, that's really noticeable across the board in terms of closure rates or in terms of coverage ratio.
It's you know, for us, this has really been about being focused on building a large enough pipeline that -- that would enable us to -- to plan our business such that we would not be dependent on an overly -- overly aggressive close-rate or an overly aggressive -- or on an overly low coverage ratio.
And we've been trying to keep it around 5 times.
You kn ow, all throughout the year.
The -- the -- it -- it just always seems to be all about building a big enough pipeline so that you can, during the course of a quarter, a quarter is only a 90-day cycle, and we the vendors care about it a lot, and customers don't like to focus on it quite as much as we do.
So, it -- it's important to be sure that -- that there is a large enough pipeline that is well enough qualified, so that there's a reasonable basis for -- for whatever plan we may have for a quarter and whatever expectation we may set.
And it -- it's been -- it's been pretty consistent.
So again, for us it's been about being able to -- to grow that pipeline over time, based upon having more people out there, more sales people, based upon having more impact from our partnerships, that brings more -- brings us into more opportunities.
Kevin Buttigieg - Analyst
Okay.
Because, I -- I just thought that looking at your -- at the license revenue guidance for the first quarter, that you -- you made comments about, obviously, seasonality in the first quarter.
I didn't think that the guidance, to me, it only looks, obviously, for about a 3.5 to $4 million sequential decrease in license revenues.
And I was just -- given your comments about seasonality trying to get -- get an -- an understanding as to how conservative an assumption that was.
Peter Gyenes - Chairman, CEO
Right.
Well, you know, we -- we -- the factors we try to apply here are -- are both the -- the aggregation of our working set and of our opportunities as well as a list of specific situations that we believe are far enough in the sales cycle where we would have an expectation of closing it during this period, based on our understanding of the customer time table and our view where we are in the process and, you know, all the factors that affect the point in time of -- of developing the sales opportunity and -- and winning the competition and then actually getting a purchase order.
Kevin Buttigieg - Analyst
Okay.
Fair enough.
Peter Gyenes - Chairman, CEO
So it's all based on, you know, we try to base it all on rather bottoms up assessment, of -- of -- of what's happening in each and every one of our operating regions.
Kevin Buttigieg - Analyst
Okay, fair enough.
Then on your -- just -- just on the guidance for 2005, just -- just, you know, going through your assumption of doing a back of the envelope calculation, does -- does about a mid-40s kind of sound -- number sound about right?
I beg your pardon.
What was the last part?
Does about a -- a mid-40 cent number sound about right for 2005, $0.45, or something like that?
Pete Fiore - President
I -- I think, you know, the way you ought to be thinking about it is we -- we try to focus on -- on the -- what we see out there is our ability to -- to meet the level of demand and set an expectation that -- that as best we can takes into -- takes into account all the factors of -- of, you know, the macro environment and -- and the pace at which we think customers make decisions an the pace at which we -- we think we can develop the opportunities into actual orders.
You know, I think if you -- if you do the calculation of -- of -- of the guidance we've given on, you know, on spending and so forth, I think you can see how, you know, the range of EPS might come out.
Certainly, I would expect the EPS to -- to grow at a faster rate than the revenue.
Kevin Buttigieg - Analyst
Okay.
Thank you.
Peter Gyenes - Chairman, CEO
Thank you.
Operator
Okay.
And your final question for today will come from Mark Verbeck from Smith Barney.
Your line is open.
Mark Verbeck - Analyst
Thanks a lot guys.
Good quarter.
Peter Gyenes - Chairman, CEO
Thank you, Mark.
Mark Verbeck - Analyst
Just a couple of quick questions.
R&D capitalization, how did that impact the quarter?
And that -- Is that part of the reason costs don't decline next quarter as much as they -- I thought they might have sequentially?
Pete Fiore - President
Say the last part again.
I -- I didn't catch it good.
Mark Verbeck - Analyst
Expenses aren't declining as much as sequentially as I thought they might have.
Is that -- is that some of the impact there?
Pete Fiore - President
No.
Actually, the -- the amortization -- software amortization is pretty -- pretty comparable what it was in Q3.
Mark Verbeck - Analyst
The capitalization?
Pete Fiore - President
The -- the capitalization was a little -- a little heavier than it was in Q3.
I thought your questions was the amortization.
Mark Verbeck - Analyst
Okay.
Sorry.
And what do you expect that to do next quarter?
Pete Fiore - President
It will decline slightly.
Maybe because of some of the projects that we had capitalized in previous time periods are starting to roll off a little bit.
But it will also be dependent upon the timing of when we have the general release of our next -- of our next generation too.
So, you know, you -- you -- you -- you have 2 elements there that you're trying to -- trying to coordinate.
But I would expect it to decline a little bit.
Mark Verbeck - Analyst
Okay.
And can you give us an update on what you have open on your share buyback?
And if you've bought any shares back in the quarter?
Pete Fiore - President
We have not.
Mark Verbeck - Analyst
Okay, great.Thanks a lot.
Peter Gyenes - Chairman, CEO
Thank you.
Operator
And at this time there are no further questions.
David Roy - VP, Investor Relations
Okay.
Thank you all very much.
Peter Gyenes - Chairman, CEO
Thanks for your continued interest and support, and we'll look forward to speaking with you at the next conference call.
Thanks a lot.