Microstrategy Inc (MSTR) 2002 Q1 法說會逐字稿

Good afternoon,

my name is Mitch, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to

MicroStrategy's 2002 1st quarter

earnings conference call.

All lines have been placed on mute to prevent

any background noise. After the speakers' remarks,

there will be a question-and-answer period.

If you would like to ask a

question during that time, simply

press star and then the number "1"

on your telephone key pad, and

questions will be taken in the

order that they are received.

If you would like to withdraw your question,

press the pound key.

Thank you. I will turn the call over to

Mr. Michael Saylor, Chairman and

CEO of MicroStrategy.

Thank you, sir.

You may begin.

Hi. This is Michael Saylor.

I wanted like to thank you for

being with us today.

I'm here with Sanju Bansal, our Chief

Operating Officer, and Eric

Brown, our President and Chief

Financial Officer.

And the three of us are going to conduct

the conference call today.

First, Eric is going to speak about

with the financial results in

much greater detail.

Then Sanju's is going to review our sales

and marketing programs, and also speak about

the launch of our new product, MicroStrategy 7i.

Then I'm going to review our

corporate strategy, direction, and strategic initiatives.

Finally, we'll take questions

and answers from analysts on

the phone.

Okay. And with that, I'm going to give

the microphone to Eric Brown.

Thank you Michael.

I would like to start out with

the Safe Harbor Statement.

Various remarks that we may make

about future expectations, plans and prospects

constitute forward-looking statements.

For the purposes of the Safe Harbor provisions under the Private Securities

Litigation Reform Act of 1995.

Actual results may differ

materially from those indicated by these

forward-looking statements as a result of various

important factors, including those discussed in

our registration statements

and periodic reports filed

with the SEC.

I would like to describe some the

highlights for our 1st quarter

2002 results up front.

First of all, we sustained both GAAP and pro forma profitability

in what is traditionally one of the more difficult

quarters for the enterprise

software companies.

We generated positive EBITDA $6.4 million in Q1,

making this the fourth consecutive

quarter that we have generated positive EBITDA.

Our pro forma earnings were 2 cents per share

this quarter. This marks the 7th straight quarter

we have met or exceed Wall Street EPS expectations.

We added 109 new customers, and closed

a large number of transactions with existing

customers, including companies such as

CVS, Best Buy, Bed Bath & Beyond, Verizon,

and Telecom Italia. Finally, MicroStrategy 7i

became generally available last week on April 26th.

This is an important new

product for us which will be

described later in the call.

In terms of the revenue review, revenue

the first quarter was $35.7 million,

which was at the lower end of our guidance.

Which is down 18% sequentially and 27%

versus Q1, 2001. Total license revenues

in the quarter were $14.5 million, and total

services were $21.2 million. The Q1 revenue

mix was 41% license and 59% services,

compared to 43% license in the previous quarter.

The license revenue mix was

54% for new customers, and 46% from existing

customers, compared with 53% new customer

revenue in the prior quarter.

Overall revenue mix in Q1 '02 was 66% U.S.

Gross profit margins remained

high at 80%, which is the same as last

quarter and significantly improved

versus Q1 of last year, which was 67%.

Margins in the license

business were 96%, which is slightly

better than the prior quarter

and last year.

Margins in the service

business were high at 69%, down

slightly versus the prior

quarter and quite favorable to the

51% we reported in Q1 last year.

Headcount at the end of Q1 was 815 people

comprised of the following: 235 in cost of

services, 219 sales and

marketing, 219 in R&D, and 142

in GNA.

Headcount at the end of

Q4, 2001 was 852 by comparison.

In terms of operating costs,

we improved our overall cost structure

in Q1 compared to last quarter and

last year.

Overall total cost of revenue and

operating expenses, excluding

goodwill amortization, re-structuring and tangible

write-offs, were down by $.7 million

sequentially and were down by $33 million

versus Q1 of 2001.

Compared to last quarter, we have

slightly higher sales and

marketing in GNA costs, as a result of

the Q1 MicroStrategy World

User Conference.

These expenses were offset by lower R&D

spending, as we capitalized a total of

$2.4 million on 7i software development

costs in the quarter. Total cost of

revenue and operating expenses are down by 51%

versus Q1 of last year, which

is $132 million on an

annualized basis.

Our operating cost structure is

property line for 2002. In the future, we

expect to ship more overall spending

headcount into sales and marketing,

and out of other areas as we focus on 7i field execution.

We reported total pro forma

net income of $1.8 million in Q1 2002,

compared to $7.4 million in Q4 last year,

and a loss of $15.7

million in Q1 2001.

We reported a GAAP profit of $.4

million in Q1 2002, and as expected, the GAAP

and pro forma results are starting to converge.

We provided detailed

disclosure on the

reconciliation of GAAP results

to pro forma results in the press release.

We applied the exact same

methodology for the pro forma

reconciliation as in prior quarters.

The primary adjustment was the gain in

the Securities Litigation Evaluation

that we backed out of pro forma earnings

for this quarter. The pro forma earnings

per share result for the quarter,

using fully diluted share count, was a

profit of 2 cents per share versus consensus

estimates of break even.

The GAAP EPS results for the

quarter is minus 8 cents per share,

which is a bit counterintuitive.

So the reason we reported negative GAAP EPS

for the quarter, even though we had

positive net income, is that we are

required to include the effect of

the preferred securities, under the share

settlement method since they have

dividend participation

features. Under this computation,

we are required to include the

net loss assuming that these securities

were settled with common shares at

the end of Q1 2002.

Since these shares occurred at

discounted value in our books, a theoretical,

end-of-quarter settlement produces a

neutral, non-cash loss.

Further details for this

calculation are included in

the press release financials.

In terms of re-structuring

efforts, the re-structuring costs related to

discontinued operations were

in line with expectations.

Strategy.com was shut down,

and the liabilities are lining out

exactly to our original plan.

The only significant items

relating, relate to equipment leases.

We did make a $1.2 million adjustment to

our subleasing re-structuring accrual

to reflect the assumption that we would have

slightly higher rent concessions over the next

5-7 years, as we sublease our vacant office space.

Turning to the balance sheet, I would like to

make a number of comments. At the end of

the quarter we had a total of $32.6 million

in cash, which is down by $5.8 million

versus the prior quarter. Total deferred revenue,

that is short-term plus long-term deferred revenue,

is up versus the prior quarter by

$.6 million dollars.

We ended Q1 with 27 million in deferred

revenue, versus 26.4 in Q4 last year.

As we did discuss in our last quarterly

call, we expect the deferred

revenue to remain essentially flat with a

minor reduction in long-term deferred,

as we work through the remaining portions

NCR of the contract.

Of the $27 million in deferred

on the balance sheet at Q1 in

2002, about 90% of this

relates to maintenance.

Our Q1 DSO figure was 58 days,

compared with 47 days in Q4

2001, and 64 days in Q1 2001.

I will note that our normalized DSO

for Q4 last year was approximately 53 days,

as a result of a large deal

prepayment at the end of the

year.

Overall, the 58 days is

consistent with the range we

expect moving forward for DSO's.

In terms of cash flow, I would

like to provide reconciliation

of cash usage for the quarter.

First of all, starting with the EDITDA of

positive $6.4 million, which was detailed in the

press release, we had the following

items relating to cash flow.

First of all, we spent $2.8 million in total

re-structuring cost, which $1.6

million on core business cash

restructuring, which are primarily real estate

related items. And $1.2 million related to

Strategy.com discontinued

operations cash usage.

Total operational cash flow

usage was $7.5 million, which

consists of the following:

Our working capital and bad debt

was cash outflow of $1.1

million.

Total deferred revenue was cash

inflow of $.7 million.

We had cash outflow of $2.4 million relating to 7R cap software.

And we spent approximately $12.7

million in cash in Q1 relating to

annual year-end 2001 bonuses.

Subtotal for cash usage under

the capital and financing category is

minus $1.9 million which consists of two items:

Capital spending of $.6 million,

and bank facility pay down of

$1.3 million.

The subtotal of those three categories;

restructuring, operations, and

capital/financing is $5.8

million cash used.

We have two key covenants in

our bank credit facility.

First of all, EBITDA covenant and

the requirement to raise an additional $10 million

in new equity, but through non-core asset

sales by June 30, 2002. As noted in the

press release, we recently amended the credit

facility to eliminate the $10 million

equity rate covenant,

since we do not believe we need

to raise additional capital.

In conjunction with this amendment,

we revised the EBITDA covenants.

As the end of Q1 2002, we had an EBITDA surplus of

$10 million versus the revised EBITDA

covenance, so we continue to perform well here.

I would now like to recap the key

operating metrics.

First of all, the number of new customers in

the quarter was 109, which is about the

same as prior quarter at 113.

Total number of customers

to date is 1,642.

Our new versus existing

customer revenue was balanced

in Q1, with 54% of revenue from new customers.

This is essentially

the same as last quarter.

The breakdown of license deals in the quarter

is as follows: 16 deals greater than 200K,

11 deals greater than 250K, 5 deals in excess

of 500K, and 1 deal in excess of $1 million.

In direct revenue as a percent of overall product revenue

was 35% in the quarter, versus 38% in mid-prior quarter.

We signed a total of 26 new

channel partners in Q1, which is up

slightly versus Q4 of '01.

At the end of Q1, we had a total of 70

quota-carrying people; 61 direct quota-carrying

individuals, and 9 channel quota-carrying individuals.

Last quarter there were 71 in total.

Total headcount at the end of

Q1 was 815.

Headcount as of today is 805.

For the trailing 12 months into Q1 2002,

the attrition rate was 22%, which is down

from the 28% that we reported in

the previous quarter.

The attrition rate is now down to

the levels we had in the

second half of 2000.

The average deal size for the

quarter was 69,000, which down 9%

versus Q4 '01.

Gross margin, as I mentioned before, for Q1 was 80%, which is the same as last quarter

and up versus the 67% we recorded in Q1 '01.

We had a total of 218 license deals in the quarter,

and the revenue mix for the business in Q1 was

66% U.S. and 34% International, which is the same as Q4 of '01.

DSO's were 58 days.

In terms of financial guidance, we have provided information in the

press release.

This financial guidance information is

valid as of today only.

We do not under take any obligation

to update this in the future.

For the second quarter 2002, revenue is expected to

be in the range of approximately $33 to $37 million.

Pro forma results of operations, excluding

special charges, are expected to range from a

loss of 3 million to break

even in the 2nd quarter of

2002.

Overall operating costs, excluding goodwill

amortization, are expected to be slightly higher

than those reported in Q1

due to the expenses from the MicroStrategy 7i launch,

and the discontinuation of R&D

capitalization relating to 7i.

Pro forma earnings per share, again

excluding special charges and assuming

a basic weighted average share count,

is expected to range from a loss of

approximately three cents per

share to break even.

Our the full year 2002 guidance is

for revenue to be in the range of approximately $145 to $160

million.

Consolidated pro forma

earnings per share for the full year, excluding

special charges, are expected to be in the range of

approximately positive 2 cents

per share to positive 6 cents

per share.

Per share count we are assuming 96-97 million

basic shares outstanding during Q2 2002,

increasing to 100 to 102 million

shares by the fourth quarter of 2002.

This assumes conversion of the

series A in Q2 2002 and no

interim conversion of the series B, C, or D

preferred shares through the

balance of the year.

In summary, we are profitable, as well

as a difficult quarter for

enterprise software companies.

Our overall operating model is now working.

We recently released what promises to

be the most important product of the VI sector,

MicroStrategy 7i.

And Sanju is going to actually spend a fair amount of time

talking about that in

the next session. This concludes my remarks,

I will turn the call over to

Sanju.

Great, thank you Eric. If there is

a word that describes MicroStrategy's activities this

past quarter, I would select

"building."

"Building" best describes what we did in Q1

and what we have been doing

as a company since late 2000.

We have created a much more cost-efficient,

leaner company.

We've strengthened and expanded

our customer base, and of course

we are continuing to invest in and

build on the foundation of

success, our technology

leadership.

Last week, we released the new version of

our Business Intelligent software platform,

MicroStrategy 7I. While it was officially released in

Q2, much of the preparatory work for the

release was completed in Q1.

With 7I, enterprises can now standardize

our one-business intelligence platform, and deploy

high value VI enterprisewide.

The new platform has gotten very

positive reviews from customers

and analysts alike, and

we're excited about the

opportunities 7I will create

for us in the market.

With that as preamble, let me talk a bit about the quarter.

As Eric said, we had a very

positive quarter with 109 new

customer wins.

We had 218 total transactions, which

we think is about on par with what we

expected in the quarter.

Q1 was more or less a typical Q1

for us with the majority of

deals closing in the last month of the quarter.

We managed to bring forward several

large deals from Q2 into March, and

we think that generally speaking our sales

force execution was quite good.

Approximately 50% of our Q1 transactions are

new customer deals, indicating

we're maintaining and building MicroStrategy

mindshare in the marketplace.

We have also been working hard to

transition our consulting

business away from a lower

margins systems integration business and

towards a higher margin business intelligence

advisory service.

And in Q1 we closed our first

advisory service deal, and we feel

this is indicative of the

services transition we will be working to

achieve throughout 2002.

I would like to briefly highlight a

few important customer wins during the

quarter.

The first I would like to

highlight is with AstraZeneca.

AstraZeneca is one of the top five

pharmaceutical companies in

the world, and they purchased MicroStrategy

software and services to extend

their Business Intelligence application enterprisewide.

Approximately 250 AstraZeneca employees

today use the MicroStrategy

platform to determine market share,

explore cost and profit data,

and track the performance of new

products.

The global pharmaceutical company uses

MicroStrategy software to distribute 70,000

reports within the 24-hour window

every month.

The second deal I'd like to cover

is with Best Buy.

And Best Buy is North America's leading

specialty retailer of consumer

electronics and appliances.

And they purchased an approximately additional

13,000 licenses in Q1.

A MicroStrategy customer since 1997, Best Buy's

award winning Business Intelligence

applications are currently deployed to

4,500 end users for business performance management,

and vendor performance management. Best Buy will

deploy the additional MicroStrategy several licenses

to its newly acquired businesses including Sam Goody,

Sun Coast, Media Play, and On Cue.

MicroStrategy is Best Buy's reporting standard,

and Best Buy currently runs over 100,000

reports a day using our

Enterprise Reporting platform.

The third deal I would like to highlight is

with Telecom Italia. Telecom Italia, Italy's

top telecommunications firm in wireless

and fixed flight operation, purchased

additional MicroStrategy software and

services to expand their Business

Intelligence application.

The company uses MicroStrategy software to

analyze the characteristics and

needs of over 1 million portal visitors

to its four Web sites. Insights gained through the

use of MicroStrategy software helped Telecom Italia

improve its customer service and enhance

its customer loyalty.

A quick update on partners.

As Eric noted, we entered into

relationships with 26 new OEM resale and consulting

partners in the quarter. Including companies like

Iratel, Innovative Consulting, Kinetic Networks,

and [Infowide] Solutions. We're enthused about our

partners' continued adoption of MicroStrategy technology

and are working hard to get an increasing percentage of

our revenues from these indirect channels.

Third, a brief update on our technology.

Our technology continues to get highly favorable reviews.

In January, MicroStrategy won two Intelligent

Enterprise Reader's Choice Awards.

One for our software's analytical and data

mining capabilities, and one

for our strength in customer relationship

management analysis.

MicroStrategy won these awards in competition with

our leading competitors including Business Objects, Oracle,

Cognose, Brio, Actuate, and Sas Institute.

Last week, we announced general

availability of MicroStrategy 7I.

And what I would like to briefly delineate for

you the five key innovations in 7I

and why we are so excited

about this new platform.

The first key innovation is our introduction

of Intelligent Cubes. 7I is the first

technology to combine the

speed and interactivity of multi-dimensional [OLAP]

again, often noted for its high performance.

With the full analytical power and depth of relational [OLAP]

7I accomplishes this through,

what we call Intelligent Cubes, which are user-created,

multi-dimensional cubes that operate

within our intelligence server. In 7I, creating

an Intelligent Cube is as easy as creating a report.

This is quite a new phenomena for the industry,

because generally these cubes have been

administrator created rather than user

created.

We are the first company to

seamlessly combine access to terabyte

size data bases with the speed of multi-dimensional cubes,

now enabling reporting, add [INAUDIBLE] queries, OLAP

statistical reporting, and relational OLAP

all from one seamless user interface. The second major

innovation of 7I is the incorporation of Windows-like

look and feel over the Web;

what we call "Windows on the Web".

Our new Web interface provides the speed and

features of a Windows client, including

drag and drop report formatting,

drop down menu bars, and right and mouse click

without Active X or Java Apelet downloads.

MicroStrategy Web users can also build their own

reports, designed to approach brother users, and

interactively analyze data all through a secure zero

footprint Web client that is

completely transparent to fire

walls.

Again, what's innovative here is the fact that we

have these fantastic Windows-like features over the

Web through a zero-footprint

client.

The third area we've spent a lot energy

on is work group, or

information collaboration.

Since 7I is designed to simplify

information sharing and it's the

only platform to provide full capability

to both create and share business

intelligence insight, users can analyze reports by

drilling, pivoting, sorting, filtering, and

sub-totaling, and then they can e-mail reports

to other users instantly

using our Send Now feature.

They can also schedule reports for

regular delivery, either to themselves

or to others in their work group, and they can

publish reports to their work groups.

They can also now export reports in

full featured, and fully formatted Excel documents,

PDF reports, or HTML format.

Another major innovation in 7I

is one that we think is going to be a

pivotal for the entire industry, and

that is the introduction of

Portable Analytical Modules.

What we have done in 7I is we've created

Portable Analytic Modules which contain

predefined business-oriented

reports and business work loads, with the additional

ability to be fully customized

and imported to existing databases and

data warehouses.

What we've noted over the last year is pre-packaged

applications have came to

market in the [BI] area.

They provide a lot of promise

in terms of predefined

reports and work flow.

But they've have been problematic

because they force customers

to adopt vendor-defined

schemas and replicate data outside their

core data warehouse.

With our portable analytic modules,

again it's now easy to take defined

applications and backward map

them to your existing data model,

eliminating costly ETL and data replication.

So we are excite. We think that we've

created a great methodology as

well as a technology for backward maping

applications to an existing

schema, and we think that this will be adopted

broadly throughout the industry as a technique

for delivering packaged applications.

The final innovation in 7I

that we're going to note here today is the

incorporation of a Portal Integration Kit

and a Web Services Development Kit.

And with the introduction of the

new 7I Portal Integration Kit,

companies now have pre-packaged

connectors to quickly include business

intelligence into portal products like Epicentric,

Hummingbird, and Plum Tree. Similarly, with our

Web Service Development Kit, customers can

access any MicroStrategy function through

standard Web services protocals

and techniques, such as SOAP, and UDDI.

Over the last month and-a-half,

we briefed 30 industry analysts from 12

top analyst firms on 7i and we've

received great reviews.

I will share with you one comment from

one of the industry's most

respected analyst Nigel Pendse, who is also

the lead author of "The OLAP Report."

"MicroStrategy 7I has taken a great

step forward in improving the interactivity of

its Web interface. In addition, MicroStrategy has

provided a technical breakthrough for enterprise class

business intelligence by

integrating a multi-dimensional style cube with

traditionally strong relational

analytical engine.

The net effect is that more

users can access critical

analysis with high

performance."

I think that's a good summary of the kind of

commentary we're getting from analysts across the board,

and they truly believe 7I is a breakthrough platform

in a business intelligence sector.

We've also received good trade press

over the last two weeks as we've

launched the product in Information Week, Info World, E-week,

and Internet Week, and we'll continue to

see, I think, good stories as the

monthlies deliver the news about our new launch.

In summary, we've had a very

positive quarter, I think.

Q4 for us is always strong.

Q1 sometimes gets off to a slower start,

but I think we've had good execution

within the quarter with

a good number of transactions

and an impressive number of new

customer wins.

MicroStrategy 7i clearly demonstrates that we are

continuing to define the

standard for business

intelligence, and we are

excited about the sales

opportunities that 7i will open up for us.

For the first time probably in

three years, I'm seeing that we're winning

beauty contests, that is that interface oriented

evaluations in the field. And so in addition to having the best

infrastructure in business intelligence, we're

now viewed as having the best

interface in business intelligence.

With that as a summary, what I

would like to do is turn the

floor over to Mike.

Thank you Sanju.

I would like to close this

session with just a few

comments about our corporate

strategy and strategic

initiatives.

First, I will just review quickly over of

the past 12 months where we

have been and where we are

headed.

My summary for 2001 would be a year

of re-structuring.

We went from four businesses

to a single business.

From four sets of competitors to one.

The four businesses were Systematic Integration,

CRM Applications,

Strategy.com, and Enterprise

Business Intelligence.

By refocusing our initiative and our focus Enterprise

Business Intelligence, we were

able to drastically simplify

our business, and in so doing

we were able to refocus our

sales, marketing, and technology

efforts in one particular

area.

From the beginning of the year to the end of

the year 2001, we reduced our headcount

from 2,000 to 850.

I am happy to say for the past seven months or

so, our headcount has been fairly

constant.

We haven't had any substantial

layoffs or re-structuring, so

we have about the same footprint today

as we had towards the end of

the 3rd quarter of last year.

And I think that's a good sign.

It indicates that the entire

business has stabilized.

And this is helping us enormously

with both our employees as well as

our customers and our partners as we

move forward.

I anticipate that we will remain

fairly stable going forward.

We returned to operating

profitability in 2001

by making these difficult cuts

in cost and headcount.

And as I said, we re-focused all of our

energies on Enterprise Software.

Now, 2002 is a different year.

2002 is all about focusing

upon making the Enterprise

Software business model as

good as we can possibly make it.

That means in this particular

case, focusing on the quality

of revenues and quality of earnings.

We are working to make

revenues as predictable, as

proprietary, as protectable

as we possibly can.

That means decomposing all the

things we do in the process in

making our customer

successful and

then putting them back

together again in a way that's

good for our customers, as well as

good for the company.

I think you can see the first

half of success in this area.

If you just look at the quarterly

results and comparisons between

2001 and 2002, they are in our

press release. You will see

that our product license revenues went

from $18 million to $14

million over the course of a year, but we were

able to pull down our sales and marketing cost

from 26.6 million to 12.4.

So now we are spending less money on

sales and marketing than the

software we sell.

Before, we were spending more money on the software we sell.

If you look at our service

lines, you see that we have service revenues

that compressed from $39 to

$21 million, but our service costs compressed from

$15.3 million to $6.6 million. What you don't

see as clearly here is that in some cases the

revenues associated with the

quarterly results in 2001 had

a larger component of revenues

that were due to deals we'd done in previous quarters

that were deferred revenues accruing in the period in question.

The quality of our revenues in

2002 has improved, and to a much

lesser extent we have

revenues that are due to mega deals

that we have done in the past.

And so the operating model on a

week-by-week and a quarter-by-quarter

basis is becoming

cleaner.

It's becoming easier to

understand.

And although our revenues have

compressed somewhat, you see

our gross profit went from $33

million to $28.4 million.

So the gross profit didn't compress nearly

as much. In fact, our overall operating costs,

as I'd like to point out, really have decreased by

a factor of 50% or so.

So, we're doing a pretty good job

of generating value-added from

our field sales and services

activities, and we're

doing it with a lot

less corporate overhead.

Now if you look at our initiatives

for 2002 going forward, we obviously

hope to improve and continue

along these lines.

Our plan is a simple

four-point plan.

Number one, we are going to

introduce new products and

services to support Enterprise

Business Intelligence.

Microstrategy 7I is

obviously the new product.

By new product, it's not just

a new set of features on our existing software,

but rather it also consists of a number of

new modules that we can

relicense to our existing

customer base.

We've introduced a Business

Intelligence Developer's Kit which

incorporates these analytical modules

that Sanju spoke of. We expect that many people

have already purchased MicroStrategy's

development and environments

may want to come back and purchase this

developer kit for it's additional value-added.

We've also introduced a module called

OLPA Services which gives people the ability

to ploy OLAP reporting,

and slice-and-dice type analysis.

This is really directly competitive to

a Cognose OLAP server or Hyperion [Arbor-type]

server, and so we see that

as a really nice line

extension for us.

We also released a new module called Web Professional.

Web Professional is very

competitive to other reporting

techniques, or reporting tools.

So people that might have

purchased MicroStrategy for

relational analytics, and also

purchased a report environment

from the [Seagate Crystal Reports] or

Business Objects or [Cognose's Impromtu] are more

likely to purchase our Web

Professional instead.

And so again, this is good for us for

a number of reasons.

It obviously makes us more competitive

in new sales cycles. It also allows

us to take business that might

go to our competitors, or

convince customers that

rather than paying the

maintenance fee to our competitors, to keep

running their software, they should go ahead

and take advantage of our software

and simply upgrade the existing

installation of MicroStrategy

with a new 7I module.

This set of new product

modules of course are

incredibly important to us.

And they are exciting and they

inject a dose of vitality into

our existing customer base and our

partners, and our

new prospects.

We also have some new services

that we are introducing.

The new services include

things like annual educational

contracts. Customers

benefit by buying a

12-month education contract at

the corporate level.

They get additional discounts,

and they also get additional services and service

levels they wouldn't have

gotten otherwise.

We've also introduced our annual

service contract for technical

account management.

We bring their proprietary business

intelligence advisory services, harnessing our

experience in our customer

base, everything we know

about the way we can tune and

deploy our software, and also

our knowledge of how to

integrate our software with third-party

applications, and

customer applications in order

to make our customers

successful.

And we deliver this to customers in a measured

methodic 12-month methodology.

This is a first step along the

path of converting our

business from time and

materials, system integration

services, which

are more commodity than

they are specialty, and

moving over towards

multi-client subscription-based

research services which are

more proprietary, more specialty and

more predictable.

Obviously, we expect it will take

some time, and it

will only take place in a

portion of our services base.

To the extent that we sell

these educational contracts and

we sell these technical account management

contracts, we expect that overall

our services business will become

more predictable, more proprietary,

more profitable, and at the same time, more

valuable for our customers because

we are able to manage the

service levels for them better

and provide them with a better

overall result, which allows us

to be proactive and make their

BI pplications successful.

The second part of our plan for 2002

is to sell these offerings to our

existing customer base.

Once we've introduced them, the

key is to sell them.

And luckily for us, most of the

things we are doing are very

relevant and near all of our customers.

In 2002, given the nature of

the overall macroeconomy, we

feel that any good business

plan needs to have as its

cornerstone a set of new value-added

products and services you can

take back to existing customers who

know you and trust you.

The the third part of our plan

is to sell to new prospects

versus the competing VI vendors.

We believe the 7I offering is going to

be a lever that we can use to

compete very, very effectively against

Sass, against business objects, against

[INAUDIBLE], against Brio, and on an ongoing basis

against [INAUDIBLE]. We are going to of course,

the piggy backing on their

investments and marketing.

To the extent

that customers know they want

business intelligence. Our marketing message

quite simply is we have better business intelligence.

If you dont believe us, kick

the tires.

That marketing message is backed-up

by what's on our Website.

Over the past 12 weeks, we

have taken a great deal of

effort to up grade our sales

presentations, our marketing presentations

to make them more technically

focused and more topical to

enterprise business

intelligence needs, and

specifically to make sure that

customers understand that we

really are the low cost

provider to meet these needs for

them. Now,

the first prong of our

business plan is to grow our

sales force while keeping

tight control on

our operations.

We have a sales force right

now that has been structured

for the most part to manage

our existing accounts as well

as to cultivate prospects as

they arise.

Typically the quota of our

high end account managers is

somewhere between

$2 and $3 million dollars, that is what we

are expecting them to generate.

On the other hand, what we're missing which we would like to

build into the business is a

second tier of sales reps.

What we call junior account

executives. Where

their costs are somewhat lower to us.

The cost of the sales team and

the cost of the personnel. But at the same

time the quota is much lower.

There's no reason that the company

can't actually be successful

having a two-tier model with

sales reps that is do $3-$5,000.00 a

year in business as long as their costs are substantially less than that to us.

In another tier of sales

managers who actually are doing $2-$3

million in business and costly to hire.

So, with that in mind, we are very

busy building that expanded

multi-tier sales force.

We will be carefully keeping

track of how the sales force

does and building the sales

machine and tuning it.

As it begins to work, we will

be testing it's gross margins

and then we'll be scaling it up.

Our view right now is that we've

got a business model which

works well and we've got some

fixed technology assets that

are amortizable over a much larger

installed base of users and so - so

the incremental investment

much a single account executive who is actually

capable of prospecting,

especially with leads and

opportunities is a good

investment and a low risk

investment for us.

So the great focus of the

senior management team and my

energy in particular has shifted

to building the sales machine.

As we look forward, what you

can expect from us is that we

will focus upon selling new

modules of 7I to our customer

base, we will focus upon selling 7I

to qualified prospects.

We will sell new license

capacity to existing customer base.

We'll sell our new

proprietary services to our

customer base. We will build up this 2-tiered sales force of

account managers and account

executives, and

as you can see from our

history, we've accomplished many,

many things over the past few

quarters, but

I want to assure everybody, that for

the coming few quarters in the

business, especially the

remainder of the year, the senior

management team is fully

engaged in the field sales function. I, Sanju Bansal, Edwardo Sanchez,

we all spend a great deal of

our time focused upon customer

relationships, account

management, how we're gonna make

our customers happy and how we

are going to ensure that these

product and service offerings

are successfully delivered into

our customer base.

We think that the other major

strategic issues that the

company has had to deal with in

the past are effectively

managed and behind us at this

point.

At this stage, success or

failure really all reduces down to

sales execution.

So that's where our heads are going to

be.

With that, I'm going to go

ahead and make one more

comment.

Some of you may have seen the

notice at the bottom of our

press release.

As of the end of the trading

session today, I have suspended

my 10-B 5.1 diversification

plan.

I was, under that plan selling

15,000 shares a day into the

open market since February of

2001.

I had originally announced that

plan would run approximately

two years.

I've terminated that plan and I've

done it a bit early.

The reason I've done it, is because number

one, I believe in the future

of our company.

I'm excited and more excited

today than I have been in quite a while.

Number two, I think that

clearly it's a difficult

market.

There is a lot of uncertainty in

the market right now and

it's more important for me to

put the needs of the customers,

the employees of our company

and you, the outside

shareholders first before my

interest in diversification.

I still continue to hold 36

million shares of the company.

I think 36 million share block

makes me one of the larger CEO

shareholders of any publicly

traded technology company.

So, I just want to assure all of you, I

am firmly committed and willing

to put my money where my mouth

is.

We on the manage team are

extremely focused right now

and excited about the future.

I think that the 7I release

along with the other things we're doing at the

nuts and bolts level within our business are the

right things and

I think they are all very

responsible things and

they will result in us

building a superior enterprise software

company.

So, with that, I'm gonna go ahead and open the

floor to questions and answers

from analysts on this call.

Ladies and

Gentlemen,at this time I would like to remind everyone, in order to ask a

question, simply press star and then the

number one on your telephone

key pad.

We will pause for just a moment to

compile the Q & A roster.

Your first question comes from

David Hillall of Fraidman, Billings, Ramsey and Company.

It's Daniel for Dave. How's it going guys?

Just a few questions. One,

with that $1 million deal, who

is the customer if you are

disclosing it.

We actually cannot disclose the

customer by name, Daniel.

Ok. Off to the next one, in

regards to cash, where do

you view the water mark on

cash being, as we look out into 2002

based on your forecasting?

The water mark

will be in the 4th quarter of

2002 and it'll be approximately $15

million.

Ok. Great.

Thanks.

Next question is

from Rob Thollmier of Wells Fargo

Securities.

I've got two questions.

Good afternoon and good

evening.

The first is for Sanju.

One of the things we've noticed

in a lot of companies looking

closely at, kind-a behind the scenes

sales is that there was a

certain kind of inverse

linearity in a lot of

companies where the March

quarter got really tough when it

should have been the most

voluminous of the three months of

the quarter.

Can you talk a little bit

about how this April is going

and what the sort of expectations are over

linearity? And then,

for Eric, my question for Eric - is there

is this $6.5 million dollar

series A convertible that's a -coming up

and at the current stock

price

it's more than just either

face value, you have to issue

more shares than face or you

would have to potentially you could

redeem it or could you just, Eric,

discuss the various options

what you are thinking about

and what we could expect,

what sort of scenarios you see playing

out on this immediate

relatively small but very

eminent convertible

offering?

The series A. Thanks.

I will take the first

question.

With respect to the transactions

and the transaction flow over the quarter,

we didn't see anything that

looked at all anomilis from our

history.

We typically get off in January to a

somewhat slow start as we are ramping

up the year and rolling out

new comp plan and getting the

sales force geared up.

February tends to be a

reasonable month and then we close the majority

of our transactions typically in our Q1 in the March month.

That was the same in Q1 2002

as it's been in previous years and so, for us, it's been

pretty much steady we didn't see anything

strange. So,

I'm surprised you mention it. We didn't see anything

at all

different in our Q1.

Ok thanks, Eric?

ROB, inn response to the second

half of your question.

We have $6.5 million face value

outstanding of series A convertible

preferred securities, and

as of June 19 of 2002, we have

two basic options with

respect to those securities.

settle or redeem for

cash or b: allow the preferred

securities to convert into common effectively be redeemed in

that manner.

At this time our intention is

to allow them to convert into

common.

They will do that pursuant to

the conversion price formula built into the securities.

Which will be a 30 trading day

price average going into June 19th of

2002.

Eric, in the press release

you mentioned a share count

based upon the conversion of

the series A.

What is the price that you

would use to factor that in?

It - well we can't predict right now

what it might be, Rob.

It will be a 30-day trading

average going into June 19th.

That means the pricing period

will start on or about May 7th.

What will happen is the price

will be determined by

averaging out those 30 days of

trading multiplied by 95%.

That will be the conversion

price. And so,

we can't exactly forecast what it

might be.

In terms of our share count

guidance for Q2, we built an

assumed conversion price in

the low $2 range.

Ok, thank you, Eric.

Your next

question comes from Mark Murphy

of First Albany.

Hi guys, this is actually Jeff Corford for Mark.

I was hoping you could talk

about the competitive

landscape. I noticed, you mentioned that

you've seen your competition go

down from four vendors to about one.

You can talk a little bit about that and

any pricing pressure you might be seeing.

[UNKNOWN SPEAKER]: I don't think we said that.

I think we said our principal

competitors are SASS, Hyperion, Business Objects and Cognose to a lesser degree

secondary competitors are actually Angreo.

I think that the competitive

landscape over the past few

years has consolidated.

If you roll the clock back to

'97, '98, there were

approximately 25 different

business intelligence companies and

many companies like Inquire and Medicube

and Information Advantage and

Pro Dia have all disappeared

from the landscape, have been purchased or

alamgamated.

And so, generally the comparative landscape is

consolidating, but

otherwise we do clearly have

competition from the majors like

Business Objects.

Did you have a second

question?

Yeah.

I did ask about ASP's and one more, if I may.

Could you comment just - I know you have, you said

you can't mention the biggest

customer was, but if they

generated over 10% of license

revenue?

This is Eric.

I'll answer the second half

of that question.

They generated approximately

10% of license revenue in the

quarter.

: Ok, Thank you very much.

At this time

there no farther questions.

Okay.

I would like to thank

everybody that with us in the

conference call today.

We appreciate your support.

We will look forward to seeing

you again in 12 weeks, So,

have a great evening.

Thank you.

Ladies and

Gentlemen, this concludes

today's conference call.

You may now disconnect.