Strategy 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.