Microstrategy Inc (MSTR) 2004 Q3 法說會逐字稿

Good afternoon.

My name is James and I will be your conference facilitator.

At this time I would like to welcome everyone to the MicroStrategy third quarter 2004 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 this time, simply press star then the number one on your telephone key pad.

If you would like to withdraw your question press the pound key.

Thank you.

Mr. Saylor, you may begin your conference.

Hello, this is Michael Saylor I'm the Chairman and CEO of MicroStrategy.

I wanted to welcome all of you to our conference call to discuss our results for the third quarter of 2004.

On here with Eric Brown our President and CFO, and Sanju Bansal our Vice Chairman and Chief Operating Officer.

And, first, Eric is going to read the safe harbor, and then he's going to review our financial results.

Sanju is then going to review our sales and marketing activities for the quarter.

I'll summarize with the Corporate outlook, and then we will take questions and answers from the audience.

So, with that, Eric Brown.

Thank you, Michael.

Various remarks that we may make about our 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'd also like to note, that we (inaudible) supplemental information regarding our financial results to the IR section of our website, which is www.MicroStrategy.com.

This supplemental information will provide a detailed reconciliation of GAAP to Pro Forma results.

I would like to begin by describing the highlights from Q3 2004.

Revenues for Q3 was 60.6 million which is up 42% versus Q3 of 2003.

Our GAAP diluted EPS was a positive $7.22 per share, versus our guidance of 15 to 40 cents.

Our GAAP results included a non-cash non-recurring P&L tax benefit of approximately 1036 million related to the release of the Company's tax valuation allowance.

Our adjusted, or Pro Forma EPS of $1.08 per share exceeded the upper end of our earnings guidance and exceeded first call consensus EPS of 51 cents by 57 cents.

This marks our 12th consecutive quarter of positive adjusted net earnings.

Our operating income margin was 31% for Q3 2004, which is up from 15% in Q3 of 2003.

We generated approximately 14 million in net cash flow for the quarter.

Our cash, cash equivilant plus long term investment position at the end of the quarter was 101.2 million, which is up from the 87.2 million at the end of Q2 2004.

During the quarter we used 2.3 million in cash to repurchase approximately 67,800 shares in common stock at an average price of $34.35.

In terms of the P&L review, I would like to comment first on revenue.

Revenue in the third quarter was, again, 60.6 million, which exceeded the upper end of our revenue guidance range, which was 43 to 47.5 million.

It was well above the consensus estimate of 48.5 million.

Total revenue, again, was up by 42%, versus Q3 '03, and up 22% sequentially from Q2 2004.

Licensed revenue in the third quarter was 25.8 million, which is up 46%, versus Q3 of 2003.

Services revenue in the third quarter was 34.9 million, which is up 38%, versus Q3 of 2003.

The services revenue breakdown in Q3 2004 was as follows.

Maintenance 23.8 million, consulting 8.2 million, education 2.5 million, and other .4 million for a services subtotal of 34.9 million, with 25.8 million in license, nets out to the 60.6 million of overall consolidated revenue.

The Q3 2004 revenue mix was 42% licenses and 58% services.

Gross profit margins continue to remain high at 86% for Q3 2004, which is slightly higher than the 84% achieved in the prior quarter in Q3 of last year.

Gross profit margin and licenses was 96%, and gross profit margin in the services business was 79%, improving from 77% in the prior quarter and 76% in Q3 of last year.

Our total head count at the end of the third quarter was 914 people, and is comprised of the following. 240 people in cost of services, 295 people sales and marketing, 209 people in R&D, 170 people in G&A.

Included in the numbers noted above are 31 employees in the Angel.com and Alarm.com business units.

In terms of operating costs, the GAAP line item comparison for Q3 2004, versus Q2 2004 is as follows.

Cost of services was 8.5 million, which is up by .4 million, versus 8.1 in Q2 of 2004.

This cost increase is the result of higher head count to support increased services revenue.

Sales and marketing cost were 17.2 million for Q3 compared to 15.5 million for Q2.

The 1.7 million increase sequentially is due to higher variable fuel compensation, and higher head count.

R&D expenses in the third quarter of 2004 were 7.3 million, which is up by 8 million versus the 6.5 million from Q2 2004.

And, again, most of this increase is attributable to the fact that we had a million dollars of capitalized software expense in Q2 of 2004, versus zero capitalized R&D expense in Q3 of 2004.

G&A expense in Q3 2004 was 8.7 million, which is up by approximately 1.2 million versus Q2 2004.

This is due, primarily, to increased bonus and compensation expense and nonincome related taxes.

Total expenses for Q3 2004 were 41.8 million, versus 37.7 million in Q2 2004.

In Q3, 2004 we recorded GAAP net income of 122 million, which translates to $7.22 per share.

This figure includes a non-cash non-recurring tax benefit of 103.6 million, related to a release of the Company's U.S. and Canadian evaluation allowance for deferred tax assets.

This is a substantial increase compared to net income of 11.4 million in Q2 2004, and the loss of 24.4 million in Q3 of 2003.

The adjusted net EPS results for the quarter, using a diluted share count of 16 million 903 thousand shares was a profit of $1.08 per share, significantly exceeding first call consensus of 51 cents per share, and our guidance range of 15 to 40 cents per share.

There are three reconciling items between GAAP and Pro Forma which are as follows.

First of all, starting with the reported GAAP number of 121 million 990,000, we subtract 65,000 for the minority interest, we subtract 103 million 613,000, due to the impact of the release of evaluation allowance, and we add back approximately 18,000 for amortization of intangibles.

That nets to approximately 18.3 million of Q3 2004 adjusted net earning.

We have provided GAAP results and additional financial information in the press release to reconcile adjusted net earnings as discussed above.

Several comments on income taxes.

Due to the release of a substantial portion of the Company's U.S. and Canadian tax evaluation allowance, we had an income tax benefit for the quarter of 103 million, compared to an expense of .6 million in Q2 2004.

After considering our historical results and future projections, the Company has concluded that it is more likely than not, that it will be able to utilize a substantial portion of the Company's U.S. and Canadian net operating loss carried forward, and other deferred tax assets prior to their expiration.

As a result, the Company released a total of 125.4 million of it's U.S. and Canadian deferred tax asset evaluation allowance in the third quarter of 2004. 103.6 million of the evaluation allowance released was recorded as an income tax benefit on the statement of operations, and 21.8 million of the evaluation allowance released is attributable to stock options exercises, which was recorded as an increase in additional paid in capital an the balance sheet.

Turning to the balance sheet, I would like to note that, our cash plus long term investment balances increased by 14 million to 101.2 million versus last quarter.

Total deferred revenue decreased by approximately 1.2 million versus the prior quarter, with a .8 million decrease in short term, and a .4 million decrease in long term deferred.

Our Q3 DSO figure was 46 days, compared to 50 days in Q2 2004.

This DSO metric is slightly better than our expected range of 50 to 65 days.

And for the third quarter, we reported adjusted EBITA of 20.9 million.

This marks the 14th consecutive quarter of positive EBITA.

And, on the (indiscernible) four quarter basis, we have generated 52 million in EBITA, which translates to an EBITA margin of 29% (indiscernible) showing 12 months revenue.

The overall cash and long term investment balances increased by 14 million this quarter.

This also marks the 10th consecutive quarter the Company generated a positive cash flows from operations, excluding the large, one time, accrued interest payment in Q4 of 2002.

The reconciliation of cash flow is as follows.

First of all, starting with the EBITA figure of 20.9 million, we subtract .9 million for cash restructuring cost, we subtract 1.3 million for the change in deferred revenue, and we subtract 1.8 million due to working capital, which nets out 16.9 million of positive cash generated from operations.

From there, we subtract 1.2 million for CapEx, we add back .6 million for stock options and ESPP(ph), and then we subtract 2.3 million for the cash used for the quarterly share repurchase program.

That nets out to an overall net change in cash and investments of 14 million.

Key operating matrix for Q3 2004 are as follows.

The revenue mix for the business in Q3 was 61% U.S., and 39% International Compared to 63% U.S. and 37% International last quarter.

The total number of new customers in this quarter was 90.

Our total number of customers life to date is 2,902.

Our new versus existing customer revenue mix in Q3 was as follows: 31% of revenue is from new customers, which is down from last quarter with the difference being driven by several large transactions with our existing customer base in Q3.

The breakdown of license deals in the quarter is as follows: 32 deals greater than 200K, 27 deals greater than 250K, 14 deals in excess of 500K, and 5 deals in excess of one million.

During the quarter we had several large transactions that I would like to highlight.

First, we completed a series of transactions with a large U.S. technology company that totalled approximately 4.1 million in license revenue.

Second, we completed a transaction with a large European retailer that resulted in approximately 4.7 million in license during the quarter.

And lastly, we completed a transaction with a large U.S. financial services company that resulted in approximately 1.2 license during the quarter.

Indirect revenue as a percent of overall product revenue is 13% in the quarter.

We signed a total of 8 new channel partners in the quarter.

We had a total of 103 quarter (inaudible) personnel at the end of the quarter , compared to 99 total quarter caring(ph) personnel in the previous quarter.

Again, total head count at the end of Q3 for the Company was 914, and for the trailing 12 months ended Q3 2004 the attrition rate was 19%, which is about the same as the previous quarter.

We closed a total of 381 license deals in the quarter, compared to 369 last quarter, and 283 deals in Q3 2003.

The average license deal signed(ph) for the quarter was 100,000, which is an increase versus the 77,000 in Q2 2004.

Gross margin for Q3 '04 was 86%, which is up slightly versus 84% in last quarter.

Our four strongest vertical segments for the quarter were retail, banking, manufacturing, and information technology.

Approximately 51% of our world wide license sales for the quarter were from the new products, which are defined as Web Professional Report Services, MicroStrategy Office Web Universal, and Intelligent Server Universal.

In terms of the share count for the Corporation at the end of Q3 2004, we had 16 million, 17,000 shares outstanding, this is a decrease of approximately 50,000 shares versus the end of Q2 2004.

And the GAAP weighted average number of shares outstanding for the quarter were 16 million 53,000 basic shares, and 16 million 903,000 shares on a diluted basis.

An update on the share repurchase program.

In July 2004 MicroStrategy board of directors authorized the repurchase of up to an aggregate of 35 million of the Company's Class A common stock over the next year.

The share repurchase program is to be funded using the Company's working capital.

During the third quarter 2004, the Company used approximately $2.3 million to repurchase approximately 67,800 shares of common stock at an average price of $34.35.

The timing and amount of any shares repurchased in the future will be based on market conditions and other factors, and the repurchase program may be suspended or discontinued at any time.

Turning now to the financial guidance, I would like to note that the following statements are subject to risks and uncertainties described they end of our earnings release.

Management guidance for Q4 2004 and full year 2005, is valid as of the date of today's earnings release only, and supersedes any previously announced guidance as to the Company's expectation for financial results for Q4 2004 and full year 2005.

Q4 2004 revenue is expected to range from 47.7 million to 57.4 million.

Q4 2004 GAAP EPS is expected to range from 39 cents a share to 79 cents per share with a share count ranging from 17 million to 17.2 million shares.

The guidance assumes an effective tax rate in the range of 5 to 7% for the 4th quarter 2004.

Full year 2005 revenue is expected to range from 211.1 million to 251.6 million.

Full year 2005 GAAP EPS is expected to range from a profit of $1.87 to $2.74 per share.

For the full year, and for each quarter in 2005, the guidance assumes an effective tax rate in the range of 28 to 31%.

Our guidance assumes no significant adjusting to items between GAAP and Pro Forma EPS as we expect the two to converge.

In summary, our Q3 2004 results demonstrate that we are increasing operating margins while increasing both license and services revenue.

Our new product releases, which include Report Services, MicroStrategy Office, and the Universal addition of Intelligent Server, continue to create enterprise level demand.

Universal purchases appear to be a catalyst, which is driving larger transaction.

This concludes my remarks, I will now turn the call over Sanju Bansal.

Great, thanks Eric.

Q3 was indeed am outstanding quarter for MicroStrategy.

While there are multiple drivers of our revenue growth this past quarter, there are 2 I would like to highlight.

First, our strong new product cycle continues to help generate license revenue from both new and existing customers.

We launched MicroStrategy Report Services last November, MicroStrategy Office this April, and the MicroStrategy (indiscernible) Universal in June.

While all three offerings have been well received, Report Services has thus far had the greatest perceptional impact on our business.

Prior to Report Services, we were known primarily for our data scale ability and powerful analytic capabilities.

With Report Services, we have entered BI(ph) main stream and extended BI to all business users from analysts to executives to line workers.

MicroStrategy Report Services simplifies BI consumption throughout an organization by providing content rich, well formatted, user friendly reports.

Some customers have indicated to me that the improved formatting of Report Services has the effect of making our entire product line seem easier to use.

With Universal Edition, another one of our recent releases, we now offer the market's first BI product line compiled at both, 32-bit and 64-bit modes from the same code base.

MicroStrategy Universal Edition can run on Windows, IBMAIX and SunSolaris.

This release has opened up new market opportunities for us, particularly, in the very large deployment and OEM markets.

The second major driver behind our financial success is the fact that our existing customers are harnessing MicroStrategy software to build numerous new applications, as well as deploy their applications to many more users.

Many existing MicroStrategy customers are now only getting fluent with the wide range of capabilities in our platform.

And, they understand that applications are possible with MicroStrategy, they are expanding their vision for BI applications, and many now have a dozen or more additional MicroStrategy applications planned.

As an example, one of our million dollar license customers this quarter has plans to build 30 additional MicroStrategy applications in the near future.

Obviously, these additional applications are driving demand for additional BI capacity.

Also, we continue to see BI deployed to more and more users in an organization.

With MicroStrategy Web and MicroStrategy Narrowcast Server, and now MicroStrategy Report Services, we are making it easier to deploy applications with precisely the insight and formatting that businesses require.

So, I think our strong product cycle, coupled with increased customer application scope, and larger use of deployment positively impacted our license revenue growth in Q3.

I'd like to now provide additional detail on our outstanding Q3 results.

Here's a partial list of the customers we did business with this quarter, Air Force Safety Center, Brook Stream, Singular Wireless, Tribologic(ph), Dayton Early Education Agency, Discovery Communications, E!

Entertainment Television, Albagreman(ph) Stores, Grange Insurance, Liz Claiborne, Lone Performance, Meredith Corporation, the National Institute of Health, Office Depot, Prescription Solutions, Shopper's Drug Mart, Spartin Stores, The Warnaco Group, Us House of Representatives, U-Crops Supermarkets (ph), and Universal Studios.

We had a very good number of new customer wins, as Eric stated, at 90, and we had a good total number of transactions at 381 in the quarter.

Also, in Q3 we entered into 8 relationships with systems integrators and OEM partners, including Map Info, Hasertain(ph) and Nova Consulting, OBSI Technologies and Pentasystems(ph) Technology.

I would like to also briefly highlight some interesting examples of customer wins during the quarter.

First, we had Discovery Communications.

With current global operations in 160 countries and territories and 1 billion cumulative subscribers, Discovery Communications is the leading global real world media and entertainment company.

Discovery selected MicroStrategy for it's ability to meet the complex reporting requirements and analyzing ad sales volume and revenue patterns.

Discovery also utilizes MicroStrategy platform for internal HR reporting applications.

Discovery intends to have over 500 MicroStrategy users in production in the very near future.

Second, we have Singular Wireless, with more than 25 million voice and data customers across the US.

Singular Wireless is the leader in mobile voice and data communications.

Singular selected MicroStrategy for its ad-hoc analysis capabilities.

Approximately 100 MicroStrategy users in marketing will perform customer turn analysis on data contained in their care data data warehouse.

The Company will utilize the MicroStrategy platform to track and analyze sales and marketing data to provide end users with greater insight into the customer's acquisition and retention programs.

Third, we have Premiere.

Premiere is a strategic alliance in US health care, entirely owned by nearly 200 of the nation's leading hospital and health care systems.

Premiere is using MicroStrategy to anchor Clinical Advisor, a program offering hospital assessments, rules setting and bench marking information to guide health care improvement efforts.

Using more than 18 distinct business (indiscernible) applications developed on MicroStrategy, 100's of Premiere's clients make informed decisions on such issues as the clinical care process, financial market strategy, resource utilization, patient safety and staffing.

Finally, I would like to highlight the Federal Bureau of Investigation, also known as the FBI.

The FBI will be using MicroStrategy to access and analyze information in the bureau's investigative data warehouse.

MicroStrategy's technology will support information sharing among the law enforcement, intelligence, and homeland security agencies..

Information sharing amongst these agencies, essential to national security, will be supported by MicroStrategy's ability to provide a web based, collaborative, environment for hundreds of analysts.

This information sharing is intended to help the FBI react and respond to possible homeland security threats.

So, in conclusion, in reviewing the results of this quarter, I think it's clear we have established a very solid financial foundation from which to continue to grow our business.

I'm particularly proud of our recent success in the reporting space, where we are bringing MicroStrategy's industrial strength infrastructure to the task of enterprise reporting.

Here are two comments for MicroStrategy customers on MicroStrategy Report Services.

First, from RH Donnelly: As a direct result of customer demand, RH Donnelly became an early adopter of MicroStrategy's Report Services, explained RH Donnelly's, Joe Mertons(ph).

With report Services, our senior executives will leverage picture perfect sales and marketing score cards and reports to provide daily feed backs on sales and product performance.

And, from Campbell Soup Company.

Campbell Soup Company is utilizing MicroStrategy Report Support Services for sales, finance, customer service, and marketing applications, said, Paul Williams, Director IT at Campbell Soup.

The Report Services provides many options for presenting highly formatted information in a consistent user friendly format.

This exciting new reporting capability also fully leverages our existing MicroStrategy investment.

So, looking ahead, our robust product cycle is in full swing, but it's hardly abating.

Early next year we plan to release the next major update of our entire platform, under the monocum(ph) MicroStrategy Eight.

Overall, we continue to be very optimistic about our future, and by any measure, MicroStrategy has never before been in a stronger position, financially, technically, and competitively.

And, with that, I'd like to turn the floor over to Mike.

Thank you, Sanju.

One of our goals is to operate an efficient enterprise software company, so, I would just like to summarize by saying that we are pleased with the P&L results for the quarter.

The 31% operating margin, I think, speaks for itself.

Our license results were an unexpected but pleasant surprise, and our service results were somewhat more expected, and we worked very hard to manage our services business efficiently, and we did see healthy growth there.

More importantly, it's our gross margins, in that line of business.

Which, I think reflects our discipline as managers, came at 79%, as Eric pointed out, and I think that's something that, again, we're somewhat happy about.

We're also pleased with the developments in our balance sheet.

If we look at the last nine months we have added $166 million in shareholder equity to the balance sheet, or approximately $4 million a week.

We find that to be, again, a nice surprise and we're pleased with it.

We're also pleased with generating $54 million of cash in the last nine months from operations.

Again, working to be very fiscally prudent as we build our enterprise software business.

As we look at the competition, I think, we are pleased to note that we appear to be growing at an organic rate, a bit faster than some of our competitors.

Which would indicate that we are taking some market share.

We feel that's a very good strategic goal, and we are happy to see it taking place.

We believe we are running a very efficient P&L, compared to our competition.

It's a bit more efficient than theirs.

And, we are improving our balance sheet at a rate which I think fairs favorably to our competition.

So, we are pleased with those developments.

Probably, one of the nicer things, though, is that we managed to accomplish all these results while staying more focused.

I think we are a bit more focused on a single market, we are a business intelligence platform company.

We are not trying to be an application company.

We are very focused upon on the BI platform business and the enterprise segment of the marketplace.

We're focused on a single platform, we've got a single code base, and that continues to distinguish us, versus other people in the marketplace who have multiple code sets they have acquired through a hodgepodge of different acquisitions over time.

For those of you who have been in the software business for a long period of time you know that, ultimately, the homoginaiety(ph), and the elegance of your code base determines, to a great deal, your options going forward to develop that code base, and then, of course, your cost to maintain it , and the quality of the services you can deliver to your customers.

And, as Sanju pointed out, we're just very pleased with our rapidly evolving product line.

We are brick by brick filling out our product structure, and we are removing elements or objections that customers might have to not buy from us.

The delivery of the 64-bit product was a great edition.

The delivery of the UNIX capability is a great addition for us.

The delivery of a great full featured report writer is a great addition for us.

There aren't really any good reasons for the largest of the global 2000 out there to not do business with us.

We will continue to try to make it easy for them to do business with us, and I think that many of the product innovations we have made during the past year or so did have an impact on our ability to sell licenses this quarter.

And we're seeing that when people make large decisions, and large multi year commitments, or substantial multi thousand user commitments at the enterprise level, they certainly like to see a company which is looking out to their best interest.

So, when we deliver a strong UNIX product, that helps, and that has helped us in a number of these larger deals.

Delivering the report writing product has helped on a number of larger deals.

And, I think at a qualitative level, the combination of running an efficient business, a disciplined business, delivering a strong balance sheet to the marketplace, and delivering a strong technical product line to the marketplace is making it easier for our advocates within these companies to choose for us, and advocate for us, and so, ultimately, all of these factors are combining, I think, to offer us better potential as we look out in the future, so, we are pleased with these developments.

With that, I would like to go ahead and open up the floor for questions and answers.

At this time I would like to remind everyone, in order to ask a question please press star then the number one on your telephone keypad.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from David Hilal with Friedman Billings.

Thank you.

I've got a few questions guys.

First, I wanted to focus on those large deals.

And, I wanted to understand, specifically the deals over 4 million.

What was it that drove those deals, and I'd be curious if the Universal Service Product, the UNIX version helped contribute to those deals?

Yes, David, this is Michael Saylor, the Universal Product played pretty prominently in at least one of those deals.

The other thing that played prominently in all of our large deals, I believe, is customer success in deploying applications at a lower level.

Generally, these customers, they grow over the course of a couple years, and they deploy first, 1 and 2, and then 5, and then it's not uncommon to see 10 or 20 or 30 applications.

And, when they do that, and then they cross the 1,000 user barrier with a dozen applications or more, they're what we characterize as a mature, committed customer.

In that case, or at that point, they're often times ready to make much bigger commitments because they want to expand, perhaps, from 1,000 to many thousands, or they may want to go ahead and expand to embrace new parts of our product line, like the Report Services, or the Universal Product.

So, I believe there's a combination of these factors, but, in general, people making these commitsings are expanding more applications and taking them to more people and they're enthusiastic about our new products, either the Report Services products, or the Universal Product platform.

On the guidance, when you guys gave guidance three months ago, I think, Eric, you said, your guidance generally, or at least for Q3, was not going to include large deals because the visibility is a little tough on those.

And, I guess I want to understand, the guidance for Q4 next year, has your philosophy changed as to whether you incorporate some large deal contribution, or do you assume that's kind of gravy on top of what's in the pipeline.

I think in general, and, when we're looking out 90 days, for our quarterly guidance, in this case Q4, 2004, we don't feel we can pin down a million plus dollar deal or multi million dollar deal within that 90 daytime frame.

So, our philosophy is unchanged, so we don't explicitly forecast those large deals in a 90 daytime frame.

Over a 12 month timeframe, i.e. looking at full year 2005 guidance, we tend to incorporate on a weighted average basis, on the assumption that we will close a number of million plus dollar deals

And on the guidance for next year also, the taxes, what percent are you actually paying in taxes?

I mean, I'm assuming you're still paying minimal taxes because of the NOLs, so, therefore, cash earnings are going to be higher than GAAP earnings, is that assumption accurate?

And, if so, what, -- so, if GAAP taxes are 30% plus or minus, what are actual cash taxes going to be?

Your observation is correct, David.

Our actual tax rate will be extremely low, i.e. in the 5 to 7% range, which is what we have historical seen.

We have a substantial amount of NOLs that will take us a number of years to utilize before we actually start paying cash taxes of anything approximating a normal effective tax rate.

Great, I will pass it over, good job guys.

Thank you.

Your next question comes from Mark Murphy with First Albany.

Thank you, good job on the quarter.

I have a question on the forward pipeline of the business, where it occurs to me that in looking at Q3 that there was an acceleration of the business, and yet, if we look at the revenue guidance for Q4, and note that it's substantially higher than the revenue guidance that you gave for Q3, coming into Q3, on that basis, should we be assuming that the 90 day forward pipeline of business is now larger than it was a few months ago?

Well, mark, this is Michael Saylor.

Generally, as we've said a quarter ago, Q3 is normally a bit slower period for the business than Q4.

So, if you look at the historical seasonality in the business, we expect a bit healthier pipeline in Q4 than in Q3, you know, subject to, as Eric pointed out, it's difficult for us to forecast with any pinpoint accuracy extremely large deals.

But, I would characterize the Q4 business at a steady state as being a bit stronger than the Q3 business in a steady state, all other things considered.

Thank you, Mike.

A follow-up.

Were any of the three very large deals in the quarter primarily driven by the reporting services product specifically?

I think that the Reporting Services product is a factor in our business.

I can't answer, specifically, that question, maybe, I'll get some help here from my associates.

Hold on one second.

Yeah, I think that, at this point, I wouldn't characterize the large deals as being driven by Report Services.

I would characterize them as being driven by our customers obligation to deploy more capacity, and invariably, generally, they are wanting more capacity to deploy to more people or to support more intense applications.

In, at least one case, I know it was driven partially by an interest in a customer upgrading on the UNIX, Universal release.

The Report Service tends to be, at this point, an incremental add-on that's still percolating in the market.

I think it's helping us get most momentum a lot of places, and I would expect in the future that it will have some impact on some large deals, but I wouldn't characterize these particular deals as being driven by it.

Has there been any change in the existing customer retention rate, or any change in what you're seeing in terms of maintenance contract renewals, when you compare that to the historical norms of the business, as you have made some adjustments or updates to some maintenance contracts?

Yes.

We're seeing our maintenance business is tracking in the same historical range of renewals it has had.

So, we don't have any particular news to report there.

Okay, Mike.

One final one, do you have any thoughts on some of your competitors that are talking about trying to make a move from a cube based architecture to eventually more of a relational type of architecture?

It sounds like it could be a difficult or very risky type of process, and I'm curious if you see in the pipeline, is there any opportunity for MicroStrategy to capitalize while some of your competitors are maybe mired down in this rewrite process?

Yes.

That's a good question.

We have been in this business about a decade, and at the beginning of the decade there were about 25 players, of which four were true relational analytical players, like Information Advantage and Prodea and STG.

In that decade, all of our direct competitors in the relational and analytic segment have all been amalgamated, and largely disappeared as effective competitors in the marketplace, and we are the only one that survived.

There was another group of Olap players, in which S-Base was a leader.

At different times, the true Olap of the S-Bases, the other applex type, TM one application, tried to expand, but they never really made it into the relational business and they tend to still be cubed.

Then there was something called Wholelap(ph) or like something in the middle, probably 10 companies have announced an intention to try to go from the Olap cubes into the relational market, and of the 10, you know, for the most part I know 7, 8, 9 of them have just failed, they never quite made it, they tried to make it, they got distracted along the way.

Today, as we look at the market, you know, of course we see, (indiscernible), and, for the most part, they are still coming out of their middle market roots.

I think that it's essential if they want to compete with us in the higher end market that they would have to announce an initiative like that, otherwise it doesn't really have any message at all for the market.

But, we are not optimistic about them getting it any time soon.

We don't want to underestimate the competition, because, every day we go to work, and suit up, and make sure that we are ready for the competition.

But, at the same time, it took us about, you know, at this point, about 10 years to figure out what we know, and that was running into problems that we couldn't solve back in 1993 and '94, so, I would say that anybody that comes to the market with a product now, or a year from now, or two years from now, is probably looking at a good 3, 4 year slug even if they fund it at a much higher level than we originally funded it.

It takes, you know, time it takes a year to get the product in the market.

It takes a year to hear what customers think, it takes a year to fix it the first time, it takes a year to fix it the second time, so, there's a natural life cycle to this business.

And, it's not easy.

It also turns out that if you have got an existing cubed product in the market, that you tend to get a lot of initial resistance, either inside your customer base, or from your own development teams, because many of the metaphors and the mathematical modeling techniques that you use to be really good in the relational business, don't translate to the multi dimensional business and vice versa.

So, they tend to get caught up in their own inbread metaphors, and that slows them from conceptionalizing the product the right way.

So, we hear some rumors in the market that there's some people working on this, but at this point, I think we are going to put our head down, and continue to sell, and to grow and to improve our own product line.

I think we will do just fine.

Okay, thanks very much.

Your next question comes from Frank Sparacino with First Analysis.

Hi guys.

I wanted to go back to the two large deals, and just curious when those deals were actually signed, and from a forecasting perspective, were they forecasted to close this quarter, were they forecasted in an earlier quarter, maybe even Q4?

Frank, this is Eric brown.

If you look at the large transactions we are not going to comment specifically, like what date, or what stage in the quarter they did close.

Also, just again, make the general observation that, again, our forecasting methodology, which we have kind of consistently applied over the last two to three years, is that going into a quarter we do not assume that we can again pin down within that 90 day time frame a million plus dollar deal because there are just so many more things that can cause these deals to be slipped or to be downsized, etc., so, that's our position or our statement with regards to the large Q3 transactions.

Eric, you guys have had two press else recently in terms of large International deals, it looks like one of those was not recognized in the quarter.

Can you give me any sense as to why it wasn't recognized, or was it a prior deal that you just got the press release out now?

Again, the one thing you always have to keep in mind is that, there can be anywhere from a 1 to a 101 day plus lag between the date that we actually ink at a deal and close the transaction and book it, and when we actually have the rights to actually put a press release on the wire.

So, you shouldn't associate, for example, the date of a press release with the closure of a particular transaction, because we may have the press release pre-agreed as part of closing the deal, in which case we can release it quickly, it may be subject to mutual review by both sides, and it may take weeks to get that final format.

So, don't think that there's any direct linkage in terms of timing there.

Okay, thanks guys.

Your next question comes from Patrick Mason with Pacific Growth Equities.

I think you said you had five deals over a million dollars, is that correct?

Yeah, that's correct

Do you have like the split on new versus existing customers, are they all existing customers?

On the five deals over a million dollars?

Yeah.

I don't think we gave that split, but, certainly, a portion of those five deals were to existing customers.

Again, that's one of the things that gave us the -- kind of the upside and the positive skew toward the install base versus new customers.

All right.

And, then, as far as just hiring, are you guys going to hire into the Q4, are you going to maintain flat?

Any kind of color on that?

I'm sorry, could you repeat that

On the hiring sides, are you going to be hiring, you know, in the Q4 time period?

Are you planning on maintaining that around flat, or do you have any color on that particular issue?

Sure, I'm assuming you are referring to the number of people in the sales force carrying a quota.

We are, indeed, looking to hire.

We are not quite at the levels that we've set for ourselves at the end of the year.

We are optimistic, though, that we will be able to add some additional quota carrying head count between today and 12/31/04.

I appreciate it.

The last question is on the capitalized software piece, do you expect to capitalize any software in Q4, and do you have any kind of an absolute dollar amount assumptions for FY05?

We don't have any explicit dollar amounts for either Q4 or 2005.

What I can tell you, is that historically on a 12 month basis we have had 1.5 to 2 million worth of capitalized of R&D.

And, assuming we maintain the same kind of rhythm of new product releases, it's not unreasonable to assume that, for example, in full year 2005 we might have a similar level to what we experienced thus far in 2004.

So, knowing that sea change one way or the other.

All right, very good quarter, thanks.

And your next question comes from Mark Herbeck with Citigroup.

Hi, thank you.

Great execution.

Mike, you commented that, if you look at the numbers it's pretty obvious that you are taking some market share from somewhere.

Do you think that's a result of you increasing your win rates, are you seeing more deals, any kind of thoughts on what the exact dynamics going on there, would be appreciated?

Well, I'll let Sanju answer this, and, if he has anything left to add I'll try to --

Sure, I think certainly in deals that we are competing in with our new products we are more competitive, so I do think our win rates are going up.

In particular, we are seeing that we are more competitive than we were, let's say, 18 months ago, relative to Business Objects(ph) and Crystal(ph), and I think that reporting product has helped there, and I think their, their slight stumbling in execution maybe hurt them there.

I think, with respect to overall, is our win rate up or not?

It's tough to really say, but I do think that compared to certain competitors, in particular Business Objects, we are doing better.

I guess, the point I would make too is, if you look at the segments of the market where we didn't compete as well, we didn't win dollars out of customer budgets that were allocated toward large UNIX deployments, so, now, we are in position to win those, and we're winning some.

We didn't win dollars from customers that were allocate toward just low end of the quarter, or broad base reporting, that would have gone to a Crystal or somebody else, and now we're in a position to win those, and we are winning some.

And, of course, on the high end of the market, our product just continues to get more scaleable, as we get 64-bit, and as time seasons our product line we keep improving it.

That means that one area of growth that we have, which I think is we are uniquely positioned to pursue is the high end.

We have had, you know, for example credit card companies that were not able to succeed in scaleable deployments with one of our two competitors, and we have been able to go from 0 to 10,000 users or more within 12 months.

So, just the scaleability of our products means we can win where there's a 10,000 user high transaction volume requirement.

So, you summarize it down, it's partly more functionality, it's partly more platform support and it's partly a more seasoned, more scaleable product as we mature, and all these things translate to a bit bigger share of the budget of the global 2000 IT departments, and a bit more commitment from them, and the more they get committed to us then the more opportunity we hope to see in the future.

Okay.

Given your execution and profit margins, any thoughts on any ability to grow the business faster if you invest more, are you kind of at a pace that's kind of the best optimization right now?

That's a good question.

We try to be very disciplined in our approach to the business.

Part of the discipline comes in setting expectations.

We have more comfort with the rate at which our license -- more comfort with the rate the at which our service revenues will evolve, and the rate at which our license revenues will evolve, because services typically sign as one year contracts.

You know, things like that.

So, we tend to try to base our business on our understanding of the predictable organic growth rate of the business.

We also know that if we hire really, really good people, we put them out in the field, then probably good things will happen, but we also want to make sure we don't put people out in the field that will be undermanaged.

So, we are always considering this.

It's unreasonable for you to think, I wouldn't want any of you to think that we will take our quarter in Q3 and sort of continue to extrapolate up lineally(ph).

We were benefited by a couple of large deals, and we'd like to have some in the future, but we are not going to grow the business based upon having to have each of those things in the future.

We want to always keep our options open in that regard.

So, I would say steady growth, disciplined growth, but we have been through good times, we have been through bad times, as have all software investors, so we don't want to forget where we came from, and we want to make sure that we just move forward at a rate that is manageable, both with regard to our employees and with regard to our customers.

Okay.

And kind of along those lines, on the services line, is it reasonable to expect anything unusual there, is it reasonable to expect that that continues to grow sequentially, modestly?

Yeah, Mark, that is Eric Brown.

I think that it's fair to say there wasn't anything extraordinarily unusual in the services line or any of the sub components in (indiscernible), consulting, educational or maintenance.

We think that's a reasonable baseline to use to extrapolate forward.

Okay, great, thanks.

Your next question comes from the line of Nathan Schneiderman with Wedbush Morgan.

Thanks a lot Impressive quarter, guys, congratulations.

I was hoping you could give us an update on your efforts to reduce the maintenance pricing on the existing customers, specifically the conversion on some of your older customers, from net to list pricing, where do you think you are in that process, and how do you assess renewal risks going forward for those customers that may have a decision toward year end?

Thanks Nate.

Generally, we just try to manage our maintenance business in a steady fashion and where we have individual decisions to make, we try to make decisions that are fair for the entire customer base.

Then if we have issues to work on a customer by customer basis then we resolve them as quickly as we can.

In terms of overall results the maintenance business is moving along consist than ENT with the way it's been moving for the past four, five, six, seven quarters, there's really nothing new there to report.

As I look forward, I think it will be business as usual during the coming year.

Occasionally, we will have issues we have to work through, but, I believe we have a set of customers that are fairly committed to us and we have got to focus upon making them successful.

So, generally, where there's a lot of value being created we can find some common ground to work through those things, and we will continue to do so.

I would also add that, you know, (indiscernible) made the comment earlier that, as we look to the early portion of next year, we are going to be rolling out MicroStrategy 8, and I think what we have been trying to do is progressively work toward getting everyone in more or less the same kind of maintenance configuration and pricing mode, because, we expect most of what to be made available MicroStrategy 8 to be a maintenance upgrade versus a new product.

So, this is important precursor work.

Just to follow up on that, perhaps you could express it in a percentage basis, or maybe more broadly than that, do you think the vast majority of the way through these price adjustments and the negotiation over that, or do you still have a lot of work left to do?

We don't track exact percentages, but on a -- since we deal with this on an annual basis, and we have been focused on this program for about a year now, I would say that it's reasonable to think that we are well over half the way through it.

And, so perhaps more than that.

But, definitely we have done a lot of work there and it's been very constructive for the customer base and I think constructive for the business in general.

We will look forward to the 2005 timeframe, and this new product MicroStrategy 8 that we are going to release to all of our existing customers.

Okay, that's helpful.

One other question for you.

Were the Farapore(ph) and Metro Group deals Q3 deals?

And, can you talk about revenue recognition policies in general in some of these larger multi year deals like the five year deal announced with Metro Group?

We don't comment on individual deals, they are all subject to confidentiality restrictions, so, I can't say.

And, Eric, do you have any other comments?

Yeah, I would say also, in terms of the deal structures, we talked about the Metro deal as being a significant International win, with kind of a multi year commitment, I think it's important for you to understand that we are not just closing transactions, which are one off license sales, we are looking to enter into multi year relationships with service purchase commitments over multiple years with potentially future license purchases as well, etc., so, we are evolving our model when we are dealing with customers at the enterprise level here.

Do those deals typically involve an up front, a large up front license component with the certainty of getting maintenance over the five years, or is the license recognized ratibally(ph) over the period of time, or over a period of time.

Yes.

Again, it's not as though we have a large population of multi million dollars deals to draw up.

So, you really can't generalize, Nate, to be perfectly honest.

And, that's a fair, honest, answer here, we can't extrapolate and create trends here, because no trends exist.

Okay, thanks a lot, I appreciate it.

Your next question comes from the line of Peter Goldmacher with SG Cowen.

You mentioned you had 90 new customers in the quarter, how many of those deals were actually first time product sales to customers you had never done business with before?

Yeah, this is Eric.

The short answer is using your definition there of brand new customer, actually, we don't track that metric.

So, to be clear, for example, a new customer for us would be someone that had not purchased license in the last three years or so, so, I can't ,on the fly here, distill that new customer add, and convert it to a new, a new definition.

So, I simply don't have that statistic

As you look on the deals you did in the last quarter, and your pipeline going forward, as you get the product more palatable at a mid-tier level where you can go head to head against Business Objects and Cognos(ph) and have it be a good head to head fight, how is that pipeline developing down at that end of the market for you guys?

Yeah, this is Sanju.

I think that a year or two ago we weren't very focused on that part of the market.

We continue to serve the high end needs incredibly well.

We are finding, though, that customers in the 100 to 750 million dollars range are increasingly becoming interested in the MicroStrategy story.

So, we are starting to get a lot more in-bound demand, that is people hitting our web site and calling us from companies of that size.

We are also outbound, going and hitting information intensive companies in that same revenue range.

So, we are starting to see a good amount of activity now in the sub-billion dollar market for MicroStrategy.

And we are finding there that, our story is not only competitive for usual strengths for scaleability, but actually the administerability of the platform is playing very well to these shops that have few people to maintain their BI systems.

So, the reduced administration required MicroStrategy, it's making us very competitive in a market that we historically have not played very strongly in

I'm sorry, I was asking a slightly different question.

My question isn't about the low end of the market, it's sort of the departmental BI functionality, where you'll have the Fortune 2000 will all have department BI needs.

So, my question is, in the accounts where you already have the high end enterprise class Olap deployment, and Cognos or Business Object is in at the departmental level, I suspect you guys are both competing for incremental, departmental dollars, for incremental deployment, how, how is, on that battleground, how is that going?

This is Michael.

Well, certainly I think that when we get some of these larger deals, one of the implications is that we are winning over the central IT organization to adopt us for a host of departmental applications as well as a few central applications.

So, we are seeing some good results there.

Obviously, we're more competitive today for all those departmental applications than we have ever been.

Because, a lot of them were point solutions that just needed a certain report to be generated.

Some of them were restricted to only run on the UNIX platform, because that was the department's choice.

Some of them required certain other features that we have only just now added to our platform.

It is true that the big three BI players, you know, us, Cognos, or BO, most of us are in many accounts at the same time, and we are all vying for the same budgets and for the same projects, and that will probably continue for quite a while.

To the extent that we're all talking to the same customer, the customers are getting pretty rational, they look at the feature set, They want to do comparisons, so, to the extent that your feature set looks a bit more competitive than it used to look.

Then, you get a little bit of leverage there and you get a little bit of buzz going, and you'll tend to win a few more than you would have won otherwise.

Our engagement, I assume engagements are increasing, which is good.

And, then, beyond engagements, can you say whether or not win rates are increasing?

I think we previously talked about that.

We feel qualitatively a bit more comfortable with win rates.

You know, the truth is there is so much activity going on all the time, I would not want to give you the impression that it is a scientific business that it's possible to track it down to individual, statistically, verifiable results.

We feel pretty good about our win rates.

We feel good about our abilities to compete within each of the various accounts.

And we feel like we are expanding right now within accounts, and grabbing more share.

And, certainly, when you look at the macros statistics our Company's organically growing much faster than either BO or Cognos is, and that being the case, then it would seem, from a high level point of view, that our win rate must be increasing.

But, I don't want to reduce it down to something really simple, because, it's also possible that you could grow your market share by convincing to existing customers to purchase more from you, or to expand their capacity faster than the competition.

So, you can win with a higher price point, you can win with a faster expansion, you can win with more, via higher win rate, or you can win because you are just considered for more applications to be appropriate, and the competition may not be considered to be appropriate.

So, there's a lot of factors that play into success.

And, I think, we're happy to be successful in any of those ways, so, should it occur.

Thanks.

Your next question comes from the line of Patrick Walravens with JMP Securities.

Two questions.

So, there were 5 deals over a million dollars, and you, mentioned, I think, 3 of them, a 4 million, a 4 million and a 1 million.

Were the other 2 also 1 million?

It's a little confusing.

Why call out one of the $1 million deals and not the other two?

I guess that's the question.

They were in the 1 million range.

They weren't substantial like the two large deals, which we called out during the script portion of the earnings call.

And, then, I saw that you filed a, something with the SEC which says that two of the directors resigned today.

Can you just explain the circumstances around that?

Sure.

One of them, Ralph Turkowitz has been a long time director with the Company since before we went public.

And, the other had been a director for quite a while.

And, of course, we are very pleased with their service.

Both resigned for some personal and professional reasons.

And, we are greatful for what they've done.

Great.

Do you have replacements, or are you looking for replacements?

We'll replace them over time.

Okay.

Thank you.

Your next question comes from the line of Robert Schwartz with Jefferies and Company.

(indiscernible) You seem to have pretty good collections this quarter, and I'm wondering if that quarter was less back end loaded than, say you had expected?

Or, whether you just negotiated really good terms?

We don't disclose that.

Okay.

Earlier, Eric, you mentioned that, something about, the percentage of revenues was with new products, which included the Reporting product, and the Universal product, and I -- you went pretty quickly on those, I was wondering if you could, sort of share with us, proof(ph) points around Report Services and whether it's number of deals, or number of seats or something that would help us understand how well it's taking off now.

Yes.

Just to be clear, the -- we start out with a kind of a definition of what we consider to be the new products, and, so, it breaks down into the following: OS services, the Report Services product, MicroStrategy Office, and of course, Intelligent Server Universal, and the companion interface product web, Web Universal, and, of course, Web Pro.

For those, that's what we track as the new products.

And, so, the evolution is up to about 50% or so of license revenue in Q3 of 2004 versus about 37% or so in the second quarter of 2004.

The growth in Report Services, was pretty respectable and it's a combination of transactions, transaction count.

The bigger driver we're seeing is on the Universal side, you know, Web Universal plus Intelligent Server Universal as, as customers, typically larger enterprise class customers are looking to move to, either a UNIX operating system environment, or a 364-bit(ph) processing capability.

And, so, that's what we observe as the drivers in the new product uptake in increase.

Okay.

And, to be clear, the 50% number, that's the number of deals, the percentage of the revenue included in these, or is that actually you are attributing that percentage of the license revenue to those products?

Total amount of license revenue booked versus the old products.

Okay.

I'm wondering, you've gone after, you know, BI, it's supported by data warehouse, traditionally, and I'm wondering when you're going to compete for, really compete with a (indiscernible) that doesn't require data (indiscernible).

So, if you are ever going to do that with the Report Services?

Right now, to be clear, we do allow people to go directly against operational systems with our product.

I don't think we are well known for that capability.

We do have a medidated(ph) construction layer that people walk themselves through to configure the product to make sure that our report writer does have all the capability you'd expect, not only out of a report writer, but out of an analytical environment.

But, we do compete in that area today.

We are going to be making some additional enhancements to ease the process to make sure that people can more readily go after the operational systems directly, and we expect those, those features to be released with the MicroStrategy 8 release in early next year.

I'm wondering, how many of the 5 deals that you mentioned that were over a million, how many of them were true competitive, where the truly competitive, where the client, or customer went on, had a make(ph) off with a major competitor?

I would just say, you know, generally, with the companies that we're selling to, they're all fairly sophisticated purchasers of IT.

They've all got professional staffs, and all of them have used multiple BI products now and in the past.

So, almost no one gives you a million dollars or more without asking the question, Can we do this with a competing product?

And, either benchmarking you against it, or looking to see whether anybody else can do it better.

So, in general, we have good relationships with existing customers that make large commitments like that, but, I don't think, you know, any of these companies that we do business with are known for being charitable toward their vendors.

I mean, they are in business to serve their own shareholders.

So, they're always considering every option.

And, you know, we have a mindset, which is every day we go to work to compete, and we have to stay competitive on every deal, all the time.

Last question.

I just want to confirm, in the deferred revenue it's all maintenance, is there, was any licenses in that deferred revenue?

Yes.

This is Eric.

The components of the deferred revenue is still -- the vast majority related to maintenance.

No net change there, so it's 90, 90 plus percent maintenance.

Okay.

Thank you.

Your next question comes from the line of Michael [Nimmeroff] with Maxim Group.

Just a follow-up on that deferred license, deferred revenue line, since you guys were focusing on the maintenance revenues, it seems like that has gone up, consistently and steadily, but this is the first quarter of the last six or seven that it has gone down.

Can you kind of comment on that?

Yes.

This is Eric.

The decrease is pretty, pretty minimal.

I don't think that there's any trend there.

There's no change, or significant change that we see.

So, we're not, you know, surprised, or concerned necessarily but how that played out.

Okay.

And the last couple of quarters, you've highlighted the effort around finding additional channel partners, and stronger channel partners.

How many of the large deals were brought through the channel, if any?

And, can you talk positively on how you think about strengthening that channel going forward?

Traditionally, our channel partners have seeded the market for us.

And, we do some material business with them.

But, the larger deals are normally direct deals.

And, as customers start to make large dollar commitments, or they start to make mission critical decisions to the (indiscernible), they normally want a direct relationship with the company.

The director of services, and for communications and other reasons.

So, I think the direct business is primarily responsible for large deals.

Now, looking forward, I think that we expected our (indiscernible) product and our UNIX, our capability is going to help us in the channel, and, at the same time, I don't think we have unrealistic, or over optimistic expectations of how much the channel is going to do for us.

I think that growth is really dependent upon having a balance, or a disciplined approach, and doing a lot of blocking and tackling.

And, just one last question, the number of new customers this quarter was 90, and that's the lowest it's been in probably about, almost 3 years.

Can you comment on that, or is there any, anything we should be alarmed about with that number?

We don't see anything in particular to be alarmed about.

I think, again, in Q3 we normally don't expect that to be as fertile an environment for selling software as Q2 or Q4.

So, there might be some kind of sequential dip.

But, in general, it's also true that, as Eric pointed out, we're getting to the point where we've got 2,900 customers, so, as your customer base increases, and as you get more exposure, then you're selling a bit more into existing customers over time, naturally.

Great.

Thanks guys.

Nice execution.

Your next question comes from the line of Doug Crook with Moors & Cabot.

Share with me, does the Company have a long term target for the business model, in terms of what long term operating margin should be?

Or, long term operating margin that is possible?

Yes.

We've discussed this in the past, and we've said that we really respect corporations, the better enterprise software companies, and that means companies like SAP, and companies that have operated, traditionally, with operating margins in the mid 20's. 25% operating margin.

We think is very healthy, and comfortable.

And, obviously, this quarter, we did a bit better.

But, we also benefited from a couple large deals, and our view is, responsible custodianship of the business would be to try to build a business, and depend upon a business model that does not rely upon excessively large deals.

And, in the study state, just doing blocking and tackling, we'd like to be running and operating margin in the mid 20's.

I understand.

A tax rate guidance for calendar '05 of 28 to 31%, does that suggest that there's another release of the valuation allowance coming?

And, it seems like a long term sustainable tax, affective tax rate would be more on the order of 36, 38%, at some point?

That's a good question.

I think, long term, looking out, several years, you'll have expect to reach a fully tax rate in the range of 36 to 39%.

However, during, say 2005, we expect to generate profits and certain foreign subsidiaries with a lower effective tax rate.

And do not expect to accrue a U.S. tax on current year foreign earnings.

This would be in a (indiscernible) foreign loss position for a period of time.

So, we'll have a bit of a step up say, from the rate of 28 to 31% that we've given for guidance next year, to the longer term fully taxed rate of say, 36 to 39%.

Right.

And, then, the final question is, there's a broad range of, in the calendar revenue guidance, and I'm, to use a phrase that Michael used earlier in the call.

Seeing the business, in terms of the predictable organic growth rate, so, I'm trying to understand what might be an appropriate predictable organic growth rate.

The broad range of the guidance extends from below existing consensus to well above existing consensus, and I am guessing there's a standard deviation of confidence associated with that guidance.

Can you share, you know, a level of confidence at the mid-range of that guidance?

At the level of confidence at the high end of that guidance.

Yes.

This is Michael.

As we've said in the past, we believe that the Services part of our business is much more predictable than the license component of our business.

And, over the last few years, we've taken time to focus upon ways that we could build a bigger services business, in which more of our revenues over to the services product line, so as to create predictability.

But, the practical matter is, in the software business, that if you're forecasting out at any given time period in the future, the greatest range of deviation is going to be in license revenues.

And, in this particular case, I think that most of the deviation, or the range in our guidance for 2005 is based upon the common sense observation that our license results could vary, plus or minus some percentage, based upon what our expectation is.

I would hesitate to say that there's any particular number in that range you can zero in on.

The truth of the matter is, it is a statistical range, and we have a reasonably good degree of confidence that we'll be within that range, but, it is now the end of the third quarter, beginning fourth quarter 2004, we're talking about results that would take place in Q1, Q2, Q3, 4 of 2005.

So, we've got 14 months or more of uncertainty out there.

As the year goes on, and as we get into 2005, I think you'll see us narrow that range just as we did in 2004.

We, like everybody else, feel more confident as we get more of the future behind us.

Hope that answers your question.

I'll have to remember that one.

Feel more confident as we get the future behind us.

That answers my question.

Thank you, very much.

Okay.

I'd like to thank everybody that has been on the conference call with us.

We appreciate your support, and we'll look forward to speaking with all of you again in about 12 weeks.

Have a good holiday season.

Good night.

Thank you for participating in this evenings teleconference.

You may now disconnect.