諾頓 (NLOK) 2002 Q1 法說會逐字稿

Please standby we are about to begin. Good day everyone and welcome to the Precise Software Solutions first quarter 2002 earnings conference call. Today's call is being recorded and will be replayed today beginning at 8 p.m. Eastern Time and will be available through Monday April 29, 2002, at midnight Eastern. The rebroadcast dial in number is 719-457-0820 and you will be asked for a confirmation code. That code is 793-191. Again that number is 719-457-0820 with the confirmation code of 793-191. With us today is the Chief Executive Officer Mr. Shimon Alon and the Chief Financial Officer Mr. Benjamin Nye. At this time for opening remarks and introductions I would like to turn the call over to Mr. Benjamin Nye. Mr. Nye, please go ahead sir.

Thank you Wilfred. Good afternoon everyone and welcome to our first quarter conference call. Today we will discuss certain matters that will include forward-looking statements within the meaning of the section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. We use words like "expect," "anticipate," "estimate," "believe," "may," "will," "should," and similar expressions to indicate forward-looking statements. These forward-looking statements are based on our current intent, beliefs, and expectations. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict and which could cause actual results to differ materially from forward-looking statements. These risks include risks identified in our annual report on form 10-K and other filings made from time to time with the SEC. Now I would like to turn the call over to Shimon.

Thank you Ben. Good afternoon everyone and thank you very much for joining our conference call. Precise had a solid first quarter of 2002, in spite of difficult seasonality of the quarter and the changing economic climate. I am pleased with the overall performance of our company mainly with our competitive strength, operating profit, and revenues. Revenues of the first quarter grew at 49% year over year to $17.1 million, and our pro forma operating income grew to $672,000 versus a loss of $726,000 for the same quarter in 2001. With small sequential growth quarter over quarter, this was our 18th consecutive quarter of revenue growth. Our balance sheet in Q1 remains very strong at $142 million in cash with no debt, which is an increase of $6 million since December 31, 2001. If I continue to show more insight on the quarter, I would like to use this opportunity to thank those who contribute and continue to contribute to Precise's success our overall 5,000 vendor customers, our overall 400 dedicated employees worldwide, our strategic partners, and our investors for their continued confidence and support. While we did not achieve all our expectation in Q1, we continue to enjoy strong performance in key areas, stronger peak sales, strengthen our competitive position and record revenue for international sales; all while increasing our profitability. On the customer front, our installed base has gone to over 5000 customers worldwide. Our customers continue to update from individual component to Precise i3 as they recognize the value of the complete solution set. In fact our reputed customer figures reached 58% of license revenue due to the very strong return on investment and very high customer satisfaction. Reports from industry analysts such as Gartner confirm what our customers are telling us all the time that Precise continues to generate among the highest and the most favorable references in the industry. During the quarter we also continued to strength our competitive position. Precise i3 value proposition resonates well with our customers. This unique technology clearly differentiates the size in the application performance management market. We believe that Precise is the only company that is able to correlate [_______________] protocols of performance in a production environment and with this enable our customers to detect and collect performance volumes across the all tiers. Our unique i3solution enable us to win any bakeoff against companies setting single fields or stroke 5 product. As a result we increased the insight license revenue nearly 400% year over year, as we covered the insight sites for those transactions which include insights. At the same time it was one of the major contributors that helped us to generate 21 days over $100,000 this quarter. I am also pleased to inform you that during the quarter we continued to gain momentum in our international operations, which grew at 119% year over year and contributed record license revenue to the company. In addition, we gained significant market awareness for Precise Solution and the benefits they provide in the international marketplace. During the quarter, our strategic partner contributed less than what we had previously expected. At the same time we extended our OEM agreement with EMC to include the full Precise product into the EMC distribution channel to support the EMC auto IAC initiative. We also made significant progress with HP in making strategic accounts among our global sales teams, cost training account manager, which we believe will contribute to Precise in 2002. In addition, we recorded our first small employees revenue from SAP and Amdocs continue to send Precise nicely into their installed base. Before we move into more views of the exciting future plans we have, I would like to ask Ben Nye, known as the young and restless CFO, to provide you with full financial details for our first quarter results. Ben?

Okay, thank you Shimon. First quarter revenues totaled $17.1 million up 49% year-over-year and 0.2% sequentially making it our 18th consecutive quarter of revenue growth. We recorded $672,000 of pro forma operating income or nearly 2 cents per diluted share. This is an increase of 25% over the 538,000 we posted last quarter. Net income totaled $650,000 a 180% increase sequentially. The business mix this quarter was 73% license revenue and 27% services. License revenues were up 31% year-over-year and down 6% sequentially. Services which include both our growing professional services as well as the seasonally high maintenance renewal number were up 127% year-over-year and 21% sequentially. The channel mix this quarter was once again led by North American channel that accounted for 38% of total revenues as compared to 42% the prior quarter. The international channel posted its best ever quarter representing 23% of total company revenues. Services too reached the new high at 27% of revenues up from 23% in Q4 while our strategic partners were down slightly at 12% of total revenues. Now lets turn to key business metrics. Across our direct and indirect channels, Precise continues its emphasis on selling a full performance management solution. During the quarter, we closed 21 transactions with more than a $100,000, up from 14 summer side deals completed in the same quarter last year. Of these deals, 11 were more than $200,000 each. Based on US direct sales results that excludes stand alones of unstorage central sales, our average transaction size in the quarter were $61,000 up from $51,000 recorded during the first quarter of last year, but down from the $71,000 reported last quarter. With the growing contribution from our international channel, we report our average transaction size metrics based on the results from the worldwide direct sales channels going forward. During the past quarter, the average transaction size in our international direct channel increased from $82,000 to $87,000 and was up substantially from the $29,000 in the same quarter last year. On a weighted average basis this results in a slight seasonal decrease sequentially in the worldwide average transaction size from $73,000 in Q4 to $69,000 in Q1, but up substantially from the worldwide weighted average transaction size of $44,000 in the same quarter last year. Repeat purchasing continues to be one of our most important revenue drivers. Our repeat business remains strong in the first quarter amounting to 58% of total non-OEM license sales. This resulted up from 52% we recorded in the same quarter of last year and down 1 percentage point from our prior record of 59% achieved in the fourth quarter. This important metrics serves as a strong endorsement of the value our customers receive from Precise. Now lets turn to directs for the P&L. Gross profits for the fourth quarter were $15.9 million and remained flat quarter-to-quarter but increasing 49% over the $10.7 million posted in Q1 of last year. Our plenty gross margin for Q1 was 93%, a half a percentage point lower than the previous quarter and basically flat year-over-year due to the increased percentage of our business this quarter coming for services. Going forward, we continue to project plenty gross margins of roughly 90%. Research and development expenses as a percentage of revenue was 19% up from the 18% recorded last quarter and flat year-over-year. R&D expenses totaled 3.3 million versus the 3.1 million recorded last quarter and the 2.2 million recorded in Q1 of 2001. We expect that our R&D expenses will try to gain 18 and 19% of sales as we continue to focus on introducing new products that expand our complete performance management solutions. Sales and marketing expenses for the first quarter represented 57% of total revenues, an improvement over the last quarter of 60% and a substantial improvement from the 66% during the first quarter of 2001. Total sales and marketing expenses were $9.8 million versus 10.2 in the fourth quarter of 2001 representing our investments in people, trade shows, and seminars that we made to enhance our direct and indirect channels worldwide. We expect sales and marketing expenses to continue to decline as a percentage of total revenues as our investments and our sales force and distribution channels continue to ramp. G&A expenses were 13% of total revenue this quarter, roughly 2.2 million in absolute terms up from the 12% of $2 million through quarter in the fourth quarter of 2001. G&A as percentage of sales remained flat, year-over-year. Operating income, our pro forma operating income in the past quarter totaled $672,000, a 25% improvement over last quarter's $538,000 operating profits at a $1.4 million favorable swing from last year's operating loss of $726,000 for the same quarter. We are reporting this pro forma operating income, net, of stock based compensation expense, amortization of good will, and unchangeable assets to reflect the true financial results of our operations. Our first quarter net income was $650,000 or 2 cents per deluded share. This compares very favorably to our fourth quarter 2001 net income of $232,000 or 1 cent per deluded share, a net income of $29,000 or 0 cents per share for the first quarter a year ago. We did average shares using these calculations were 31.7 million in the first quarter of 2002, 30.8 million in the fourth quarter 2001, and 29.4 million in the first quarter of 2001. The company maintained its exceptionally strong balance sheet with a cash balance increase by nearly $6 million to $142 million at the end of the quarter, compared with 136 million at the end of the prior quarter. Accounts receivable balance at the end of the first quarter was $ 12 million a decrease of 600,000 from the prior quarter balance and up from 6.3 million a year ago. As a result our DSOs for the quarter sell 3 days and came in at 62 days total. This is at the low end of our guidance range of 60 to 70 days range. Deferred revenue also increased $1.2 million to $7.9 million this quarter, up from 6.7 million last quarter and 3.8 million a year ago. Deferred revenues consist of maintenance contracts and a small balance of undelivered professional services contracts. We continue to build and strengthen our overall organization. At the end of the quarter our total headcount was 413 people which is up 49% compared with the 278 people a year ago, and up from the 389 people in the prior quarter. More than half our employees work in sales and marketing function including roughly 122 quarter carrying sales people up from 87 people at the end of Q1, 2001. To summarize the results, we had a seasonal first quarter, but we continue to focus diligently on our execution across all aspects of our business. One area of concern is the performance of our strategic partner channel. Despite a strong start this year and its strong historical performance this strategic channel delivered its lowest quarterly revenue contribution to date in the past 2 consecutive quarters. As a result we are now adjusting our revenue guidance for both Q2 and for the full year precipitated strategic channel contribution levels are between 10 and 15% of revenues, which is down from our original expectations of up to 25%. Based on these changes we are adjusting our guidance for the full year revenues to between $76 and $83 million, which represents 35 to 50% year-over-year growth over fiscal year 2001. We anticipate a pro forma operating income in the range of $4.5 to $5 million adding a financial income of approximately $4 million and assuming an effective tax rate of 5% for the year, this results in $8 to $8-1/2 million of anticipated pro forma net income. For the second quarter we expect to achieve revenues of between $17.6 and $18.2 million with pro forma operating income ranging from $800,000 to $900,000 and pro forma net income in the range of 1.7 to 1.8 million. This forecast assumes 3% to 6% sequential revenue growth and 39% to 43% year-over-year. We will maintain this guidance unless there is a material change in the business. Because we have now recorded 3 consecutive quarters of operating profitability, henceforth we will report our future earnings using pro forma net income rather than pro forma operating income. In conclusion we have improving profitability, substantial financial resources and a fast growing team of exceptionally talented individuals. Despite the challenging economic conditions, we continue to see strong customer demands for our IT solutions. We sell differentiated products with high margins that produce large and quantifiable return on investment for our customers. With 5000 referenceable accounts and strong repeat business, we have established a solid foundation on which we continue to build our business. Now I would like to turn the call back over to Shimon.

Very good. Thank you Ben. I would like to take the next few minutes to share with you the Precise outlook for Q2 and the remainder of 2002. Our comprehensive solution and a strong worldwide distribution will continue to drive the growth of our business leveraging the market demand and our competitive position. Today companies continue to be forced to maximize the performance of their application infrastructure across more platforms, more applications, and with fewer people that is more [________________] than ever before in our market and therefore our new opportunities for Precise remain very strong. We will continue to focus on serving the market with our unique Precise i3 solutions as we continue to expend the value of Precise i3 to our customers. Few weeks ago, we released the new version of Precise/Indepth for J2E which optimized the performance of J2E application server. This further includes our revolutionary SmarTune technology, which automatically identifies the real good colors of J2E application performance and recommends the most appropriate collective action, launched at BEA, Word and Java 1 product and generated significant interest in the industry and sense opportunities for Precise. We saw those 25,000 global customers using BEA WebLogic and IBM WebSphere. There is a substantial opportunity for our leading solutions in this growing market. Recently, we announced the acquisition of the Luminate Suite for SAP enabling us to extend our Precise i3 application performance management suite to provide high quality business metrics to manage SAP service levels. This combined solution enables SAP users to quality business objectives with their infrastructure to analyze and improve the performance of an SAP application. Together with Luminate Suite we also acquired its customer base of 200 industry leading companies worldwide providing new opportunities to cross-sell Precise i3 for SAP. We are very encouraged by the positive feedback on the joint offering of Precise i3 and Luminate that we have received from SAP customers and industry analysts. This is yet another product that we have introduced as part of our strategy to increase customer value by elevating our solutions to provide business performance management. With the introduction of Precise/SiteStor, we had expended our SRM, storage resource management solutions, beyond Windows into multi-platform environments including Unix, Linux, Netwell, and network appliance storage devices. In addition to the products we released last quarter, we have more exciting product news ahead. This quarter we expect to release 3 significant new products. First, Precise/Indepth for SQL server. This product was jointly engineered with Microsoft to bring our innovative Precise technology to the SQL server database platform allowing customers to detect and correct performance problem in the Microsoft SQL environment. We received unprecedented response to our beta program as people need these solutions and need it now. With this new offering, we have expended our solutions to cover all these relational database platforms, Oracle, IBM digital, and now Microsoft SQL server. This enabled us to sell in heterogenous database environment which is difficult along many of our large customers. Precise/Indepth for Hitachi Data Systems, this product was jointly developed with ACS and will enable customers to bring logical applications and end-user information to physical locations on the storage device. This product that will again be in G&A this quarter continue to strengthen Precise's unique capabilities of correlating transactions all the way from end-users to storage devices and sell Precise/Indepth for transactions allow our customers to correlate end-user experience with protocols of performance [_______________] in any web enabled application. Combined with IT, it will enable users to correlate the web transactions all the way from the web page to the infrastructure component network, web server, JAVA server, application server, database server and storage. _______________] is very strategic to Precise. Despite the recent performance we believe in the importance of this channel. We will continue to work very closely with our current partners, providing them additional products and support. As well as building new partners channel to leverage distribution for the new product I just shared with you. Precise grew to a 413 dedicated tenant and focused employees worldwide, including 120 quota carrying sales people. We will continue to strength our organization by adding additional new sales people worldwide to leverage both the market demand and our unique product offering. The management will continue with a focused execution approach, mentoring our fiscals on a truly understand customer business needs and resolving their pain thereby achieving a high return on investment for our customers. In conclusion Precise is the place for leadership, performance, innovation and execution. In the true Precise tradition we will leverage our objective intense employee culture to continue to drive our future goal. With that said Ben and I would be happy to answer any questions.

Thank you gentlemen. Our question and answer session will be conducted electronically. If you would like to ask a question please firmly press the * key followed by the digit 1 on your touchtone telephone. We will come to you in the order that you signal and if you find that your question has been asked and answered before you could ask it and you would like to remove yourself from the question roster, please firmly press the # key. Again if you would like to ask a question press the * key followed by the digit 1. And for our first question we go to Sarah Mattson with RBC Capital Market.

Hi Shimon, hi Ben. Couple of questions. First when do you look at the strategic product channel what do you feel has materially changed over the past 2 or 3 months to cause your expectations to change so significantly and then on the Microsoft and Hitachi Data System side will either one of those partners be marketing with you or recommending those products as they do go to market?

I will ask Ben to answer the channels and I will answer the Microsoft and HDS. Ben please.

Okay. Excuse me Sarah. We are not going to breakdown individual contributors but one thing I think is fair to say is we had a couple of new contributors, I think 3 of them were in their first quarter contribution to us from a revenue standpoint and our belief is that some of that will take longer to ramp and build a pipeline that we would expect to see out of them then the meaningful contribution in, certainly in the first quarter and now we are sort of looking into the second quarter and beyond. Secondly, some of our traditional partners have not had the same level of contribution that we have seen in past quarters and when we saw two quarters at 12% of total revenue we felt that the visibility was not as strong on a full year basis than it had been in the past. I think we still maintain some of the benefits on a quarter over quarter visibility but again it was more an element of conservatism instead of saying look we have seen two quarters at about 12% where we thought we should really begin to adjust our revenue model.

Okay and one quick follow up to that. On the EMC side is the EMC Dell relationship contributing at all or do you expect it to contribute at all over the course of next year or so?

So far they did not contribute we are expecting both, talking with Dell as well as EMC that it will contribute but continuing with the Dell message we will see to it when it comes in the visibility, its the one that we are concerned the most.

Okay.

On the HDS and Microsoft, first of all very excited about bringing these products to the market and bringing them ahead of schedule thanks to our very talented research and development employees. The Microsoft organization already told us that they will help us to dually market it and help us from a marketing point of view, introduce us to the resellers and others. We had a very good experience with Microsoft so far. We are in a process of better [_______________] product, we will get market and customers references and with that after the introduction we will start to seek full business development and regional indigenous. We believe that the Microsoft product will be very attractive and will create a demand in different distribution channels for Precise. Hitachi HDS, again our experience both with the MC and the HP was first we bring the product to the market and then they are the people who ask to be included in the product portfolio. Hitachi right now is testing the product in the lab, it will go to BT very soon and we will continue to walk with them very closely, see how we can eliminate both companies distribution.

Okay. Thank you very much and one quick follow up on the Microsoft side how many BT sites did you have?

Right now we have a high demand, we will not go and fulfill the demand. Actually it is the first time we can be a little bit of more demanding in our requirements. I think worldwide we have nearly 50 customers who are asking to run better sites still and our fate will drive based on sales as we come along forward.

Okay. Thanks very much.

For our next question we go to Jim Mendelson with SoundView Tech Corp.

Hi Shimon. Hi Ben. Could you give us a little bit more color with respect to the Q2 revenue comment as it relates to license revenues, do you think you can be up sequentially given that the EMC software revenues for the quarter just ended, were down sharply year to year and quarter to quarter?

The answer is yes and I would like to emphasize again because I will be asked this question again and again what you see is that while our direct operation performs very well and gets strong results we just kind of cannot continue to hold the line on the resellers as [_______________] knows. Not that they would not deliver, again, its visibility and focus become much tougher than we had before. So license will go up and I would like to bend to it.

Sure. Just one other comment Jim, we are showing obviously a sequential increase and our expectations is that services typically has a seasonal high in January and that is why the 27%. That's when a lot of contracts come renewing and so I think we had a higher than usual services contribution this quarter and the rest of the guys its obvious they have the licenses so it should be a sequential up quarter.

And could you comment a little bit, give us a little more color on the strength internationally and how that compares to what is going on in the US and why is international doing so well?

If you remember, in Q3 we had identified that we need to strengthen the operation in international both by expanding the organization there, creating more critical mass, educating customers, and more importantly mentally and using the same methods we had in the United States over there, whether it leads to see an increase in the number of IT and inside sales, we can see now the change we will be [_______________] and overall we start to see our investment in worldwide operations and we will focus in Q3 gain momentum. Many times people ask me if it's a one quarter, only Q4 and I say "no, I just came back from Europe." We continue to see the momentum that we want during Q1 and we have been told that that is what we have achieved.

And one final followup. Could you comment on the relative linearity of the license business excluding the indirect and channel partners?

Well, I mean Jim, we don't usually comment on linearity. We have the benefit obviously of in the strategic channel recognizing SAP and EMC both and CBI Microsoft all one quarter arrears. So that's usually an enhancement to our linearity but the rest of the, smaller, sort of the more tactical resellers, I would call them, are very analogues to the similar linearity in the direct sales channel.

I guess what I am getting at is for the direct channels, a lot of companies this quarter were talking about, particularly in the application space, a significant drop off in March and I am just curious whether or not you saw that or whether or not March was relatively normal independently of the channel partners coming in relatively less than you might have hoped.

I think we had a very strong March in the full scheme of things but I guess there certainly were some deals that were because of seasonality in Q1, typically you have them either push out or not close quite on time, but I think if you look at it we actually had a pretty strong March.

The other answer to this is about the partners. I would like again to emphasize that EMC will receive as you know 45 days after the end of the quarter so there is no, we cannot see a multiple thing in EMC and in HP they will coordinate actually with end by the end of April. So, we will see the results from HP only around the beginning of May when they will give us the orders for Q1, their Q1, and SAP is a [_______________] revenue, so, I think it is very tough for us to see [_______________] by month or by specifically the last month of the quarter.

Okay. Thank you.

For our next question we go to Damien Rinaldi with First Albany Corporation.

Yes. I would like you to talk a little about sales force productivity and sales force hiring. I think following the December quarter results, you indicated a plan to add somewhere north of 30 sales reps, it looks like you are up 3 or 4 over the course of the quarter, but the overall revenue expectations that you're setting, represent a significantly higher rate of growth. Given the amount of time that your own direct sales force has been building, can you comment on how product they are today relative to quarters and expectations and what you need to do to get them more productive to sort of make up the gap between expectations and the shortfall on the indirect side?

Okay Damien. You always ask a good question. You know the funny thing is you're phrasing your question on a Q1 look after having a very strong Q4 if you remember we had 19% sequential growth. So everybody is a hero in Q4, and you always have a seasonal upstream swing in Q1. There was no question that the direct channel, I think, worked a lot harder in Q1 then they had to in Q4. We have seen prior to that regular quarter-over-quarter sequential improvement in revenue for ramped fulltime equivalent. We saw particularly strong improvement in that metric in Europe and then it basically held into Q1 particularly again in the US and in Europe and then a slight down in the US, but your fundamental question is do we have the capacity built into our direct sales organization worldwide to achieve the numbers that we are seeking to achieve, the answer is absolutely yes. And it really comes down to making sure that we are deriving the revenue per sales person that our models expect.

Okay. Can you also comment on the down ticking in North America? That seems to be sort of counter to the pattern we are seeing from other organizations where Europe has been somewhat weaker beyond the indirect contribution to what do you attribute the weaker performance in North America, both in absolute terms and in terms of the deal sizes?

Damien if you look at the [_______________] operation in the US they had a very strong Q3. Actually they surprised everybody in United States having one of the best quarter ever then they continue with the best Q4. So the US operation did very well over the last 2 quarters, over the last 6 months and what you will see is that they will continue to do very well. I don't think you will see Q1 as indicative of anything different. I would also say they continued to win very large accounts that sometimes we need the time to gain all the 12 applications in large accounts and so on. I see ready drivers in the most strategic way, in lot of applications, in lot of customers, and we are very pleased with the US operation today.

Okay and then what comment do you have at all about the smaller deal sizes?

I mean we've definitely had a number of deals where it may have lowered the overall. I think, the thing you don't want to take your eye off Damien, is we actually had a record, not a record excuse me, but certainly a year-over-year increase in our deals over 100,000, and we did 21 deals in the quarter over 100,000 and 11 of those deals were over 200,000 and we even had a couple of million dollar deals. So I think, the point about some smaller transactions lowering the overall average in terms of numbers of transactions is probably you are missing a part that we actually have a much more strategic and a higher value added sale. Shimon you want to add anything?

Yes. I just want to use this opportunity to say that one of the reasons for that is actually the traction we got with the j3. During the quarter we saw an increasing number of j3 sell and what we try to do there is not to try to sell the 500,000 [_______________] at one time, but gain market share as quick as possible and going and capture the market right now. These guys volume of sales wind the end range construction of the j3 still remain what we used to have a long time ago. We think that they are talking when we started the market. In the future it could lie very strongly in big sales, get us the recognition we are gaining right now and that is why we are approaching the j3 market in this strategy.

Okay. Thank you.

For our next question we go to Scott Philips with Merrill Lynch.

Hi. I was wondering if you could comment on any changes that you saw on the competitive landscape specifically one of your competitors, Mercury Interactive, I think, posted 181% year-on-year growth in their performance management sweep, did you see them more often, was there any sum more or lesser in the quarter?

And again I would not comment on the growth versus Precise because if we do it we have to look at the last year, or the last 6 months, and more greater than one quarter. I would say, that we strengthen our competitive landscape this quarter, and again Scott, you have to remember we are the only company that can correlate inner production environment all though the way from the EON to the SQL. Actually I would say the most straightforward we did not lose any accounts that I know to Mercury in this quarter. A lot of companies not just Mercury follow Precise using the [_______________] application performance management, using the old correlation, actually using the marketing information and may confuse the market [_______________] things got they confused the international investors much more than the customers because customers buy what they use not, what they yield.

Okay. Taking a look at the license monitors, it's a little bit shy of what we were looking for, I was wondering if you could provide me a little bit more color as to what was really behind that. I understand from Premier's earlier comments that certainly the channel contribution was weaker than it anticipated. However, I am wondering if you could provide some more color as to what else could be pressuring that print on that number?

No I think the 2 things that I would point to Scott, are first you had to, obviously we expected a larger license contribution from the channel, from the strategic channel and then I guess the second thing is that you always have some seasonality down draft in Q1 and coming off such a strong Q4, I think that affected some of what we saw in the slight decline in the North American channel.

Okay. Did you see, has it been deals pushed out or do you have a number of deals that failed to close within the quarter that you are still have in the pipeline? Was there any of that that would be more related to the overall economic weakness or is it simply seasonality combined with your weak channel partners?

Well actually you know what it is a good question because we are getting orders now that we did not get in March. We are getting them in April and some to do with in between the Easterner and [_______________] and other things, I would attribute it more to the seasonality in the last week of March other than anything else. Actually, we see the momentum already in April going forward.

Okay. I guess my final question then would be have you seen a material change in the conversion rate of your pipeline in the P&L and if so, what is that and how does that affect the guidance that you have given. Thanks.

The guidance we gave is mainly attributed to the partners, as you know. So we don't see any material change in the direct operations, in the competitive landscape, in conversional pipeline, HL pipeline is due to go, our tenant right now is to gain much more from the HL to trade off the potential decline. We don't know if it will happen but we have to be very potent. The potential decline in the [_______________] and then we are not controlling the [_______________] and pipeline.

Okay. Thank you.

For our next question we go to John Rizzuto with Credit Suisse First Boston.

Hello. Shimon, do you guys have any data that you would like to give us on how much of the j3 you did so in the quarter, or if you were able, you have the data, you are able to remove from that your average deal size, what do you think it would have been?

We did not actually calculate it. With us we typically what we do, removing the [_______________] long advantage [_______________] it then will be quick and automatic. You may get it but if not we will provide the information throughout the next few days. Although what I would say that the J2E, even though we don't breakdown the revenue by product. We are very pleased, very pleased with the customer feedback. Actually one of the best product we had this quarter was the J2E getting new customers. One of the things we got through the J2E is new customers gain, very good competitive for that, very strong feedback form. It shows that we have, we introduced a new feature, an important feature, in the product called the smelt tune which again, it is one thing that enabled us to, it's a very intelligent way to identify the problem and then commence resolutions very quickly. I see feedback from customers. I see e-mails. I visit customers and it is amazing to see how strong a feedback and recommendation we will receive from customers. We also know that in the next few quarters we start to see a very [_______________] coming from the J2E due to the fact they enjoyed it, they saw it, and we know we cannot tell the timing but we know that in 2002 we start to see lots of deal coming from the J2E in the routine sense.

Right. And that is 100% this J2E right?

It is 100% direct unless we talk about an organization like Japan, potential worldwide in area, but we are not sending directly.

Right. Just distributors then in that case?

Yes.

Okay. Do you think at this point as we start to look more, we have to focus more on your direct sales, you can give us any info on the large deals, the over 100K, the million dollar deals in particular, the one alternative where that came from your direct sales force and where those came from partners?

Yes. I can tell you John, all those deals were done in the direct channel. This is exactly why we are building them. You need to know that all, everyone of them, was a repeat purchase as well. So, again, when you look at a couple of nice trends here it is, you saw Europe international having a strong quarter and one of the other reasons is that the repeat business was a new, I believe it is a new high overall, but it certainly reveals a substantial sequential increase and it is part of what we had talked about, about the need to build a referenceable account inside, but we had one of the large deals there. There was another nice large deal done in the United States, actually 2 other nice ones done in the United States, all 3 of them were done by the direct sales.

Okay. Right. And then 58% coming from existing partners I think that's the first time we've seen that flat for awhile, is it a, are you creating loss just to get partners? Are your direct partners buying a little bit more conservative on what they are buying or would you say it's a diversionary [_______________] let me [_______________] the question for you. Is it more what you are seeing at penetration in new customers that kind of offsetting that?

No. I think the 58% to put it in context, we just came through our fourth consecutive year, last year was our fourth consecutive year, of increasing sales coming from existing customers buying more. It totaled 54% then, and they came in at 58% now. In the fourth quarter we hit a new record which is 59%, but it could be seasonal down draft of one percentage point is hard to measure a material change. The main point here I think is that the repeat business is alive and well, and I think we've had a really nice continued referenceability from our customers coming back and buying more products.

Okay, and this final question. The J2E, the large deals you're referring to Shimon, are they from existing customers or new customers?

By definition they would be multiple types of distinct customers and the first what we try to do is a strategy. Then to the customers fist with showing the [________________] and then you follow this projection you will see a much larger account. At the same time, we also know they are new customers that are dealing with us right now on a very large scale, but again the timing was right because they are not an existing customer and you have to go through purchasing [_______________] but while the strategy works very nicely [________________] penetrate the account and then leverage the repeat sense as quick as you can.

Okay. All right, thank you.

For our next question we go to Jason Maynard with Wachovia Securities.

Hi guys. One more kind of followup question on the strategic partner, Channell. I can understand lowering the guidance based on 2 quarters of a little softer than expected results but if I look at this maybe more kind of internally, what are the steps that you take to try and boost that contribution? Is there perhaps, has it been a focus maybe with some of the indirect channel reps in terms of bringing on new partners and perhaps that causes a little bit of a softness with some of the existing partners, what are the steps that you take to try and use that channel again?

And again, when we really, the management is focusing very much on all the partners here and there, we are interested in focusing on the existing partners we have, we are doing a much better job on mapping, again we didn't see the revenue from HP yet, and after 2 quarters we don't want to focus the price now, but we do believe and we do see in the pipeline very strong sales from HP, as we don't have the experience in revenue coming from HP on every quarter, this will be the first time we've seen something like this, we will continue to support them, work with them, meet with them and then we believe that HP will continue to grow very quickly. The SAP, again they're growing their customer base, which will enable us to grow our customers base. At the same time we're looking to bring new product to EMC. EMC as you know have the [________________] initiative and they are starting to [________________] in seeking for additional products, EMC wants to add their open architecture supporting multi-platforms and Precise is supporting the IBM, [_______________] and Microsoft SQL, this product will continue to enhance the capabilities of EMC and deliver higher revenue for Precise. Of course, we again, depending on their actions or their distribution to serve the [________________] as well as the Precise product. While we do this we're constantly looking at additional partners. The opportunities will come from few areas and are very nice opportunities. Starting with Microsoft SQL, continue with the J2E, continue with S11, actually we feel a very strong interest in companies looking at our S11 solutions to see what can we do together with it and with these storage devices we have dedicated people in the company, they're looking for partners we believe in the partnership but as we are driving a very strong organization here, not all our partners can commit for the revenue we're expecting for them at the same time.

Let me just take one follow on then with the, if I had to get an idea, how would you sort of force rank, your allocation of sales resources to each individual partner?

Okay. Jason, let me address that, we're not going to rank order to the importance of our partners, I think it's the wrong thing to do in terms of being a true partner. What I can tell you is that if you look at us going forward from where we are today, where we have changed our models too soon between 10% and 15% of revenues coming from partners, and so if we get them going stronger than I think we are comfortable that there may be upside associated with that, and so you know purpose of today's exercise in terms of conservatism is to lower number to make sure that is was achievable and that's the reason for the change in guidance, but at the same time we can get them running again through account mapping and additional products and so forth we expect to see more coming from there.

Okay, fair enough. Thank you.

Thanks very much. A couple of questions, first of all Ben just to followup on the last question in taking the guidance when you were modeling it out, was all of it due to the partners or was any of it due to the bit of the weakness in the North American area?

No Melissa, it was definitely attributable to the partners channel, and if you heard Shimon's comments earlier I believe that the North American channel issue was purely seasonal.

Okay, alright. Sorry, Shimon you were going to say something?

No. I have been [_______________] and we say it in English which is even better.

Okay, fair enough. Can you just comment on potential shelf where you referred about upon several companies talking about how shelf was finally getting implemented, are you guys benefiting from any of that trend?

I think the first thing is if we comment on shelf but we rather not comment on our competitors.

I am not asking you to comment on what you committed to sell. I only saying have you in your business seen shelf [_______________] finally going in?

I think it's true that if applications are made to perform and companies are forced to deal with making those applications perform with fewer and fewer people dedicated to them in an increasingly distributed architecture. The fact is there is more pain than ever before and I think that is what helps drive our business very well. I mean we are certainly finding that customers out there need help. If you look at our own products given the quick deployments, the trials we run, as well as the incredible [_______________] the very high VP business we run, I think obviously we don't qualify a shelf although we can certainly help make things that they brought in the past work for them.

_______________] got question is are the applications that you guys are supporting, are they applications that people bought several year ago or was it the last year?

we are supporting multi-application dynamics, one would be the ERP applications. People are more under pressure to finish the deployment of the Oracle and 11i or the SAP, in the CRM, lot of people bought lot of Siebel and are in the midst of installing it, using it, and actually the competitive pressure in the market today on this guidance force them to get the Siebel [_______________], the Oracle [_______________], the SAP. The second area is the area of all this Java application. The market spent billions of dollars in hardware and software building all these e-commerce applications and that's the way they work with the vendors, with the customers, and there is no one company who does business today is not depending on their web applications, not they have told us that all their architecture are using the web. That's why our J2E [_______________] is continuing with the [_______________] driven very, very well and these are not essential. We also see some application maybe not being deployed but we don't see them as much because we all have been given to deploy applications and not just to, you know, if you are going to be in development market and you are in a testing market, you may see some companies who develop and stop the deployment. We are into the deployment and production, therefore we always see people under tremendous pressure and tremendous stress to produce to deploy them. Even doing the own application is the result of another which we see Melissa, it's the consolidation of service. Actually one of the major drivers of this size is where people try to consolidate databases, applications, i-net customers that had 180 applications and try to drive the same applications to about 20 to 30. Given the consolidated data bases to focus on our Oracle, IBM, and Microsoft. They are able to use any type of data base around the world. All these projects, all these hypotheses are those who drive the Precise. That's why we continue to see the demand and denies the demand for Precise. What I think we don't see is shift will in our customers, those that we meet with.

Okay. Fair enough. And just last question about Israel and you know the way your facilities, are there any concerns there?

The thing is usually I think I am in the best position to answer.

Well that's why I am asking.

Very good and the answer is absolutely not. We all say that we are all concerned and very formerly very closely in the situation in the Middle East and Israel, I just can't give you a number that is shocking me will probably shock you. Actually, I'm not too proud of it, but out of our 116 employees in Israel about 85 in R&D, we only had 2 employees that were called to Israel for a short time. If all our employees are just weak, they are not fighters, I have no idea, but there is no impact whatsoever on anything, and any activity that we have in our Research and Development. On top of it, just that people will know, we have had redundancy both in our operation in Denver as well as in Virginia, and we are network worldwide so we don't see any current as well as future concerns to our development. We don't have hardware. We don't have manufacturing. We don't have spare parts and we basically can be transparent worldwide the way we want.

Okay. Fair enough. Thanks.

For our next question we go to Nitsan Hargil with Friedman, Billings.

Hi. Good Evening Guys. On the services revenue, the 27% services, do you break that out into how much is maintenance and how much is services?

We actually don't break that out anytime. It's still predominantly maintenance revenue.

Okay.

And keeping in line with stuff you don't comment on. Products which, any product family's contributed more than 10% of your revenues, I know that previously Precise Oracle was a very major line item and still is, but any other ones that are over 10%?

The answer is yes.

How many?

In a range between 3 to 5.

Okay.

We don't comment mainly for competitive reasons. We try to keep it as the strength of the silence. It takes more than 1 as you heard.

Okay. And I think you commented on this, but sales force growth for the next year, any plans on particular numbers?

We announced the plans at the beginning of the year that we there will be lots of [_______________] and we are holding this plan very skillfully.

Okay.

But we continue to add additional outservices worldwide.

Thank you very much.

For our next question we go to Abe Finkelstein with Goldman Sachs.

Hi guys. Just another question on the service revenue in the quarter going forward, do you that in Q2 that the mix will jump back to where it was in 3Q or 4Q or do you expect that to trend towards that over the course of the year?

Oh. I think it will definitely be an increased percentage associated with license. If you look at it, in January where we typically run a higher seasonal renewal on contracts, a lot of companies want co-terminus contracts. Every time they buy they say, "Okay what do I come and do? Let's settle it all in January." And then it's a renewal quarter. So it typically runs as a higher percentage of revenue. I would not expect to see the same level on a percentage of sales basis in Q2.

Do you think it will go back to a kind of 78-22 level or is it going to take a couple of quarters to get back there? And also how do you see the Luminate service contracts contributing at this point? Is that meaningful at this point?

It wasn't a big number. And I don't think it will be a big number in the next couple of quarters and you got to remember we just bought this thing what 6 weeks ago. I do believe that it will take a few quarters to correct the proportionate services, but again I think with the percentages from the strategic channel, which is principally license revenue coming in, at 10% or 15% that, you know, it will be probably larger as a percentage of revenue going forward then it has been historically for us.

It seems like you guys are getting good traction with i3, is that changing your sales icon any where, are you seeing anything different with that, do you expect changes going forward?

No, because what we have we have a mix of sales. We have all the way from standalone components, all the way from offering Indepth for J2E, 2 or 3 components, as well as the i3 build for the mix as you can see the 21 over $100,000, as well as auto leverage [________________]. We don't see a material change from previous quarters, and we'll continue with large orders that we have been taking as well as the transactional single component basis in old orders. As long as we continue to mix both standalone as well as i3 comprehensive solution, we will have the same sales cycle as we saw so far.

Also, I mean, you guys have been pretty strategic in terms of making some nice small acquisitions, do you think the guidance that you have given today is based on what you have in place in terms of internal product roll out that you already discussed or do you think that there might be another need for a point acquisition along the way?

Well, I mean we have certainly maintained an awful lot of cash and strong balance sheet with the explicit intend, and I think part of the reason we did our secondary was to find complementary acquisitions along the way. We do believe that numbers posting are achievable organically, but that's not to say we won't acquire.

And just one last question. You guys did a very good job obviously of controlling some costs in obviously sales and marketing pretty well sequentially, what do you expect for that and what's going on across the decrease in that line?

That's why we continue to see the ramp in our sales channels, and we have made investments there. For every dollar of expenditure, we would expect to see more revenues come through and that's where the quarterly ramp is alive and well.

Okay, thanks a lot guys.

Yeah, thank you.

For our next question we'll go to [_______________] with Adams Partners.

I was struck by the much larger deal size in Europe despite the fact that you started there later, are any of the things that are happening there transferable to the US market as the economy improves here?

I see what you saw. You saw a large, you know, in Q3 and Q4 and previously you saw a very large maintenance licensing in United States, so you should not expect kind of moving one to another. We'll continue to grow the United States and they say in this time is more focusing on penetrating. This is the first quarter. The US [________________] got J2E they got excited, they tried to build both pipeline as well as customer base with it and we should expect them now to leverage the existing customer now increasing the average sales wise.

All right. And were there any customer concentration issues in this quarter?

I think our largest customer state was less than 7% of revenue from an end-user perspective.

Right, thank you.

Yeah.

And that does conclude our question and answer session. Therefore Mr. Alon, I'll turn the conference back over to you for any closing remarks.

Thank you very much. Thank you everybody who tried to be with us today. As we have said, we will continue to leverage our competitive strength as well as our aggressive operations to continue the growth and we also expect the partners with the improved economy to be able to provide us both great revenue as well as visibility so we will be able to include it in the model. For you'll just to know that we would be available and accessible to you to ask any questions. We always were and will continue. We'll participate in many investment conferences this quarter including the JP Morgan Technology conference in San Francisco. There a big conference in New York City, Merrill Lynch in Florida, in Chicago, as well as in San Francisco, Solomon Smith Barney and Bear Sterns in New York, UBS in London, Wachovia Securities and in Paget which I think is the best place to have a conference in that time and mostly few other events, but briefly to call Ben or me at anytime as well as access our website where we have all the information. With that, I would like again to thanks all the investors, the employees, the customers, and the partners for their contribution. Have a great afternoon and a great evening. Thank you.

Ladies and gentlemen this does conclude our conference call for today. You may disconnect at this time.