甲骨文 (ORCL) 2002 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Stellent, Inc., Second Quarter Fiscal Year 2003 Earnings Conference Call.

Representing the company on the call today are the company's President and Chief Executive Officer, Vern Hanzlik.

And the Chief Financial Officer, Gregg Waldon.

The senior vice president of marketing and business development, Dan Ryan, and Mitch Berg, Stellent's vice president of operations, will be available to answer questions at the end of the call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question and answer session.

At that time, if you have a question, you will need to press star, then the number one, on your telephone.

As a reminder, this conference is being recorded Tuesday, October 22nd, 2002.

A replay of the conference will be available through Tuesday, October 29th.

To access the replay, you will dial 800 642 1687 for domestic, and 706 645 9291 for international, and enter the conference ID number, 4876783.

The following presentation contains forward-looking statements, including projections about Stellent's future performance.

Stellent disclaims any obligation to update these forward-looking statements.

You should be aware that many factors could cause actual results to differ materially from those anticipated in these forward-looking statements.

Please direct your attention to Stellent's recent filings with the SEC, including their form 10K and forms 10Q, which contain meaningful cautionary statements under ``factors affecting future results'' and elsewhere.

In the future, Stellent will make other filings with the SEC from time to time, including for 10K, that will update this cautionary disclosure.

These filings are available on the SEC web site, at www.sec.gov.

It is now my pleasure to turn the conference call over to the company's president and chief executive officer, Vern Hanzlik.

You may go ahead, sir.

Thank you.

Good afternoon, and thank you for taking the time to join Stellent for a discussion of our second quarter results.

I'll spend a few moments highlighting the quarter, and discussing some of our strategic objectives.

Then our CFO, Gregg Waldon, will provide a financial review.

Gregg will then turn the call back over to me for a quick summary, and I will open up the call for questions.

As announced on October 3rd, we missed our second quarter revenue goal, due to a shortfall in the mobile and wireless OEM revenue and delays in IT spending.

Other than our revenue shortfall, we executed very well on several fronts, despite a difficult IT economic environment.

Our team secured 39 new accounts, and many were highly competitive.

We continued to expand Stellent's content management implementation within our existing customer base, our European organization generated particularly strong results.

We met pro forma consensus analyst estimates and operating results per share, with the pro forma net less for the quarter of $5.2 million, or 23 cents per share.

We maintain a strong cash and marketable securities balance, ending the quarter with approximately $83 million.

Stellent has emerged as one of the top content management vendors in the world.

Our software enables companies to fully leverage the business content found within their organization, resulting in streamlined information flow, improved efficiencies, and tangible return on investment.

This quarter, we released a new white paper, outlining our vision for the future of content management.

It explains how Stellent is uniquely positioned to reach further into enterprise content early in its evolution.

This capability makes the content management process transparent to users at all levels of the company, and results in expanding the amount of content being managed within the organization.

If you have not yet received a copy of this white paper, I encourage you to download it from the Stellent web site.

We signed 39 new accounts during the second quarter.

Of those, 29 were new content management customers, including companies such as Blue Cross\Blue Shield of Florida, the State of Delaware, Nations Farmers Union, Pueblo County.

We also had 40 expanded rollouts across existing enterprise customers, customers such as Procter & Gamble, Icon Office Solutions, Merrill Lynch, UMB Financial, Sandia National Laboratory.

Health care, financial services, and e-government continue to be the strongest vertical markets for our content management solutions during our second quarter.

I will discuss a little later on what we'll be doing to capitalize on these strong verticals and expand our presence in them even further.

In addition, our mobile and wireless group signed or renewed agreements with company's including Tom's, Netegrity, Zylab, IMR, Lexis-Nexis, during the quarter.

Our partnerships with other technology providers and system integrators continue to provide momentum for us during the second quarter, and substantially influenced our revenue.

We closed a number of joint implementations, winning the Danish Government and Copeland Corporation accounts with IBM, Society of Human Resource Management accounts with [Fagetti], and the First Industrial Realty Trust account with Deloitte & Touche and JD Edwards.

We also updated our IBM Websphere list, to support version 4.1 of the Websphere portal.

Also, we had three reference accounts from our ASP partner, Active IQ.

The main shift in activity in the alliance program is moving to the large system integrators, which are building solutions for vertical markets and practices around the Stellent architecture.

Also during the quarter, we announced version 6.1 of Stellent Connection Server.

Connection Server 6.1 provides content integration and distribution capabilities, enabling Stellent enterprise customers to aggregate content from multiple repositories, managing the Stellent environment and distributed internal and external individuals, web sites, and other applications.

Stellent continues to be aggressive in our R&D efforts in order to anticipate and respond to customer needs.

Recent results of those efforts were two vertical initiatives we announced this month, one to expand our reach further into the e-government vertical market via product solutions targeted at state and local government, and another to provide efficient migration and integration paths between Stellent content management and Lotus Notes.

Moving forward, we will continue to target and develop productized solutions for key vertical markets, where technology provides unique benefits.

We made exceptional progress in Europe during the quarter, winning our biggest deal to date in that region, with the Department of Work and Pensions, which is one of the largest UK central government departments, which means that we now have active projects in three of the nine central government departments.

We also have further sales activity in a number of other departments, including two proof-of-concepts, as part of a final selection phase.

Additionally, we continue our expansion in Asia Pacific, and Latin America, with partners.

We believe Stellent is well-positioned for growth when IT spending patterns improve.

We are considered a visionary and leader by major content management industry analysts.

We won several of the largest enterprise content management deals over the past 12 months, and we have tight expense controls in place, a strong pipeline, and substantial increased requests for proposal activity.

We are focused on returning to profitability as soon as possible, and are confident Stellent will continue to be a dominant content management player well into the future.

I will now turn the call over to Gregg Waldon, Stellent's Chief Financial Officer.

Thank you, Vern, and good afternoon, ladies and gentlemen.

We caution you that parts of the following financial overview are forward-looking statements and we disclaim any obligation to update these statements.

They represent our view of Stellent business as of October 22nd, 2002.

The actual results may differ materially, due to a number of risk factors that have been identified in our recent filings with the SEC, including our forms 10K and 10Q, under the caption ``risk factors'' and elsewhere in those filings.

The following comments will relate primarily to our financial performance for the quarter ended September 30th, 2002.

Product license revenues and services revenues for the second quarter ended September 30th, 2002, were $9.6 million and $6.0 million, respectively, for a total of $15.6 million.

This represents a 33 percent decrease from the $23.2 million in total revenues for the quarter ended June 30th, 2001, and a 9 percent sequential decrease from our quarter ended June 30th, 2002, of $17.1 million in total revenue.

Our product license and services revenue split for the quarter ended September 30, 2002, is 62 percent and 38 percent, respectively.

Our goal is to have product license revenues of approximately 68 to 70 percent by the March 31st, 2003, quarter.

Pro forma net loss for the quarter ended September 30th, 2002, was $5.2 million, or pro forma loss per share, basic share, of 23 cents, compared to pro forma net income of .7 million, or pro forma earnings per diluted share of 3 cents for the quarter ended September 30, 2001.

Pro forma profitability or loss is exclusive of amortization of certain intangible assets, restructuring charges, and acquisition charges.

Our product license revenue from our customer base was approximately 67 percent, and we continue to have an approximate 90 percent maintenance renewal rate in the September 30th, 2002, quarter, which shows that our customers have our software in production and continue to buy more, as they roll out our software to their numerous line of business applications.

OEM revenues, which can include the conversion, mobile and wireless, and Content Publisher and Content Server products, represented approximately 27 percent of our license revenue in the September 30th, 2002, quarter.

Additionally, approximately 26 percent of our license revenue was from our international operations, and approximately 36 percent of our non-OEM product license revenues were influenced by a partner.

New customers that were added were as follows: 29 new corporate content management customers, for a total of 1,004, ten new OEM customers, for a total of 372, and we have over 395 corporate viewing and conversion customers.

Our average transaction size for our product license revenue for the September 30th, 2002, quarter was $155,000, which is up from the June 30th, 2002, quarter of $132,000, and up from the March 31st, 2002, quarter of $111,000.

We closed one seven-figure product license deal in the September, 2002, quarter.

Our average transaction size is recognized product license revenue only, and does not include services, maintenance, or deferred revenue.

We believe that our average transaction size over the next several quarters will be between 150 and 200,000.

Overall, our pro forma gross margin for the September 30th, 2002, quarter was approximately 71 percent, which is the same gross margin as our June 30th, 2002, quarter.

The amount of $474,000 that is separately stated of amortization of capitalized software from acquisitions is due primarily to the Connecta and SCD acquisitions.

Pro forma gross profit from product license revenues for the quarter ended September 30th was 84 percent, which is the same as the June 30th, 2002, quarter, and we were able to maintain that margin on a lower license basis.

On a quarterly basis, our fixed cost of goods sold are approximately .8 million.

Our variable costs have remained fairly consistent over the past several quarters, at six to eight percent, depending upon product mix.

Our gross profit for service revenues for the quarter ended September 30th, 2002, was 51 percent, which is an increase of 3 percent from the June 30th, 2002, quarter of 48 percent.

Sales and marketing expenses for the quarter ended September 30th, 2002, were approximately $9.7 million, compared to the June 30th, 2002, quarter of approximately $10.3 million.

The decrease in actual dollars from the June 30th, 2002, quarter to the September 30th, 2002, quarter is due primarily to the restructuring and decreased funding for certain sales programs.

Research and development expenses were approximately $4.8 million in the September 30th, 2002, quarter, compared to approximately $4.7 million for the quarter ended June 30th, 2002.

General and administrative expenses comprised approximately $2.4 million for the quarter ended September 30th, 2002, compared to approximately $2.7 million for the quarter ended June 30th, 2002.

Over the past two quarters, we have instituted tight expense management controls for our normal operating expenses of sales and marketing, research and development, and general and administrative costs.

And these combined expenses were $20.0 million in the March 31st, 2002, quarter, $17.8 million in the June 30th, 2002, quarter, and were $16.8 million in the September 30th, 2002, quarter.

This decrease has been accomplished primarily through reductions in headcount, reductions in travel, and facility closings.

We reduced our headcount by 27 in August of 2002, in which the reductions were spread across all levels, departments, and geographic areas.

The total restructuring costs were approximately $.8 million, broken down as follows.

Severance and benefits, $479,000, and $360,000 for facility closings.

We further reduced our headcount by 28 employees in October.

As of October 22nd, we have 332 employees, which is down from 485 employees as of December, 2001.

The employees are broken down as follows: Sales total, 109, which is further broken down with direct, indirect, inside, and OEM, quota-carrying sales reps of 54, sales engineers, managers, and other sales staff, 55, marketing personnel, 24, consulting services, 78, research and development, 83, and general and administrative, 38.

With this latest reduction in force, our current break-even revenue point is approximately $20 million.

The challenge that we face is to strike the correct balance between cost-cutting initiatives, while continuing to position the company for growth when the economy recovers.

We have had a good uptick in sales to the installed base in the September 30th, 2002, quarter, as well as a healthy new customer count.

We believe that the revenue of approximately $20 million is a logical and a sound way to manage the business at this point.

Over the course of the last several quarters, we have stated that it is our intention to increase revenues internationally, as noted by our current-- current quarter of international revenues of approximately 26 percent.

Over the course of the last several months, we were in the process of due diligence on a Japanese company that would have given us new wireless technologies and an avenue to generate revenues for our content management products as well.

After proceeding with the due diligence, we decided that this prospective company was not situated well enough for us to accomplish our goals.

The acquisition costs of approximately $.7 million represent expenses associated with this project, which include funds that we advanced to the company for trade show, private integration testing, test marketing costs of the product, and other.

On the balance sheet, our cash and marketable securities balance is $83.0 million as of September 30th, 2002.

We anticipate that our cash used in operations for the September 30th quarter will be approximately $5.3 million.

Our day sales outstanding was 105 days; our goal, as stated from the last conference call, was 90 to 95, and we fell short of that goal.

As of September 30th, 2002, we have receivables in excess of $3.8 million, that have collection terms that go beyond 90 days, of which approximately $3.5 million is from Procter & Gamble, which we are scheduled to collect over the next several quarters.

Other areas that affected our larger-than-anticipated DSOs include a more significant increase in our deferred revenues than anticipated, a 7 percent revenue shortfall, and several payments that we expected by September 30th arriving in early October.

Our cash collections efforts will be intensified this quarter, which a DSO goal of approximately 95 days at December 31st, 2002.

Our pre-paid expenses and other current assets balances of approximately $5.6 million is down from our June 30th, 2002, quarter of approximately $6.4 million.

It is comprised of approximately $2.6 million in pre-paid expenses, such as insurance and consulting services, $2.5 million in miscellaneous, non-trade receivables, and refundable deposits, such as certain taxes, payroll-related refunds, and deposits for European facilities, and approximately .5 million in inventory.

Fifteen thousand shares were repurchased by us in the September 30th, 2002, quarter.

In conjunction with the SEC rules on corporate disclosure, regulation FD, the following guidance is provided for our upcoming December 31st, 2002, quarter, and our fiscal year ended March 31st, 2003.

In developing our revenue projections, we have examined our pipeline, the overall high-technology sector, the market growth rates of us, our competition, and with other high-technology companies, the number of quota-carrying sales representatives, partner influence, competitive pressure, new product influence, interest rate fluctuations and other factors, and the continued sluggishness of IT spending in both the United States and Europe.

We certainly are aware of what is being reported in the media regarding the select corporate IT spending and the difficult broad economic climate both here and in Europe, but we also believe that the content management industry will remain strong and we are confident that our world-class products, employees, and partners will give us a competitive advantage through this uncertain business climate.

Based upon these assumptions and trends, the following guidance will be given.

For our quarter ended December 31st, 2002, we estimate that revenue will range from $16 million to $17 million, and pro forma loss per share of 15 cents to 17 cents, based upon an estimated 22.4 million basic shares outstanding.

Of the total revenue, we anticipate that approximately 62 to 65 percent will be product license revenue.

We anticipate approximately .5 million in interest income in the December, 2002, quarter.

Our pro forma loss per share does not include any restructuring charges, acquisition charges, or amortization of certain intangible assets.

For our fiscal year ended March 31st, 2003, our estimates are revenue ranging from 68 to 70 million, and pro forma loss per share of 60 cents to 67 cents, based on an estimated 22.4 million basic shares outstanding.

Of the total revenue, we anticipate approximately 64 to 67 percent will be product license revenue.

As previously discussed, we anticipate requiring revenue of approximately $20 million per quarter to be profitable, based upon our current cost structure.

After reviewing the current and forecasted pipeline, the IT spending environment, and the general economic environment, our goal is to achieve break-even in the March 31st, 2003, quarter.

We continue to examine all options regarding returning to profitability, including generating additional revenues and further expense reductions.

We believe that we are well-positioned in the content management space to take advantage of any rebound in IT spending.

I will now turn the call back over to Vern Hanzlik for the summary.

Thank you, Gregg.

I'd like to conclude today's call by emphasizing three grassroot-level indicators, pointing to a rebound occurring in IT spending in the content management market.

One, our pipeline is strong.

Two, we see momentum and activity building in this market sector.

Three, industry analysts are noting a sharp increase in the number of content management inquiries and RFPs received during the past three months.

Stellent is committed to returning to profitability, capturing additional market share, and furthering our worldwide expansion.

We are confident that we will fulfill these objections, by continuing to focus on achieving ROI for our customers, targeting lucrative vertical markets and expanding our product suite as the content management market matures.

We believe Stellent is very well-positioned to emerge as the leading content management vendor, as IT environments continue to improve.

I will now open the call up for questions.

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 key pad.

We'll pause just a moment to compile the Q&A roster.

Your first question comes from Steve Ashley of Robert W. Baird.

Hi, guys.

Vern, maybe if we could start with you -- first of all, you mentioned twice in your commentary here on the call and once in your press release that you've seen an increase in RFP activity in enterprise business.

Maybe you could give us a little color around pipeline activity; is the pipeline larger today than it was three months ago, and are you seeing more large deals in play?

Well, I think that there is-- I don't know if the deal size is any larger, Steve, but I think that if I look at just activities and raw numbers, right now in-house, we've got about 83 active RFPs in the database that we're working.

Last quarter, we sorted through qualified leads in our base that we came up with, you know, somewhere in the 120 range of qualified opportunities and that was domestically, U.S.

Starting as of October 1st, to the 17th, we've seen about 1,400 leads generated just on activity in, you know, new things coming into the base.

So what we're seeing is a tremendous amount of activity as we sort through those and bring them on to the qualified list, and where they fall -- which quarters they're going to fall into; we're just seeing a lot of activity.

I mean, the key indicator are the close ratios, as we're looking at business this quarter and in the March quarter, how that all turns into business and where people-- the size of deals, I think, as we're seeing, are going to be, you know, in the smaller range, in the 300 to 500, versus the multi-million dollar ones.

That's what we're seeing people investing in at this point.

And in terms of expected cash burn, Gregg, how much cash might you expect to burn in the December and the March quarter?

In the December quarter, Steve, approximately $2.5 million to $3.5 million, and in the March quarter, we anticipate break-even on the cash side as well.

Great.

And in terms of the new state and local government initiative, can you give us a little bit more color on what has changed there and what the opportunity is?

Do you need a separate sales force to support that, and you know, what resources have you committed around that?

Hi, Steve, it's Dan.

We have committed internal product management resources, we have a dedicated vertical solution person responsible specifically for e-government, and probably more specifically, pretty heavy emphasis on local, state, county.

We already have a federal practice, of course, that's separate from a lot of this activity.

We have, as you know, over the last two years, have had a lot of business that naturally came our way in e-government, and we got pretty good at it, and we addressed that market specifically with product features and packaging, that addressed three or four different components that we're seeing there, from internal government to government-to-constituents to government-to-business, so we've actually productized those different packages and are marketing them directly.

I think if you look at our current lead base, in RFP activity, I think we have somewhere over 20 percent is local government, and if you added federal to it, it's probably around a 1/3 of our current RFPs are local or federal government, so it's a big part of our activity.

I think we're building a strong reference base there, with the customers that we have, and you know, you've seen a lot of them, so we're pretty aggressive about marketing that right now.

Just to add to that, I think it's not just a domestic effort that we're seeing, is that we have a good focus domestically, but as I stated in my talk about the European activity of closing the largest UK government identities, and being in three of the nine largest central government identities is momentum for us to leapfrog into mainland Europe, too, so this is something that we're seeing that they are having these types of business problems that we can solve very effectively, and we're working on terminology, as you go into these different markets, that the business problems seem to have a common denominator.

And one of the key elements, I think, too, to add, besides the functionality of our product, I think there's an issue of having a fairly rapid, straight-forward rollout, without a lot of customization, as well as ongoing ease of administration as well as interaction with basic rank-and-file employees, interacting with the system.

So all those fit our product description quite well.

And lastly, Gregg, did you say that repeat, or sales to existing customers, were 67 percent of license revenue?

Correct.

Thank you.

Your next question comes from Brian Maggot of Thomas Weisel Partners.

Hi, guys.

A couple of quick questions.

Did you break out the percentage of revenue from partners, and if so, did you break it out between integrators and technology partners?

Hey, Brian, we did talk about 36 percent of our non-OEM product license revenues being influenced by a partner, and I don't have the detail in front of me to break that out any further.

We haven't broken it out, Brian, on the-- you know, we're seeing more activity on the SIs as I mentioned, but we haven't broken out percentages of that.

OK.

Of the one seven-digit deal, was that a 10 percent customer this quarter?

No, it was not.

It was not;

OK.

Following up on a previous question, if we look at the percentage of revenue in the installed base, is there a particular product or some aspect of your technology that is resonating better in terms of add-on product for you guys into the installed base?

Well, I think there's-- you know, there's the three new servers that we announced in the March quarter, so we have some momentum with Collaboration Server into the base, that we sold last quarter, we have extensions of existing customers that are going into new applications, so we're getting horizontal into new applications.

And then we have our traditional, ancillary technologies, like our Collab-- not our Collaboration, our Categorizer, Web Analyzer, our imaging input engines, different types of publishing, XML transformation, and wireless stuff that people are starting to get some momentum.

So, it's a-- there isn't one that has a larger percentage than another;

I would say that if there's one highlight last quarter, I would say we had a significant amount of momentum on the Collaboration Server, as we started to show that to our base, with some of our web marketing.

OK, and lastly, can we get an update in terms of the competitive front, if you're seeing, you know, anything different in some of your core verticals, or perhaps some of the newer-- newer areas you're focused on?

Yeah, I don't think we've seen much of a change there, if you were just to take the top couple of vendors that we run into in the field.

As we said I think the last two quarters, that may have flipped a bit between [InterWorld] and Documentum, always being in the top rank there, with Vignette being a ways behind that, and I think we saw [FileNet] in one or two cases, [Divine] in a couple of cases, but it has not changed substantially.

Are you guys seeing Microsoft incrementally more, and perhaps maybe the second part of that question is with the release of their, you know, second version, content management server 2002, you know, how do you think that might change the competitive landscape for you guys, going forward?

Yeah, we haven't seen- again, in the field, in these sales cycles we're been in, there hasn't been any substantial change with Microsoft, with the 2002, or the prior version.

You know, we anticipate Microsoft is going to sell their share of software to their accounts, but it hasn't been something that has really drastically impacted our sales cycles yet.

I think we've seen them a couple of times in Europe, actually, more actively than we have in the United States.

Again, I think the general, I think that Microsoft in general, we're always looking at, you know, what is the true functionality, what is the true scalability, what is the multi-platform, how do you really roll this out?

I think that that's one key things, and I think the customers are savvy to this, and they're not, you know, just because it says content management doesn't mean that it's going to deliver.

I think that they're very cognizant of that.

So, we are-- we sense that there will be some more momentum there, but we're not seeing the functionality that's going to be close to what we are for quite some time.

OK, thanks, guys.

Your next question comes from Steve Sigmund of RBC Capital Markets.

Thanks, this is Steve Ju for Steve Sigmund.

Vern, can you talk a little bit about-- I mean, it's nice to see ASPs up a little bit.

Is this a combination of some of the three new servers, and which servers are really kind of resonating well with customers?

Well, I mean, when we're going into an existing customer, you know, we're providing multiple server, but we're selling a new customer, it's definitely going to affect the ASPs, because we're selling the whole solution, where we believe that, you know, collaboration is tightly coupled with content, depending on where we start in the organization.

So, I think the combination of all the servers will definitely continue to increase our ASP.

I think it's where customers are investing.

Are new customers purchasing multiple servers initially, or are they starting out with content and then, you know, hopefully with the plan to expand out?

They're just starting out with one application, I mean, and that ranges from the 150 to 300, depending on where they start.

A typical one might be a content server, you know, a middle-level content server, with a development server, and a couple of add-on modules, Steve, that would get you into that price range, and it might be to solve one or two applications initially.

And when we roll out, you know, the 67 percent that's in our base, it could be just rolling out more applications, more scale, or it could be adding on to that existing instance for a cluster, for example, so it kind of goes in each direction right now.

There are interesting things that are going on with price models in the market.

I think that's, you know, whether it's CPU-based or user-based, but I think that we're trying to, on the vertical side, we will put together more solution sets with servers, and at that X price, like we're seeing in the e-government packaging of our product.

OK.

And then obviously, OEM wireless was a bit weak this quarter.

How does that pipeline look over the next, I guess, couple of quarters in terms of activity levels and so forth?

Well, this quarter, I mean, we had some interesting activity in the wireless front.

You know, we-- that market, just because of the software market as a whole has been a little bit depressed, so I think as that starts to pick back up, as we're seeing some of the stuff in the pipeline this quarter and the March quarter, I think we'll start to see some activity there.

We're-- it's still, you know, it's still a little soft, I mean, on that side, but I mean, the applications are starting to present themselves and people are starting to re-engage to invest there.

And you then you talked a little bit about just kind of overall lead activity and RFP activity kind of being up.

Is there any vertical or any color on specific types of solutions people are focusing on, given the environment?

Well, if you break down the percentages, you know, of where we are as far as total activity, the number I was throwing out there is 83 active ones that we have; 22 percent-- well, about 30 percent are in the government, 16 percent are in financial, and about 10 percent are in health care, and then it kind of dripples off into consumer, manufacturing, and education after that.

OK, great.

Thank you very much.

We've also, just to add some color to that, I think in the verticalization that we've done, you know, the new offering, particularly with the Lotus product, we offer a Lotus integrator, which is actually a product that will integrate Notes [based] content into the content server and transform it into XML or RTF or something that we can use there.

That has generated somewhere, you know, in the neighborhood of 75 of these already, of substantial Lotus users that have interest in solving that problem.

So, this is a very big problem we're seeing in corporate America, and when we had our advisory council meeting, I think it was 70 percent or so of our customers had-- we feel like there's a strong opportunity to migrate Lotus content-- either or co-exist the Lotus content in their enterprise, so see that as--

Is most of that around a portal, an end-portal solution people are developing, or more just that's the leveragable content, of the overall--?

It's the leveraged content that's locked up right now, and to make it-- to be able to repurpose it to other web sites and applications, one of which may be a portal, but I don't think portal is driving it.

I think, you know, overall portal's presentation layer, you know, may be a best-of-breed solution that will take that layer on in Lotus environments.

Right, I think it's getting content out of these repositories, and repurposing it to extranet sites, portals, Internet sites, other applications.

Yeah, I mean, the business problem there is, you know, it's still information delivery, but if you have-- and without getting account-specific, but within five or six accounts, there could be 10,000 different Lotus databases that they're trying to standardize for the web, and they can't search across them.

These are individual, departmental databases that are built, and what we're trying to do is aggregate those for more of a universal information delivery.

The uptick on that could be into a portal of some sort, or it could just be an Internet end delivery or it could be an extranet.

But the basis of the problem is transformation of standards, you know, which is web delivery, and searching across all this information that's sitting inside these things.

And meta data, normalized meta data.

Yep.

And that's something that's really leveraging, I would say, the outside-in technologies, more than just, you know, a data level integration layer?

It's actually leveraging some conversion technology that we have developed with a partner, specific to a Lotus market, and have built a connect that replicates content and transforms it along the way, before putting it into our repository.

Once it's in our repository, then we can do whatever we would do with it normally.

We can convert it, we can present it in native format, we can, you know, convert it to HTML, PDF, XML, whatever format you might want, out either to a web site or another application.

But the core technology that we launched moves the content from Lotus, transforms it into, you know, RTF or XML, and gives it to our repository for further work flow or publishing or whatever other activities that you want-- that you want to take place on it.

Yeah, and I think that the other thing is, is you look at vertical markets, this is our vertical application, and we thought that we would get the most, and build the solution around the problem, and it's 60, 70 percent of our customers on our advisory council have Lotus, and there's 20,000 Lotus customers worldwide, and this transformation of standards seems to be a fairly big business issue, from a return on-- cost of ownership of this technology, as we move forward.

I think you're looking at best-of-breed solutions there.

There's coexistence, but there's also people that are moving messaging to Microsoft, they may be moving the portal infrastructure to Websphere or BEA or Foundry, there may be a mix and match of best-of-breed as opposed to one, you know, more monolithic solution, and we're seeing some of that occurring as well.

Great, thanks.

Your next question comes from Jeff Venry of Investech.

Hey, guys, a couple of questions.

Maybe, Vern, if I could just take you back to the OEM side, I just wanted, I guess, a bit of clarification -- so coming into the quarter, I guess my understanding of your outlook in general, and maybe for that piece as well, was that you weren't looking for anything special, so I guess the question would be, what surprised you there, given you listed that as a number-one reason, or the primary reason, for the shortfall this quarter?

Well, I mean, we were expecting them to be somewhat I would call ``flat,'' Jeff, and we had some-- we had deals that got pushed into this quarter that we thought were going to close last quarter, and some softness in that IT spending of embedded software.

Things that we've been working on for quite some time.

So those were the ones that surprised us, and then I think the other, we had a balance, you know, if you look at the revenue perspective, we had a balance between the OEM side of revenue and a balance of what we, you know, on the IT side, and what we had as a little softness on both sides.

But the majority of that were things that we thought we'd get in from the OEM side and the wireless side.

Gregg, I think you mentioned, if I caught it right, 54 direct quota reps; did I catch that number?

Correct.

And can you just break those out in terms of OEM, direct reps, and content management, internal, tele-sales.

Yeah, if you take a look at the direct sales, and the indirect sales, that'd be around 40.

And the inside sales-- and the OEM sales would be around 14.

And then just lastly, can you catch me up on how these folks are quoted?

Well, it varies, Jeff.

I mean, if you have the direct-- the direct quotes are at the 1-8 annual number, and the OEMs vary based on regions and accounts, so they can range from all the way from two million all the way up to four million, and the inside people have an influence number, what we call influence incremental number, up to three million.

Yeah, maybe you could just talk -- I mean, you know, the perception and in talking to customers, you know, a lot of satisfaction with the technology and the ease of implementation.

It seems to be, you know, potentially a very key competitive advantage that would likely be well-suited to a telesales effort.

Maybe you can just talk to what you're doing there and if you expect greater focus there, or if you disagree with that?

Well, I can just give you-- we started- you know, we've got a lot more focus on our inside group after the March quarter, to get back into our base and sort through leads, so we've had tremendous momentum there, just pouring through about 3,600 leads in the last five months.

So what we're doing right now, the strategy for the inside group is, not necessarily to, from the ease-of-use selling, it's going back to the base, communicating, you know, through the Web of how things work, new product mixes, touching the customers more, people that are renewing maintenance -- ``here's all the new things going on,'' how do you get higher in the organization.

These are deemed very effective and these folks are partnered with the regions, and you know, as we go into these verticals, we're doing marketing, a lot of people following up on these leads, then they do Webexes, and then they turn them on to the direct folks, so we have sort of a teaming approach to drive the revenue with the more efficient sales group.

And I think that it's starting to, as we turn the corner to profitability over the next six months here, we will continue to look at that strategy and build that team.

And how many heads there, in telesales?

We have a manager and five people, so six people in that group.

OK, great.

Thanks.

Your next question comes from Mike Marsoff of US Bancorp Piper Jaffray.

Hey, guys, thanks for taking my question.

I wondered if you could step back and kind of look at things at 10,000 feet.

What type of initiatives are driving business right now?

Is it content management, is it commerce, is it portal?

What are you seeing as the lion's share of the deal flow right now in terms of the initiative?

If there was one that you wanted to point out, Mike, that's a high-level, I would say it's intranets and portals, and extranets.

Those are the two biggies, and I put those-- customers kind of put those in generic categories, and then they focus on really what type of information delivery they're going to work with, and some of them have already invested in a portal, they're evaluating it, or they know they need to have content management before they get to the portal, so there isn't a-- I don't think that's solidified yet.

And return on investment and cost, up front, is the other thing that they're looking at these particular applications.

But they seem to be moving not- when I say inside the firewall, I only mean that from the perspective of the information that's going to the web delivery.

Right.

It could be a public facing, or it could be just partners or it could be just people, but it seems to be the information from a bigger mass of people.

We're hearing quite a good momentum, a good deal momentum with BEA and IBM, and they're portals, and hearing about some consolidation around some of the best-of-breed portals.

If you look at the space, I think investors are really interested in how this consolidates, so if we have a need for content management, and an app server, and single sign-on, and search, how do you see that playing out over the next 12 months and what are you customers asking for?

Is it a suite, or it is a best-of-breed play?

What are you seeing in the field?

Well, it's best-of-breed right now.

I mean, the thing is, is that from-- as long as back I can remember, we've always been integrating with security systems and single sign-ins, and that'll be a continual thing.

Search has always been something in our application, so we've never-- it's always been there, we've always thought that you had to integrate with that.

I think the portal play, as unstructured and structured information merge, as information delivery, I think that you're going to have to have best-of-breed.

The app servers do not have the full understanding of the unstructured community, and how that, as you push on- our message has been, ``how do we push down the content stack?'' and that is a very complicated structure and has a lot of different things attached to it, so I think there's a merger there, but I think our focus has always been on this unstructured offering, and if that's truly 85 percent of that, and we can be best-in-class to deliver that to the portal, whether the portal is BEA, whether it's Webster, whether it's Plumtree, we're going to be best-in-class.

Security and single sign-on and search are inherent in those, and that's kind of how we see it playing out over the next 12 months.

And then Gregg, what are your headcount targets for year-end, and do you need to make any changes to hit break-even in the March quarter?

No, Mike.

Based upon what I talked about here, we did a restructuring here a couple weeks ago, in October, and I think we're set here for the time being.

We have 332 employees, and we anticipate carrying that through the end of the year.

So no additional, is the answer?

Correct.

Great.

Thank you.

Your next question comes from Nate Swanson of Bink Equity Partners.

Hi, a couple of questions on the wireless side.

What kind of traction are you seeing with the Nokia Communicator and other wireless devices?

Well, on the Communicator, Nate, we haven't seen a tremendous amount of shipments on those at this point.

I mean, we're starting to-- we're trying to dig back into Nokia and see how many they're shipping domestic and in Europe right now, but we're still burning through some royalties with those folks.

I think one of the bigger ones is the IPaq.

You know, we've seen quite a bit of shipment of those, of the IPaq machines, and there's some other, you know, the Sony/Ericsson Intelligent, the Internet phone, we just haven't seen the volume on those at this point, so I think those are still maturing in the market, so we're still-- I think that there's still great promise for those, and there's some other ones that we're working on right now that are from other manufacturers to come in the market.

There's still people coming out with new devices that need the functionality that we can bring to their operating systems.

OK, so as you look at that business going forward, do you think, or does your pipeline tell you, that's going to driven more by the server side, or by the device side?

Well, I think the big upside is the server side, I mean, where we see the bigger dollars.

I mean, because it's more of a-- it's more of a, you know, depending on who's selling it, deals that we've done already, some that we're working in the pipeline for big carriers that can use this stuff, we see it-- you know, it can be big on the server.

I mean, the device side, you know, it's clicks -- how many devices they ship and the royalty we have.

They ship a lot of those devices, we will make- that's a high-margin business for us.

The server side is more of a monthly thing we can track as soon as they get their users on board, so-- but I think the momentum that I see longer-term, over the next two to three years, is on the server side.

Right.

It just seems like we're starting to see a refresh cycle on the device side, as you see phones coming out with color screens and what-not, I'm wondering if you're going to see that in your business, or if it's going to be driven by the server side.

Yeah, on the device side, guys haven't-- you know, everybody hasn't solidified on OS.

I mean, we're on four OSes on the device side, running our viewing stuff.

On the server side, which is really the strength of the core technology in our component group, is that we have a lot of flexibility there.

They can deliver to a lot more devices that way.

OK.

And then I'm sorry, I missed it on the call -- where are you at with the buyback?

We purchased 15,000 shares in the September quarter, Nate.

OK.

And what are your plans for that going forward, given where the stock is trading right now?

Well, we haven't made any definitive plans right now, Nate, and we'll just see as-- you know, see as our stock price goes, whether we'll make any purchases.

No commitments upfront.

OK, thanks.

Your next question comes from Scott Phillips of Merrill Lynch.

Hi guys, Ed McGuire for Scott here.

You made some comments about the strength in the European markets, and I guess there have been somewhat mixed signals in the market regarding the, you know, the economy over there.

I mean, what did you guys see over there, and if you could also kind of comment on the linearity of the quarter, both in the U.S. and in Europe, you know, I think we're hearing some mixed signals, and you know, we'd definitely like to hear what you guys have to say.

Well, I think just in general, I think we had really good execution in the UK, the Nordics, and the Beneluxes, where we saw the revenue really coming out of Europe.

We really started the last six to nine months, the team over there, has been focused on e-government vertical solutions, so we've been in these cycles, and I think that's really where we've seen our strength, is that we've focused on a particular market that we can go in and create a reproducible event, and it's been quite, you know, rewarding for the team over there, and I think that's what we're going to continue to do, and we'll add verticals that, you know, make sense over there.

Health care is also another one in that region.

There's just other areas in Europe like Germany and France, which we haven't had the penetration that we'd like to see, but those are opportunities based on the IT spend there.

I mean, our products are ready there, we're working on different partnerships in order to expand there.

On the linearity, last quarter, we were 20/20/60, and that was across the board.

OK.

And further comments on that, Ed, I mean, the linearity was pretty decent; it wasn't as good as what we had in the June quarter, what was better than the March and the preceding December quarters.

Great.

And Gregg, nice job managing expenses on the service margin.

Can we expect, going forward, to kind of see services margins trend around the 50 percent level?

Correct.

OK, great.

Thanks.

Your next question comes from Amy Sang of JMP Securities.

Yeah, out of your 29 new CMS core customers, were any competitive displacements?

We had competitive wins, Amy, but we didn't-- I would not be able to say that we had displacements in that 29.

Typically, when you see among your customer base, do they have only Stellen deployed, or do they have, perhaps, Stellen and FileNet, Stellen and InterWoven, or for example, what do you see--

We have a fair amount that Stellent and FileNet because FileNet's, you know, base is transaction imaging, building web sites at this point, so we have some very large customers in that area.

We do have some environments where it's Stellent and Documentum, because of our publishing strength.

We are in other environments where InterWoven and us, because we can take the core content off the desktop.

So, there are situations that we do have that.

Vignette is another where we are installed and Vignette is installed, because they were the core, front-facing web site, did a good job there, but now as you push back down into the desktop, and we really, you know, can start to grab that information and standardize it, and then that's really where we've seen, not this quarter, but last quarter, where we've had some displacements.

We did have one displacement this quarter, but it was an existing customer.

OK.

And which vertical market can you identify was your over-a-million-dollar deal this quarter?

Manufacturing.

Manufacturing.

OK, great.

Thank you.

Your next question comes from [Eric Martinuzzi] of [Craig Hallan Partners].

Good afternoon, gentlemen.

The current health of the partner relationships -- I know you have the technology on the one side, and the system integrator on the other side -- Vern, you made a comment about kind of seeing a more activity on the SI side.

Do you see that as a data point, or more of a trend?

I think it's a trend, and I think there's a key component here, is that if you-- we went out in the last 18 months and have made a bunch of noise with partners, the technology partners, of ``here's how you integrate with Stellent at the portal level,'' because we've really positioned ourselves as [Switzerland] there, to deliver this content to the portals.

The other players that are in that, the security, the search engines, and really, the key people in the big application players, here's how you integrate with us.

I think from a revenue perspective, moving forward what we see is we're gaining mindshare coming to our desk with the SI partners of building solution, the real estate example I had was a combination of a application player and an SI, building a solution for that.

And I think that building solutions and what these SIs are looking for is how they create practices around solutions and verticals, in addition to creating architectural knowledge around an application, and we're just seeing energy there which creates revenue for us in the long-term.

They have to integrate with the BEAs and the Webspheres and the Netegritys and the other technology partners that are out there, but where we're focusing, and our trend for people coming to us, are the SIs, because it generates revenue.

Do you see that as potentially slowing down your deal cycle, with them being further up the food chain?

It depends on how we're entering in.

I mean, if we're bringing-- if we're driving and we're going to partner with them, and if they're driving, and they're partnering with us, I mean, the cycle is going to get done, depending on what the energy is of the business partners is, and the customer.

The other thing, I think, to add to what Vern said, Eric, is one other trend we're seeing is more activity around integration with other enterprise applications, not just portals and app servers.

Specifically, things like Siebel Systems and JD Edwards and other kinds of ERP/CRM applications, and obviously the systems integrators have pretty substantial practices around each of those, that are historically large practices, and I think that's an attractive area to work with them as well, and that's what we are doing in a couple of cases.

OK.

And then a question on the financial side -- with the restructuring that you did in October, will we also see a restructuring charge for the December quarter, and how big will that be?

Correct, you will, and it'll be around $300,000 to $400,000.

OK, thank you.

Your next question comes from Tim Burn of Robert W. Baird.

Yeah, guys, just picking up on the question a moment ago, and your response, Dan, of now integrating more with some of the larger enterprise applications.

You know, if you take that and combine that with the discussion earlier about Lotus Notes, and getting into the infrastructure there, it almost looks like another play for you, which is more around infrastructure, if you will, almost an enterprise content integration play.

If you kind of combine those, how big of a part of your business could that be, if we, you know, go out to maybe 2004?

Is that a meaningful portion of the business?

Yeah, I think we see it as very meaningful.

I think the value of those applications is what's driving businesses, so to the extent that we become part of those mission-critical applications, obviously our value goes up in an organization, so I think we see Lotus, Siebel, in particular, as large opportunities.

Lotus is a broader one at the moment, and I would say the same thing is going to hold true with Siebel, and obviously the portal application being the other one, that's a big driver and will continue to be.

But we think that what we're seeing is, rather than it being a software vendor that's driving the partnership as much, it's really proving that we have the integration capability and a solution, and then the systems integrators are now looking at this as a reproducible-- you know, one integrator may have 1,000 customers in Siebel or JD Edwards, and being able to reproduce that across those customer bases could be, you know, quite a leveragable model, we think.

Great.

And then last question, Vern, you were talking earlier about the OEM pipeline and a couple of deals have slipped.

Have any of those deals closed yet in this quarter, and then kind of related to that, does that enhance the pipeline for this quarter, given you had some flow-through?

Yeah, Tim, they haven't closed yet, but it does give some increase capability of the pipeline, as you look at it, size-wise.

But I think, you know, their ability to close and they're still very active, and I think that they'll- you know, we'll get those here in the near term, but they haven't close yet.

And I guess related to the question I asked Dan a moment ago, if you go out a year or so, you know, how big of a portion does the OEM and the wireless business come from you?

Is it going to stay about the same, is it going to grow, is it going to shrink, as kind of a percentage of the overall business?

Yeah, if I look at-- if you look at the next 12-- I mean, we're looking at the OEM business to be flat right now.

The wireless stuff, we just-- we want to get more indicators that it's going to start to take off, and we just-- you know, there are good things happening there, we just haven't seen it from a revenue perspective, but when it'll happen-- I think it's more of a two-year exercise, two- to three-year exercise, versus the next 12 months.

That's kind of how we're looking at it, it's a flat business.

Great.

Thanks.

We have no further questions at this time.

Do you have any closing remarks?

No.

I just want to thank everybody for taking the time to listen.

We're in a great spot right now, so thanks a lot for your time today.

Thank you for participating in this evening's conference call.

This call has now concluded.

You may now disconnect.