甲骨文 (ORCL) 2002 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to SeeBeyond third quarter financial results conference call.

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

Later we will conduct a question and answer session.

I would now like to turn the call over to Miss Andrea Williams, Senior Director of Investor Relations.

Miss Williams, you may begin.

Thank you operator.

Good afternoon everyone and thank you for participating in today's conference call to discuss SeeBeyond's third quarter's of 2002 results.

If you do not have a copy of the earnings release in front of you, please call Cissy [Rawlinson] at 650-622-2128 and a copy will either be emailed or faxed to you during the course of this conference call.

Alternatively, the earnings release is available now on the SeeBeyond website at www.seebeyond.com.

I would now like to read the Safe Harbor disclaimer.

The following conference call includes statements that are not historical in nature and as such, are intended to be forward-looking statements for purposes of the Safe Harbor, provided by the Securities Litigation Reform Act.

These statements, including those related to estimated revenue, revenue mix, expense, earnings per share, employee head count levels for the 4th quarter of 2002, the expected levels of future customer demand, the expected levels of future SeeBeyong market share, the timing of SeeBeyond achievement of profitability on a quarterly basis, and the success of efforts including customers, controlled costs and release new products are statements based on SeeBeyond's current expectations, assumptions, estimates, and projections, its industry and its future prospects.

The company would like to remind you that these statements are predictions and that actual events and results may differ materially from those forward-looking statements based on certain risks, including market acceptance of our products and services, release of competitive products and changes in the mix of products and service revenue, among other factors.

The forward-looking statements contained in this earnings release and earning's conference call are also subject to other risks and uncertainties, including those most fully described in the company's filings with the SEC, including annual report, filed on form 10K for the year 2001 and its quarterly reports on form 10Q.

The company does not undertake update any forward-looking statements.

With us today are Jim Demetriades, President and CEO of SeeBeyond, Barry Plaga, Senior Vice President and Chief Financial Officer and Ray Lane, Chairman of the Board.

Following management's comments, we will open up the call for questions.

And now I'd like to turn the call over to our President and CEO, Jim Demetriades.

Thank you Andrea and good afternoon.

Our results for Q302 were as follows:

SeeBeyond had total revenue of $35.7m which resulted in a pro forma net loss of $8m, equivalent to an EPS loss of $0.10.

We ended Q3 02 with a very strong balance sheet.

Our cash position is $99.6m or $1.19 per share and we saw a DSO stable at 88 days.

Later in this call Barry Plaga, our CFO will cover Q3 02 results in more detail and wrap up with a discussion of forward guidance.

Ray Lane will also provide some additional perspective.

You're all familiar with the current general business climate and the weakness in enterprise software demand.

It's the toughest environment anyone has ever experienced and no one can predict a turnaround with any certainty.

Given the environment, we're working hard to improve our execution and gain market share.

During Q3 we were successful in three areas of strategic focus that we identified on the Q2 call last July, winning the largest most strategic long-term customers by focusing relentlessly on the Global 1000.

In Q3 we were selected by five new global 100 customers, mainly as their enterprise standards.

We controlled operating expenses while remaining competitive, investing more in our strategic product development.

We delivered on the promise of a differentiated and effective partnering strategy with our ISV channel, evidenced by our deal with Siebel which was announced yesterday.

Because EAI is business critical, it's the biggest opportunity in software today, taking the macro economic climate into account, IDC predicts EAI will grow at an annual compounded rate of 44%, to more than $18 billion by 2005.

SeeBeyond we think is best positioned to take advantage of this growth for the following six reasons.

First, we have the best technology in the industry.

The only fully distributed, highly scalable, integrated solution, architected on a single code base by a development team whose senior members have worked together for more than a decade.

We haven't built our product by bolting together a bunch of other products that we've acquired and customers benefit directly by our not having many types of acquisition.

An initiative that may be of interest is our new array of business solutions sets.

These are process driven, pre-built and pre-configured software and service components for vertical industries.

They're designed specifically for quick deployment and rapid prime to value on the order of 90-120 days to implement.

It's too early to claim success for our business solution sets, but there's a great pipeline and a great deal of demand and interest, especially from our SI partners.

Second, during Q3 02 while keeping a tight grip on non-R&D costs, we increased our investment in R&D to protect our technology lead.

To put more distance between ourselves and the competition, once IT spending growth returns and to accelerate our market share momentum.

Third, the world's leading companies continue to select SeeBeyond for enterprise integration standard.

In Q3 02 we expanded our customer base to 1,725 customers, by far the largest in the industry by adding 31 new customers among a total of 75 licensed deals.

Going forward, SeeBeyond will continue to focus on winning the largest strategic long-term customers from the Global 1000.

Today we have the strongest roster of diversified Global 1000 customers, more of the world's leading companies in their verticals.

If they've chosen enterprise integration standard have chosen SeeBeyond.

At our customer conference earlier this week, earlier this month, excuse me, Nike told the story of starting with SeeBeyond in a small supply chain project in Canada in delivering such significant value that we've now been named the global enterprise integration standard with over 1,000 interfaces to different applications installed, in production, around the world.

General Motors, said we've kept years from its new car design process and accelerated its order to delivery systems.

And as GM's integration standard, we're just getting started, with over 15 other projects identified recently by General Motors.

Morgan Trust, one of the world's premier wealth managers, said we've helped their brand by enabling global [Inaudible] processing with our software, ahead of their competition.

In Q3 02, from the Global 1000, we added Lockheed Martin, which selected us in a competitive environment, the world's largest defense contactor.

Toys R Us, the world's largest toy company.

Toshiba and Liberty Mutual and [Escoff].

We've also [Inaudible] business of the U.S. Dept. of Defense and other local, national and international government agencies, growing our government business 20% of revenue this quarter.

I'll go into more depth about Lockheed Martin and the Dept. of Defense in a moment.

Fourth, we're experiencing significant contractual ISV partners who have chosen to embed SeeBeyond technology over other competing technologies.

These include Retek, Siebel, Commerce One, EDS, Product Life Cycle Management and Hewlett-Packard.

In Q3 02 we signed four customers through our Retek relationship.

Yesterday Siebel announced that SeeBeyond has become its preferred, real time integration solution provider.

Siebel, with OEM, Our Solutions, in its call center and ERM product suites.

Products that represent over 50% of Siebel's licensed revenue.

This is as far as I know the most significant OEM reseller arrangement in our industry.

Siebel also announced yesterday that SeeBeyond has become Siebel's preferred platform development partner.

SeeBeyond with Siebel will be working to integrate products, not only at the data level, but more importantly, at the business process level.

Some of you may remember that when Siebel announced its universal application network or UAN initiative six-month ago, all of the major integration vendors were involved.

SeeBeyond, IBM, [indiscernible], Citgo, [Vitrea], VEX.

Six month later, SeeBeyond has emerged as the preferred vendor.

Why?

According to Siebel, three things have become clear to it in the past six months.

Number one, SeeBeyond has the best technology in the [caratis] functionality.

Number two, joint Siebel/SeeBeyond implementations are handling, by far, the highest transaction levels.

And three, joint Siebel/SeeBeyond press both companies to work more closely together.

Among those joint customers are AXA, Centrica, Clear Stream, Direct TV, GM, InfoNet, Nike, Northern Trust, PG&E, [Smirk and Stone], Washington Mutual, TXU and VISA.

Fifth, analysts and trade media confirm SeeBeyond excellence on high end enterprise application integration.

Gartner places SeeBeyond in its application integration magic quadrant Forester puts our business integration sweep at the top of its tech raking.

EAI Journal names us 2001 Vendor of the Year and we received the 2002 Excellence Achievement Award.

Sixth, our management's financial interests are aligned with shareholders.

Together executive officers and directors, including our Chairman Ray Lane and I, hold more than 40% of the outstanding shares.

Before I turn the call over to Barry, I'll provide a closer look at our Lockheed Martin win as an excellent example of what SeeBeyond can do for its Global 1000 customers and spend a few moments talking about the importance and potential of our work with such vital operations as homeland security and healthcare.

As you know, Lockheed Martin is one of the world's largest military contractors, with sales of $24 billion dollars in 2001.

Spread around the world, with numerous lines of business and thousands of computer systems, Lockheed Martin selected SeeBeyond to help streamline its supply chain, drive up the cost of inefficient processes, create a collaborative environment for customers and suppliers and to present itself to customers and employees as one integrated company.

SeeBeyond won its Global 1000 customer because of our unique ability to enable rock solid integration in all its IT environments at three levels.

Application to application, business to business integration and across business processes.

We have the only fully integrated solution.

Lockheed Martin will use SeeBeyond to integrate PeopleSoft, SAP, Oracle, Metaphase, WinChill and a wide variety of homegrown custom applications to achieve its inside the enterprise and outside the enterprise business process goals.

There are 15-20 major projects that have already been identified.

SeeBeyond's growing customer base in the defense industry and government reflects a new awareness of integration as a strategic tool in the post-September 11th world.

At SeeBeyond's customer conference earlier this month, Lee [Holcombe], the Director of Infrastructure for the Dept. of Homeland Security, said that government agencies have compiled 14 separate lists of suspected terrorists.

That these 14 lists can't be linked to one another.

Congressman Mark Foley, another speaker at our conference said, there are awful ramifications if we don't achieve real time information sharing among agencies.

Integrated real time data can make America and the world safer.

Integration can also make America's healthcare system safer.

Doctor Bill [Brinkley] of PWC, who helped write the new HIPPA regulations, told our conference that medical errors kill 98,000 Americans each year.

The single greatest opportunity to reduce that number, he said, instead of use of and access to information by professionals who care for patients.

Solving this problem matters to everyone.

Developments are now barring out the conviction I've had for more 13 years.

Integration will be a key engine of transformation in business, medicine, government and national security.

Leadership in these areas will increasingly depend on an organization's ability to control the flow of information.

This presents an enormous opportunity for SeeBeyond.

So to recap what is our plan at SeeBeyond?

Number one, is to maintain our status as the leading technology in our market space.

Number two, we have boosted our investment in R&D focusing on our new product release and on the ISV channel.

We are investing on competing to win market share.

We predict at least a 10% license growth in the 4th quarter because of our product and ISV division.

Three, we will maintain our focus on gaining long-term customers from the Global 1000.

Number four.

We are aggressively building and expanding our partnership in the ISV market, witness our success with Retek and yesterday's announcement with Siebel.

Number five.

Profitability remains a high priority.

So are constantly evaluating the success of our investments.

Now I'm going to turn it over to Barry for more detailed Q3 results and future guidance.

I look forward to taking your questions afterwards.

Barry?

All right.

Thank you, Jim.

Today I will cover our operating results for our 3Q ending 9/30/02 and wrap up with a discussion of guidance for 4Q.

With respect to 3Q results I will cover revenue, [indiscernible] customer matrix, expenses, the balance sheet and head count.

We reported total revenue for 3Q ended 9/30/02 of $35.7m, which is a 6% sequential increase from the $33.7m in total revenue for the 6/30/02 quarter.

This represents a 17% decrease year over year in total revenue.

License revenue for Q3 was $13.4m which is a 6% sequential decrease from the $14.3m licensed revenue number we posted at Q2 this year.

License revenue of $13.4m for Q3 represents 38% of our revenue mix, versus 42% from the June quarter.

North America represented $22.1m or 62% of total revenue.

While Europe and the Middle East and Africa represented $10.4m or 29% and Pack Asia represented 3.2 or 9% of total revenue.

Sequentially from Q2, North American revenues were up 1%, AMEA was up 12% and Pack Asia was up 28%.

Revenue by vertical.

We added 31 new customers in Q3, bringing our total number of customers to 1,725 worldwide.

The top four verticals for Q3 were financial services and insurance, government, manufacturing and healthcare.

On a detailed basis, financial services and insurance represented 23% government 20% manufacturing 18% healthcare 18% utilities 9% and the balance is 12%, in other industries.

Some of our largest deals in the quarter were in the government sector.

We are now seeing traction with our new government sales team that was put in place during Q1 of this year.

Number of deals.

We had one deal over $1m in Q3 and although we only had that one single deal versus two in the preceding quarter, our average new customer deal side strengthened and returned to levels we experienced six to nine months ago.

During the quarter we had no customers that represented more than 10% of revenues in the quarter.

During Q3 partners, which include both our SI and ISP partners, influenced over 61% of our licensed revenue.

Extensia, EDP and CGE&Y were our top SI partners this quarter and Retek was our top ISV contributor during the quarter.

We direct 27% of our licensed revenue from our existing customer base in Q3, versus 50% last quarter.

We're doing many significant new license deals with Global 1000 customers.

These include Toshiba, Lockheed Martin, Toys R Us and Liberty Mutual.

We are very happy with our new customer percentage of 73% this quarter as this statistic shows that the viability issue in competitive situations is behind us.

Service revenue for Q3 increased 18% sequentially, from $10m in the June quarter to $11.8m in the September quarter.

We have seen a demand for our professional services increase over the past quarter and we expect this trend to continue as we roll out our new solution [indiscernible] offering, including our reference architecture offering.

Additionally, down pressure on services rates have stabilized and we saw an increase in our services revenue margins in Q3.

Managed revenue grew 12% sequentially to $10.5m in the September quarter from $9.4m in the June quarter.

Overall gross profit for Q3 was 64.3%, down from 67.7% in the June quarter and down from 71.5% in the prior year quarter due to changes in the revenue mix.

Cost of revenue for the September quarter increased $1.9m from the June quarter due to the increase in related service revenue and the increase in cost of licenses due to the change in the product mix on the licensed revenue line.

Total operating expenses in Q3, excluding non-cash charges for amortization of goodwill and stock compensation was $31.3m, up from $30m in the second quarter.

This sequential $1.3m increase during the quarter, included an approximate $900,000 increase in R&D expense and approximate $600,000 increase in sales and marketing expense and a $200,000 decrease in G&A expenses.

R&D expense increased in Q3 to $9m from $8.1m in Q2.

The increase in R&D was due to additional head count for new product development.

Sales and marketing expense increased to $17.7m in Q3 from $17.1m in Q2.

This increase in sales and marketing expense was due to sales force training programs and related partner commissions.

Our pro forma net loss for Q3 was $8m or $0.10 per share versus the loss of $2.9m or $0.04 per share in the prior year's period.

Pro forma results exclude where appropriate non cash charges related to stock base compensation, amortization of stock warrants, restructuring charges, and amortization of good will.

On a gap basis the net loss for this quarter, and its September 30, 2002 was $8.2m or $0.10 per share versus the loss of $7.8m or $0.11 per share in the prior years period.

For Q3 [indiscernible], share count was 83.5m shares.

Returning to the balance sheet total cash and cash equivalents were $99.6m as of September 30, 2002.

Total cash decreased by 9.7 in Q3 and net cash used in operating activities was $5.7m.

Total net receivables were $34.2m as of September 30.

Our DSO's, at the end of Q3 were 88 days inline with previous quarter's DSO of 87 days.

Deferred revenue increased 1.4m during Q3 to 26.3m [indiscernible] revenue to increase steadily at a similar rate over the next quarter as it is more function of new [indiscernible], in to new revenue [indiscernible] during each quarter.

We ended the quarter with no debt other then capitalize these obligations.

In terms of employees we ended the quarter with 825 up from 776 at the end of the second quarter.

R&D employees made up 80% of this increase in head count during the quarter.

Included in the 825 employees are approximately 65 quota carrying reps.

Now I'd like to give guidance for the forth quarter of 2002.

I'd like to remind you this guidance is forward looking in nature and is subject to risks and uncertainties included those identified in our FCC filing, and those mentioned earlier during this call.

We are guiding forth quarter revenues in the range of 36 to $38m.

In Q4 we expect to grow sequentially from Q3 a minimum of 10% on the license revenue line item.

Operating expenses are expected to increase 1 to 2m primarily in the research and development line item.

That the portion of R&D heads that we hired toward the end of Q2 come online.

Excuse me, at the end of Q3, come online as we discussed in our Q2 earnings call.

Using a share count of approximately 83.5m shares we expect the pro forma loss per share in the range of 11 to $0.12.

The forth quarter re-increase in research and development expense is the result of new hires made late in Q3 focused on new product offerings particularly [indiscernible] 5.0 and the integrated OEM version of our products for our ISP partners such as SIEBEL.

Although we are not providing revenue guidance beyond Q4 of this year, we are focused on three things: Number one, market share growth.

Number two, cost control, and three and most importantly profitability.

Currently we are expecting to end the December quarter with approximately 800 employees down from 825 at the end of September.

This decrease is due to attrition performance based reduction and very selective, if any, hiring during the quarter.

From there we will fine tune head count and expenses to target break even results in the third quarter of 2003, and profitability there after.

We expect our cash firm to come down ratably over the next three quarters if that target.

With that now I'd like to turn the call over Ray Lane for some closing comments.

Thank you Barry, can you hear me okay because I got cut off on the call for about two minutes.

Yeah we can hear you fine.

Okay thanks. [indiscernible] I've missed earnings announcements in just [indiscernible].

I asked Jim if I could just participate because I've had about a year or two perspective so I wanted to kind of share a little bit after being on SeeBeyond for 5 years.

I think it might be easier to think about SeeBeyond in the future by thinking about our performance this year and looking backwards a little bit.

A look over the last year and just look at our performance, I'm quickly drawn to Q2 and Q2 was all about Q2, and Q2 was a different was a disappointing quarter.

We were gaining share before Q2, we had just announced a quarter in Q3 we're gaining share again.

I'll be, it is by losing share or shrinking less than the competition.

But Q2 took us down a step function and it was all because of a quarter that was largely defended upon a starting sales cycles in the [indiscernible] after 9/11, and we had a little cash balance, and then we had all the confusion prompted by Q1, the Q1 pre-announcement.

Which turned out to be largely a red area because of the dealing question was fully recognized the next quarter and paid for.

At Q2 clearly was even though it was produced, because of [indiscernible] criteria basically had us thinking about what do we need to do if anything, in this business.

We decided at that point that we need to do at best foreign R&D of AGR Lee that was the primary reason that fortune 1000 companies select SeeBeyond as the product.

The architecture, the development of vertically oriented templates a number of things differentiated us on a product.

It is a very tough environment we made, I think, a gutsy decision to invest in R&D.

We also decided to invest in partnerships, we felt that we probably did not, had not invested as much as others in partnerships and we started investing in strategic alliance like the ones that have been discussed in this call, with Retek and Siebel, and EDS and others.

But I think will pay dividends in the quarters to come.

We also are at the board level and with Jim and the management team talking about positioning for new opportunities in integration.

Such as query development, business intelligence, ETL, all the opportunities that I think are available for a leader in the integration market.

A core integration market is critical as a foundation to build all of this on, and so investing R&D in a time where it's difficult to think about investing is critical to maintain our lead.

We are, I'm [refinded] at a time like this at Oracle when we had wall street talking about SyBase then talking about Informex and then talking about Microsoft and how we were going to get wiped out by companies that were buying technology, that were buying technology and changing the market producing discontinuities against what we were trying to do was right in develop code ourselves.

Reminder that because what we've done SeeBeyond is focus on engineering and we focus on engineering to develop the next product architectures and I'm proud of this management team for doing that, and we're focused on large enterprises.

We're not [indiscernible] place we're not just XML, we're focused on big integration projects for big enterprises.

It was very tough to go through multiple earnings calls, listening to you. "What are you doing to keep up with Informex?

What are you doing to keep up with Sybase, because they are buying their way in to the future".

It doesn't work.

It does not work, and so we're going to see, my expectation is the next several quarters we're going to see the difference in our attempts to gain share.

The board here, the board of directors feels very good about the products.

We feel very good about the 60 or so customers selecting us as a strategic standard and those are all fortune 500 customers, and we feel very good about what I think is catching up in developing these strategic alliances.

Our expectation is to gain share in Q4 and gain share in the quarters, in 2003 while flapping our expenses after we've made this investment.

So your looking basically at that investment having been done.

So my personal confidence is high on SeeBeyond.

I think we're making the right investments.

While controlling other investments.

The board is monitoring these investments ever quarter and evaluating them every quarter, and so very personally involved in SeeBeyond if its for lead generation with customer preference or individual customers, because I still have a passion for, I think is the most, if its not security then its integration that is the most important and critical initiative for CIO's today.

I just finished a CIO conference with all of the CIO's for fortune 30, and fortune 40 in the last two weeks, and still integration is the most challenging issue, and is the most important issue to them.

They no longer buy $5m or $10m contracts up front but they want integration partners that can help them exploit the value that they've invested in ERP system and integration does that.

I just wanted to give a little bit of that perspective on top of what Jim has already done, and I'll turn it back over to Jim.

Thanks Ray.

So in conclusion, I think what your hearing is that the investments of the company has made are starting to bare fruit.

We're seeing some very, very interesting shifts, where people are coming back to buying the best technology, as supposed to the biggest market hype.

We think that we're not in the position where we're trying to do $50,000 or $100,000 type of projects we're focusing on becoming the integration standard and the largest corporation throughout the world.

We feel that now with the cash on our balance sheet, we're seeing that momentum swing back our way.

With that I'd like to turn the call over to questions, and we have some time for Q&A.

Thank you.

We will now begin the question and answer session.

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Once again if there are any questions please press the 1 on your touch tone phone.

Chris Shilakes from Merrill Lynch is online with a question, please state your question.

Very good, thanks very much.

Great execution on the quarter, I had a couple questions for Ray welcome back it is good to hear you on the call again.

I was wondering if you could give us a sense of for example for these 5 new global 1000 customers that were announced in the quarter.

Your degree of evolvement on those deals in particular with kind of how far down the new customer list would you go in terms of your engagements.

That's the first question, second one for Jim on the solution sets, if you could talk about whether those will be a separate skew or whether those are just driving sales of your existing offerings, is it going to be a revenue of all opportunity and then lastly if you could talk a little more about the finical dynamics behind the Siebel relationship.

Are there any revenue minimums, any other commitments finically underneath this deal with Siebel.

Thanks.

I think to me it's good news because I don't think I was involved in any of them.

If those were sent to me to see these 5 customers.

Jim, check me I don't think I was involved in any of them.

No.

Either ones you weren't but there's a lot of other ones for you.

A bunch of others.

I'm interested in one that I don't think the company wants to talk about right now because its still on play.

But I was actually very involved in it we lost it, and it came back to us because the competition just couldn't perform, and I enjoy those kind of things basically explaining to the customers that they can come back if they find out that the claims we make of our competition of not being able to scale the way we scale, and they come back.

What I focus a lot is on looking at the pipeline and focusing early in the cycle and then helping close but I like trying to generate just going down in a war room atmosphere to make sure that we continue to increase the number of fortune 1000 clients that select us as a strategic standard, and that's how amusing my time with the clients as opposed to just trying to get a transaction done, and I think that's working very well.

If the person is involved in AGM and involved in its Siebel, things like that.

Right.

I think the types of companies that we want also Chris like DC Government selecting us over local technologies.

The Department of Water and Power, Air New Zealand, we just won a big airport for example in Europe, one of the largest in the world.

Those are all key wins, and Ray's knowledge is some of these accounts and is used on an ongoing basis.

Talking a little bit about solutions sets.

Basically what we have are 2 pieces to a solution set it is a product piece and it is a service piece.

There is no separate SKU but what we do is, we do have an ability to articulate a HIPPA transaction or a HIPPA message for example.

In Health Care that's layered on top of our core technology, we also cant pass something like [indiscernible].

Companies like Dials Corp. which have picked us for their integration needs are using this to handle parts information and pricing information to companies like Wal-Mart.

So there is a tremendous demand because we're so strong in the consumer package bids business for the use of that sort of solution set, and what that in term does as we demonstrate those prepackage integration of support of these standards it allows our customers to say "My goodness, I'm a consumer package food company, your already support the industry standard your working closely with all the different standards that I need to do to share data with our trading partners we're going to pick your technology because its all prepackaged".

So we've been very successful and I think that's how a lot of that led Siebel also by the way to its conclusion not only did they pick us we're the only OEM in integrated solutions for two of their product lines that represent over 50% of their likeness revenue, the call center and the employee relationship management.

These are two very significant product lines.

Call center represent I think they have about 80 to 90% penetration on all their customer accounts, and its all their largest customers.

We even use other call center software and so basically what we're doing is integration with all the different systems that will feed data to their call centers.

For example, Centrica which has 11,000 call center seats has over 50 different systems it wants to be able to extract data from to provide to its call center technicians so that they can answer questions to Centrica's from Centrica's customers.

So very strategic here, and not only is there at a kind of enterprise level and a software level but also down at the technical level.

What we found, we had 65 distributors a decade ago, and we're switching back to a different model, which is part distributor but very tight technical cufflink.

What Siebel management has committed to is in fact doing with this is what we are building exclusive very tight cufflinks between SeeBeyond technology and Siebel's technology.

So there's real value here in high through put pre built adapters, mapping down to the data level from certain inbound systems to outbound systems.

It's the most powerful EAI slash large application vendor relationship in the world.

Its resale opportunity into Siebel's existing customer base, all Siebel's sales reps get commission, all Siebel's sales reps get quota release and so there is tremendous interest in this type of an environment from Siebel's side to take a very large enterprise type architecture and sell that in to their customer base because as we all know its hard getting new customers, and we have to really focus on existing customers.

So we're very exciting about that, so I think our products are on the Siebel's price list and they will be pushing it.

Just a quick question, one more quick question Jim.

UAN is shipping to Siebel this quarterly will you actually see any revenue from it's OEM in the December quarter.

Yeah we do have about 80 joint Siebel, SeeBeyond customers today.

What UAN consists of for those who aren't familiar are prepackaged business processes.

We do have a pipeline, a joint pipeline of over 443 opportunities at the highest level that we're tracking but they're early in their sales cycle.

So we do have quite a few of our customers from General Motors to Centrica to AXA that have all expressed a lot of interest in these offerings, and I believe that there will be some closure for those type of business [indiscernible] offerings this quarter.

Okay, thank you.

Sure.

Linda Side, from Morgan Stanley is online with a question.

Please state your question.

Yes hi, taking a look at your balance sheet it looks like the accounts payable is experience for 36% potential increase which is a higher jump than in previous quarters.

What accounted for this increase?

Then my second question is in light of the Siebel announcement in terms of you becoming apreferred platform developer will you give us just a little more detail on what it means to be a partner at this level versus other levels.

Because I think you mentioned the highest level and it seems like there are other application vendors that also have strategic relationships with Siebel, how would you say that your relationship differs from that of your competitors relationship with Siebel?

Well in terms of I'll check the balancing question really quickly here.

In terms of total liability just look at accounts payable by itself you know a lot of things move around between there and the accrued liabilities line on a quarterly basis so in total, our total liability has increased about $2.8m and about half of that came on the deferred revenue line there was not a huge significant increase just in dollar terms.

About $1m, $1.5m it's due to payables timing and some CapEx items and those types of things that came around that quarters end.

So nothing, nothing significant on that.

But I'll let Jim handle the other.

Yeah, on the Siebel side there are two different types of initiatives that Siebel has underway.

One is called UAN and what Siebel has done is its coming up itself with what are called business proxies which say how a customer in a call center phone call how its like cycle of an event of a customers phone call.

For example, you pick up the phone and then you check 10 systems to see if this persons data is there and if it is you speak to them about that system.

That's practices is what UAN is all about more specific business proxies as they relate to Siebel applications.

So we think that's a very innovative and very powerful approach to communicating to business users and CIO's the value of integration.

In addition, the real goal of UAN is to reduce the cost integration and we're all about that.

Because what we want to do is we want to cost the building the connection drop from say $100,000 to $30,000.

The value there is that we get more license revenues, Siebel gets more license revenue, and the services component which represents usually between 60 and 90% of an implementation decreased substantially.

So these are reusable best practices that are implemented.

So what's different about us is that companies like [Web message] has an OEM for partner relationship management which represents only about 5% or so of Siebel's revenue.

Ours represents well over 50% of Siebel's revenue and we're the only OEM joint development partner for the largest single vertical app, which is call center, and one of the fastest growing apps, which is ERM.

So it's pretty much done as far as Seibel's concerned they can't spend their time working on a bunch of different companies with a bunch of different relationships they will still come out with these new [indiscernible] UAN initiatives and it makes sense for everybody to support it because we're all winners.

But, when it comes to their R&D focus and the type technical relationships, part differentiating, and for us, from a revenue perspective having access to the entire Siebel sales ports and their install base we clearly have a differentiated offering.

That help?

Yes it does.

Oh Barry just going back to the payables question, I think you said about half of the total increase came from the timing of different payables and CapEx items?

Yes.

What does the other half come from?

I meant the half the total increase in the total liability was half us from deferred revenue and about $1.5m, and then the balance was all the other liabilities outside of deferred revenues was about $1.5m and it related to all those types of timing.

Oh, okay great, thank you.

Once again if there's any questions please press the 1 on your touch-tone phone.

Jordan Kline from UBS Warburg is online with a question.

Please state your question.

Hi guys, nice execution as well, and I got on a bit late so I apologize if any of these are repetitive.

Can you talk a little Barry maybe about partner contribution again, and was this what you expected and where you think that may go as we head in to the Q4.

Over 61% contribution from our partners in Q3 and I expect with our [indiscernible] in Q4 they were expecting on the license revenue line plus our new relationship with Siebel that we should see that percentage also increase.

We should be up in the, I would say 80 plus range over the next couple of quarters just due to a significant impact all these partners combined is to have.

In addition, I think there is going to be some strengthening from our FI partner businesses as they get a little pickup here in Q4 so hopefully we'll see that pickup.

But 61% is where we expect it up from 40% last quarter and so its strengthen back into the positive range, so we like to see where we were two or three quarters ago.

Yeah I think the FI's are now comfortable that we have the cash on the balance sheet we're not going away, we've got 13 years of history and we have the largest install base in the world for EAI technology by far so I think their feeling a lot more comfortable about working with us.

Right.

Then on the pro serve uptake and you may have addressed this a little bit on your opening comments, and I apologize.

But, can you, I have a feeling that's kind of forced down the gross margin a bit was there anything else in there that may have pushed down the gross margin a little bit sequentially and can you give me a little color on what you would expect would you expect similar type of increases in that services revenue?

I think we've found a couple of things happening on the top line of the services revenue that some of the early releases of our solution set offerings that are built on top of our core technology are now getting out there and in to the market place we've got a lot of customers excited about this because it provides them with a clear path to a quick ROI in terms of a very short implementation time in terms of being 90 to 120 days versus maybe a longer time, and maybe a little uncertain long time, so that's one thing.

We have wrapped up actually to measure with the increase with the services revenue we're able to turn on resources and turn them off as we get that services demand.

So although the expenses went up, you know we did get the margin appreciation on the service line item which was good.

The mix slightly changed during the quarter, that impacted gross margins like you talked about Jordan.

I think of the other aspects was in our license, [costive] license revenue line item you know he has a couple of products that we did sell during the quarter to add a third party loyalty on them and that increased that line item.

That comes and goes depending on that product next during the quarter.

On a quarter by quarter basis.

You know an interesting point too Barry is that our users group we had at least a half a dozen companies that existed in nothing but server SeeBeyond customers.

Companies anywhere with 30 to 100 people all over the world that are involved with implementing our technology, and I was amazed just to see how many companies there are that do nothing but work on SeeBeyond and our technology.

So we're seeing I think these big companies like DuPont and others are really expanding their deployment of our technology.

Pfizer was another big one, NASA has decided to make us the total enterprise standard etc. etc.

So a lot of great initiatives there.

Just two quick ones, maybe Barry just addressed.

What do you expect to end the year in cash?

Then Jim, where Ray's still on the line, can you look out on the pipeline at the end of the year we're not really expecting, I doubt anyone is expecting any budget flush but you know the kind of deal size this unit sees as a pipeline and maybe some of Ray's experience what he might think some of these customers might look to spend towards the end of the year if there's any change.

I think the [indiscernible] Jordan we're going to be probably negative on the operating cash flow 6 to $7m during the quarter probably going to be around $90m or so plus some cash depending on the timing of CapEx items etc. during the quarter.

In terms of deal size, and the pipeline outlook I'll fill in a couple comments and let Jim take it from there.

We definitely saw during Q3 a strengthening in the average deal size of our new customers back in the $400,000 to $500,000 range really at the middle to the stronger end of [indiscernible] a very good and positive sign of the way our pipeline has transformed itself over the last couple quarters much stronger prospects and in terms of looking at Q4, there was as usual, deal slippage but some significantly larger deals this quarter in terms of being a few 7 figure deals that have slipped out of Q3 in to Q4 that look like very good solid opportunities [indiscernible] the issues, hopefully some of those will get signed in this quarter because they weren't loss related or competitively related delays but more or less when are they going to sign the paper work type of delay.

Those are the things we've being seeing for the last 12 to 18 months in those types of deals.

Over deal size is looking much better for us and I think we've saw definitely our low point in Q2 and things are up take.

Also on the sale side I think you know from the pricing perspective we are seeing some vendors you know do $50,000 pricing but you know that's like some methods [indiscernible] and half a dozen other deals that we saw but primarily what we're seeing is actually increases for us in, as Barry was describing.

But what companies are doing instead of spending multi-million dollars upfront, their buying $0.5m for a years worth of our software.

So I think what's very healthy about that is that we don't have this euphoria of you know 3 or $4m upfront and you don't get any more revenue because it's forever unlimited use of the software these companies will all be coming back to us in another year as they deploy our software, for more of our software.

Yeah I would agree with that.

Can you verify you can hear me because I don't know if I was put on mute?

Yeah I can hear you Ray.

Okay good.

So I think the business is changing and I hate to keep drawing parallels to Oracle but I think there are a lot here.

You know when early 90's [indiscernible] Sybase and Norbase there were a lot of feature function competition, how many features do you have in your product versus others in the database world not applications.

Then in '94, '95 I tried to change the business more to the way the customers were starting to evaluate is based on projects.

So you needed the features and you needed all of them everyone of the features to win.

But criteria changed to what do you have to offer me in terms of experience, knowledge, help with projects to make sure we can get through this thing safely and inexpensively, and that's what's happening in this business and that's why focusing on winning these enterprise standard deals are so important to us and we've been, if we've been successful at anything that we have absolute level have decimated the playing field on getting enterprise standard deals that's because we focused on it.

That will turn, so we had a lot similar to GM.

When we won GM as an enterprise standard I don't think we had any revenue to report.

Over the last couple of years we've had revenue come from GM and we'll have more, and each time I know I'm involved in one of these enterprise standard deals there's typically some business issue some large business issue like a merger or integration of important applications.

You know time after time, the reason that their buying from us is not just the product features but can you offer us help by setting up a server of excellence so we can use your consultants and your partners help us through this thing because we don't want another ERP nightmare.

We don't want another, this project is going to cost us $100m we want experience and [indiscernible] these vertical templates are so important and so what we're going to see I think in the next year is a lot of enterprise standards deals that we've gotten in the last, over the last year, which is a lot of them turning in to revenue around projects.

Exactly what happened to Oracle and while Sybase and Informix are out their flailing away with features and functions we we're focusing on doing projects and that's exactly what we focus SeeBeyond on doing is that when we get in to a project competition we typically will win against competition.

Okay thanks a lot guys, good luck.

Thanks.

Mark Verbeck, Think Equity Partners is online with a question, please state your question.

Hello thanks a lot, Barry one question for you just kind of, just on the numbers.

Maintenance hiked up quite a bit looked like it could have been related to almost $20m of software revenue can you tell me what's going on there?

On the maintenance line item there was really a little peep of that is coming some of the older ISP relationships and things like that that are now starting to book through the system in terms of growth and the maintenance line and you know we try to be pretty conservative on our predictions on that and then we just step it up after each quarter which we're pretty much guiding this quarter in terms of you know $0.5m to $700,000 worth of increases in this quarter.

So.

Deferred.

Deferred increasing every quarter not decreasing every quarter.

Right.

So it's getting better than that.

Jim if you could comment on the types of deals and how their getting structured is there any contractual commitment to when these companies [indiscernible] enterprise deals are only spending $500,000 with you what type of commitment do they have to roll on your solutions or is that more like kind of positioning statement for them.

Yeah what they do is, well they obviously have budget and they obviously have specific projects in mind, and what we do is we charge by connection.

So they buy a years worth of connections at a time, and what they'll do is they'll say were going to try to do 50 connections, 100 connections, 300 connections whatever the number might be in the next 12 months.

But that's the number of systems we want to integrate now, and then they come back.

So don't forget now that that 500,000 typically will translate anywhere from another 500,000 in services to maybe 2m in services depending on how complex these systems are plus hardware another infra structure of cost you know.

It might be a 2 or 4, $5m initiative and so I think what happens is that these companies that have seen us now for the last year are buying a smaller piece up front because that makes them look good to their CFO and then they come back the next year and buy another $0.5m worth.

For example BMW and GM are two great examples that GM has spent millions of dollars on our software, well on its way to achieving the numbers that we've predicated a couple of years ago and that is buying every quarter for more projects.

Same thing with BMW they sign a contract a couple of months, a couple of quarters ago and every quarter they have been coming back and buying more software.

And Mark, typically we'll see in 30%, 40% of the deals where these things are bounded an implementation and a number of connections over time that they'll have written auction in the deal that states what their going to sign up to if they elect you or not in that year time frame.

So, there is some definite times we can pay a customer you know for that renewal process or for that up take process in terms of taking on new licenses and now that the contract all have been written and taken care of on the first year it's a lot easier to get those reorders down the road.

So the customer although once they want to start with a smaller budget or smaller amount up front they do want to get visibility in to how much they may be spending over the next few years and how to outline those renewals.

Yeah, and then good one is Nike.

I mean they are a company that's famous for not wanting anybody to talk about what their doing.

They have told us that they are so happy with us that we can actually talk publicly about what their doing with our software.

In the last few years they've done over 1000 interfaces and they have a department of almost 30 people doing nothing but integrating systems all over the world with all of the suppliers through out the world.

Great thanks a lot.

John [indiscernible], CIBC World Market is online with a question please state your question.

Hey guys can you talk a little bit more about the structure of the OEM relationship with Siebel in other words are you going to be getting royalty based on volume.

Or is this more of a selling opportunity it's probably that also, or is it just that.

Hey John good to hear your voice I hear you couldn't talk yesterday.

The basic structure on the OEM structure of Siebel is there a minimum per the amount, minimum percentage, and then a dollar threshold that must be reached in those two products the call center, and the employee relationship management product.

So it's limited.

The bundle that we are, embedding in their product is limited by a certain number of connections which a number of CPU's and we have a pretty good sense around that to protect, the upside up sell opportunity with those customers so we feel we get a certain minimum level amount in contribution from each deal that they sell then there's great upside with these customers because Siebel is selling to you the very large customers and its very well aligned with how we focused on our business traditionally.

And Barry, when you said there's a dollar threshold that must be reached, are you talking about every deal, or are you talking about for a year?

No, every deal.

It's per deal.

It's not a certain minimum they're going to pay us per year type of thing.

It's a certain minimum per deal.

Okay, thanks.

And one last quick one, too, you talked about the ASP going up, and I was just curious if you have a breakout for new versus existing customers.

It sounded like some of the new customers is what brought that up, but as you just described, existing customers that might have bought sort of like a little departmental solution initially may be considering more of an enterprise solution.

Yeah.

In terms of like new versus existing, you know our new dollar price per average deal, and that area's around the 4 to 500,000 dollar range.

On the existing customer, it can range anywhere from less than 100,000 dollars to a plus-seven-figure type deal.

This quarter we saw them all over the place, we didn't see any seven- figure deals in the existing customer base this quarter, but they can range from buying a certain number of connections, say they didn't pick up any oracle connections the first time, then they're planning that type of thing, and that's a lower price item to starting a new department, like a GM where you'll see 500,000 to 800,000 dollars for an existing customer deal.

So those really vary all over the map.

But they're slightly lower than our deal average.

Okay, thanks a lot guys.

Bye.

Mike Marzoff from US Bankcorp Piper Jeffries is on-line with a question.

Please state your question.

Good afternoon, Jim.

Wondered if you could just briefly outline what type of initiatives are leading or heading up the RFPs?

Is it just pure EAI first and then phased implementation later, or is BPM or Portal, or what type of inbound interest are you seeing from customers right now.

So, business process management is, we think, what it's all about.

The standardizing on the best in industry business processes which specify when an order comes in.

What are the two hundred steps necessary to fulfill that order, so that it gets delivered to the customers or OTD?

So we're really focusing a lot of this, a lot of questions are also around standards, and web services and others.

I think the net web services will solve the problems of integration, are dying off.

Web services will help the problem of integration, not solve it.

And I think it's a great thing, we've got a lot of J2EE and dot-net questions, of course we play very well, unlike other EAI companies in that we are J2EE compliant, and we have a lot of vertical specific initiatives in the pharma industry, CIDX, which is the chemical industries' messaging standards, and MTPDP and the pharmacological industries, and then security of course with AS2, so a lot of different technical requirements, which is why the company has such an investment in R&D.

And, not to flog a dead horse on the Siebel questions, but we hear a lot of things about the Siebel relationships with the AI vendors, IBM process templates, U- and BPM, others in other areas, how do you see, when the customers draw out the architecture, how many hubs do they have, how do these play together if you've got SeeBeyond in the call center and ERM with Web Methods embedded, it doesn't seem to fit together very well.

Yeah, that's exactly right.

That's why we think that the company that has 50% of Siebel or more of Siebel installed, the cut revenue stream will be the one that may have the biggest and tightest partnership, and that's what Siebel thinks too.

But they do need to work with all the other technologies, even though they are marginalized, and they will have smaller roles to play.

I think that the facts are, we are resold by all Siebel sales reps, in about over 50% of their product lines.

We had initiatives that all the sales reps get quota relief, all the sales reps are commissioned, and they can take these opportunities into their existing customer base and into all new customer opportunities, and there's huge up-sell for us because they're focused on Siebel-related integration.

A good example here is Direct TV, where it turns out that for a Mike Tyson fight, not that I'm a big fan of those fights, but they got 10,000,000 requests to get hooked up to see this fight in the last few hours prior to the fight.

And basically, our product was able to scale and support that volume of calls coming into the call center, and the communication of that call information helped the systems which turned on the services for all of these people.

So this is a real live example of how what we call the real time information network affects the way fundamentally companies operate.

And so that's how they're using it, and that's how Siebel's going to sell it and bring more value to the call center.

And then, two parts to this question.

Who retains the IP in terms of the processes, and how do you balance your move up the stack into vertical solutions with your partners?

So Siebel will maintain ownership of its UAM, and that's true by the way with all the AI partners, so they're coming up with their best in-class business processes that align with specific verticals associated with customer relationship management.

So that will be consistent with everybody.

We, on the other hand, have business processes that expand beyond the customer relationship and deal, say, with SAP or with Retek or with EDI or with UCC Net, or Hippa.

So we will retain rights to those business processes that we have developed.

Barry, can you give us a sense for projected cash at 12/31 and at break-even?

I feel that cash would be in the 90+ range.

Hopefully by the end of the quarter it'll be about a 6- to 7,000,000 dollar operating loss burned on the operations line of the cash flow statement.

Most likely for Q4 will be some additional cap backs on top of that that'll take us down to that level, then we expect to bring our burn rate all the way down over the next few quarters as we target break-even in Q3 of '03.

With what kind of cash balance?

It should be low to mid-80's.

And the revenue at break-even?

It should be in the mid-40's range.

Great, thank you.

Greg Kleiner from Soundview Techgroup is on-line with a question.

Please state your question.

I'm all set, I'll take the rest of mine off-line.

Okay, I think that's it.

In conclusion I'd like to thank everyone for participating in today's call.

Thanks for joining us, and we look forward to talking with you all again next quarter.

This concludes today's teleconference.

Thank you for participating.

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