甲骨文 (ORCL) 2002 Q4 法說會逐字稿

Welcome to the SeeBeyond fourth quarter and year-end 2002 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 Ms. Andrea Williams.

Ms. Williams, you may begin.

Thank you very much.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss SeeBeyond's fourth quarter and full year 2002 results.

If you do not have a copy of the earnings release in front of you, please call Kristi Rawlinson at this phone number: 650-622-2128, and a copy will either be e-mailed or faxed to you during the course of this conference call.

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

I now would like to read the Safe Harbor disclaimer.

The following conference call includes statements that are not historical in nature and, as such, as 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; and earnings per share levels for the first quarter of 2003; the expected level of future customer demand; the expected level of future SeeBeyond market share; the timing of SeeBeyond's achievements of profitability on a quarterly basis and the success of efforts to secure new customers; control 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.

These include 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 earning release and earnings conference call are also subject to other risks and uncertainties including those most fully described in the company's filing for the SEC including its annual report filed on Form 10-K for the year ended December 31, 2001, and its quarterly reports on Form 10-Q.

The company does not undertake to 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 your questions.

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

Thank you, Andrea, and good afternoon to those of you joining us on this call.

I would like to first touch upon a few of the highlights from our fourth quarter 2002 financial results followed by a look at the year in review.

After my comments, Barry will give details on the financial results followed by a few perspective comments from Ray Lane.

Total revenue for Q4 was $40.5m, a 13% sequential increase from Q3, beating expectations by nearly 10%.

License revenue of $18.5m reflects a 38% sequential increase from Q3, which we expect to be the highest sequential increase amongst our peer group, beating expectations by nearly 25%.

We also successfully began to gain market share back in Q4, which we feel very confident -- felt very confident about at the end of Q3.

Our pro forma net loss for the fourth quarter was $4.8m, or 6 cents a share, beating First Call consensus estimates of 11 cents per share.

We ended this year with a very strong balance sheet, including $94.1m, or $1.14 per share in cash and a 76-day DSO versus our guidance of the mid-80s.

Our financial results and metrics exceeded our expectations.

We definitely saw a return in momentum for SeeBeyond, both in terms of new customer additions and in the general competitive landscape in our sector.

During the quarter we added 56 new customers for the full year of 2002.

We had over 20 new global 1000 customers including Northrup Grumman;

Fuji Photo Film;

Lockheed Martin;

Toshiba;

Kroger;

Tricon, or now known as GEMM [ph] brands.

Customers that purchased our software during the fourth quarter included Alliant Energy;

AXA Financial;

Ericsson;

Banca IMI;

Blue Cross of Idaho;

BAREP or Societe Generale;

BMW Group;

Centrica;

Clearstream;

Conoco;

Emerson;

Fuji Photo Film;

General Motors;

Gymboree;

Halliburton;

LabOne;

Logica;

Lockheed Martin;

Monsanto;

Maersk;

NTT;

Nike;

Northrop Grumman;

Pfizer;

Schlumberger;

Sutter Healthcare;

Smurfit Stone Container;

Texas Health Resources;

TietoEnator;

UBS Asset Management;

Woolworth's - many of the world's largest companies and a variety of verticals all over the world.

We are now seeing the real fruits of our very successful deployments within these large IT organizations around the world; successful customers that have standardized on SeeBeyond are buying more from SeeBeyond and, in some cases, are buying from SeeBeyond every quarter.

The focus at SeeBeyond has always been to make our enterprise standard customers successful quickly and efficiently.

Now I'd like to briefly touch on the full year 2002 from SeeBeyond's perspective. 2002 was a very challenging year for SeeBeyond as well as for the software industry as a whole.

However, we feel the integration sector, as many industry and financial analysts have reported, is still a top priority for IT spending in 2003.

Why?

Because integration in the companies that focus 100% of their energy on solving integration challenges are addressing the biggest and most complex issues for large companies today.

The integration market is not consolidating and is not a two-horse race as some of our competitors would like to have you think.

We think the integration market will continue to have multiple independent players and welcome even more incumbent platform players who will offer differing strengths, price points, and technologies.

At SeeBeyond we are going to continue to focus on our core competency, offering industrial strength, open, highly scalable and robust integration products to the world's largest company.

The focus we have maintained in a challenging business climate in 2002 has made us stronger and prepared us for 2003.

This focus was, number one, research and development growth culminating in our forthcoming 5.0 release, which we will be launching this quarter.

Further development of strategic ISB relationships, culminating in our significant OEM relationship with Siebel Systems; a commitment to grow our business costs effectively and efficiently; our emphasis on license revenue growth while maintaining costs in the fourth quarter has resulted in an excellent sequential growth rate of 38% and an increase in market share.

What did we accomplish in 2002?

SeeBeyond added 153 new customers in 2002 to reach a total of 1,780.

We have the largest installed base of pure play integration technology in the world.

These customers include many of the world's largest organizations.

SeeBeyond added OEM relationships with Siebel, EDS, PLM, HP.

During Q4 we saw significant traction with our two most meaningful ISP relationships closing business with both Siebel and Aritech.

We strengthened our financial services and our government selling teams in 2002, both of which are performing well as evidenced by the contributions of 30% from our financial services team and 9% revenue from our government team in 2002.

Our biggest government customers in 2002 include the military health system, Washington, D.C. government;

Northrup Grumman, which is doing a variety of U.S.

Air Force projects;

United Kingdom Post Office;

Nexcon, which is the Navy Exchange.

Building on this great momentum in the government sector in 2002, we are announcing tomorrow the creation of a government advisory board, which is designed to further strengthen and expand the SeeBeyond expertise in the U.S. public sector.

This board will be comprised of six highly recognized and well-respected names in every area of government practice.

The board will provide advice and counsel on ways to strengthen and accelerate the adoption of enterprise application integration technology throughout the civilian, defense, intelligence, and law enforcement areas, and state and federal government sectors.

SeeBeyond continued in 2002 to create industry-specific product offerings.

This area will be a very strategic focus for us in 2003, as HIPAA compliant becomes a must-do for the country's healthcare and insurance organizations.

SeeBeyond offers a HIPAA solution set for payers that provides HIPAA-specific preconfigured software components, a best-practice integration architecture, all of which is fully integrated with Claride, the standard system for HIPAA EDI transaction compliance certification.

SeeBeyond is the only company in the market to have an exclusive solution with Claride, providing instream HIPAA testing with certification.

Claride has been endorsed by the following organizations as the HIPAA standard for validations -- the centers of Medicare and Medicaid services; the American Hospital Association; the Electronic Healthcare Network Accreditation Committee; and a variety of other organizations - this is, I think, a very significant opportunity because Claride, which has an exclusive for all of these organizations to validate all HIPAA transactions has an exclusive relationship with us when it comes to integrating their technology with integration technology to provide integration capabilities for the nation's largest insurance companies and providers.

For the financial services vertical, one major quaint differentiation for us in 2002 was our Swift Messaging solution.

The following financial institutions purchased our software in 2002 and in order to achieve a very highly scalable integration to Swift network and also ISO 15022 compatibility;

Zurich Cantonal Bank;

Bank ME;

BNP;

Clearstream;

UBS;

Swiss Post - and a variety of others.

So by relentlessly focusing on our current Global 1000 customer base and on new customer acquisitions by successfully bringing our strategic partner channel and by introducing numerous vertically focused solutions, we have emerged from a very difficult year, I think, a stronger and more focused organization and our value proposition has remained unchanged; that is, that 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 nearly a decade.

So what is the plan for SeeBeyond for 2003?

Our focus remains the same, and our organization will work very hard to execute on the following: Number one; our goal is to maintain our status as the leading technology in our marketplace.

We are investing and competing to win market share by boosting our investment in R&D and focusing on our new product release.

We look forward to sharing all of the excitement around our 5.0 product release with the investment community in the next couple of months, with the formal launch of the product towards the end of Q1.

What we can tell you today is that we will have a formal product launch at the end of the quarter.

We have beta customers currently using the product, and we have already had previews with many industry analysts who say no one has a product or vision like SeeBeyond.

Number two; we will maintain our focus on gaining long-term customers from the Global 1000 while also successfully serving our large base of existing customers.

Our excellent follow-on revenue this quarter of 64% speaks to the success of our customer base and the mission-critical nature of our software to the world's largest enterprises.

Number three; we are aggressively building and expanding our relationships in the ISB channel.

Witness our success with Retech and our newest success with Siebel; our HP alliance is getting kicked off at the end of this quarter when we ship our 5.0 version, which will be available on the tandem architecture.

We expect this to begin contributing significantly to our revenue stream in the near future.

Our ISB channel is one that was essentially missing from our arsenal of revenue streams prior to mid-2002 and this, we think, will be a very significant contributor for 2003.

For example, Siebel had over 15 of their sales engineers at our office for nearly a week receiving in-depth technical training as they begin to exclusively resell only SeeBeyond's technology into their customer base.

Number four, profitability and cash flow generation remain high priorities.

So we're constantly evaluating the success of our investments.

We start 2003 in better financial condition than ever before.

We have $94.1m in cash on the balance sheet, up from $47m at the end of 2001.

We have a very strong and successful customer base, new and exciting strategic partnerships, and our 5.0 product line will differentiate SeeBeyond as dramatically as our 4.0 product line did over three years ago.

So now I'm going to turn the call over to Barry so that he can provide more detailed Q4 results and forward-looking guidance.

I'll look forward to taking your questions afterwards.

Barry?

All right, thanks, Jim.

First, I will cover our operating results for the fourth quarter and the full year 2002.

Then I will follow up with our guidance for Q1 of 2003.

We reported fourth quarter 2002 revenue of $40.5m, up from $35.7m, or 13% sequential increase from Q3, beating our guidance of $36m to $38m.

Total revenue for the full year 2002 was $150.8m versus $190.6m in the prior year.

License revenue for Q4 grew 38% sequentially to $18.5m.

For the full year, license revenue was $67.2m versus $109.6m in the prior year.

International revenue represented 35% of total revenue for Q4 with Europe representing 27% of total revenues and PacAsia 8%.

Sequentially, from Q3, North America revenues were up 19%, EMEA was up 5%, and PacAsia was unchanged.

For the full year, international revenue represented 35% of total revenue with EMEA representing 26% and PacAsia 9%.

We added 56 new customers in Q4, bringing our total number of customers to more than 780 worldwide, the largest installed base in the integration sector.

For the full year 2002, we added a total of 153 new customers.

Some of the top new Global 1000 customers during the year included Lombardia, The Dial Corporation, Electronic Art;

EPN;

Fuji Photo Film;

Genesis Health Ventures;

Kroger;

Liberty Mutual;

Lockheed Martin;

Long's Drug Stores;

Monsanto;

Northrop Grumman;

Post Office Limited;

Regent's Health;

Sentry Insurance;

Sutter Health Care;

Texas Health Resources;

Toshiba;

Toys R Us;

The Young Brand [ph];

UBS Asset Management;

Right Express; and Xerox Corporation.

The top three license revenue verticals for Q4 were manufacturing, representing 38% of revenue; healthcare, representing 24%; and financial services and insurance, 18%.

More significant, we believe, is the full-year percentage of license revenue by vertical, which we believe accurately points to SeeBeyond's success in excelling in significantly diverse sectors from these totals to financial services and insurance for 2002 at 30%; manufacturing, 20%; healthcare, 17%; government, 9%; utilities, 8%; the retail group, 7%; and our other and services group, 9%.

SeeBeyond had two license deals during Q4 that exceeded $1m.

SeeBeyond had no 10% or more customers in Q4 and, in total, SeeBeyond had 11 license deals in the seven-figure-plus range during the full year of 2002 and no customer exceeding 10% of revenues in any one quarter.

During Q4 all strategic partners, consulting and software, influenced over 43% of our license revenue and for the full year all strategic partners influenced 55% of total license revenue - Accenture, Deloitte, and EDS were our top SI partners in Q4.

Repeat license revenue in Q4, which is license revenue from preexisting customers was approximately 64% and for the full year, repeat license business was 51%, up from 30% in 2001.

Service revenue for the fourth quarter was $11m, down 7% sequentially from Q3 due primarily to lower utilization rates during the holiday months.

Maintenance revenue for the fourth quarter was $11m, an increase of 5% from Q3.

Overall gross profit for Q4 was 68%, up from 64% the prior year and for the full year gross profit was 68% compared to 73% in 2001.

Gross profit for Q4 increased due to the increase in license revenue and in the total sales mix.

Gross profit on services in Q4 was down to 6% but was impacted by lower utilization rates.

For the full year, service gross profit was 14% compared to 16% for the full year in 2001.

Combined service and maintenance gross profit for Q4 '02 was 42.4% versus 45.9% in the previous sequential quarter.

In terms of our operating expenses, total operating expenses in Q4, excluding non-cash charges for amortization of goodwill and stock-based compensation and charges related to restructuring and impairment, were $31.9m, up from $31.3m in the third quarter of 2002.

R&D expense increased $700,000 to $9m in Q3 - from $9m in Q3 to 9.7m in Q4.

This increase was due to higher headcount in the product development group.

Sales and marketing expense decreased $500,000 from $17.7m in Q3 to $17.2m in Q4.

This decrease was attributable to a decrease in discretionary marketing spend and cost containment initiatives, and G&A expense increased $300,000 from $4.6m in Q3 to $4.9m in Q4.

This increase was attributable to an increase in the allowance for bad debt during the quarter.

Other income and expense for Q4 with net interest income was $234,000 with full-year net interest income of $1.1m compared with net interest income of $435,000 in the prior year.

Earnings per share -- pro forma net loss for Q4 was $4.8m, or a net loss of 6 cents per share on a fully diluted basis, beating our guidance of 11 to 12 cents.

Pro forma net loss in EPS for Q4 exclude non-cash charges related to amortization of stock-based compensation of $162,000 and corporate restructuring charges of $6.6m.

On a GAAP basis, net loss for the fourth quarter was $11.6m, or 14 cents per share, versus net income of $1.6m, or 2 cents per share, in the prior year's period.

For the full year 2002 we recorded a pro forma net loss of $16.2m, or 20 cents per share, and on a GAAP basis, we recorded a net loss of $23.9m for the year ended 12/31/02, and a per-share GAAP loss of 29 cents.

For Q4, basic and diluted share count was 83.1 million shares.

We ended the year 2002 with 82.5 million shares outstanding, ending share count and the weighted average share count for the quarter reflect the impact of a stock buyback of 1.2 million shares, which occurred during Q4.

Although the board, at this date, has not approved any additional stock repurchases, this topic will be reevaluated on an ongoing basis.

During Q4 the company consolidated its Monrovia operations from four separate buildings down to two.

Our new corporate headquarters and R&D facility now houses R&D, corporate, a majority of our North American training facilities, and a complete customer visitor center, including a state-of-the-art product demonstration facility.

The purpose of our new facility was to streamline and consolidate our California operations.

In conjunction with the move and other cost-reduction measures, we incurred a one-time charge of approximately $6.6m, which is primarily comprised of lease abandonment costs and the impairment of certain furniture and fixtures.

Turning to the balance sheet, total cash and cash equivalent was $94.1m as of December 31, '02.

Total cash decreased approximately $5.5m in Q4 from $99.6m at the end of Q3.

The decrease in cash is the result of a combination of the loss from operations during the quarter, capital expenditures made during the quarter, and the impact of the $2.8m stock buyback partially offset by a reduction in our DSOs.

Total net receivables were $33.6m as of December 31, '02.

Our DSO at the end of Q4 was 76 days, down from 88 days at the end of Q3.

Q4 DSOs benefited from excellent collection efforts as well as seasonally improved linearity of license revenue.

Deferred revenue increased $1.8m to $28.1m during the fourth quarter of $26.3m at the end of Q3.

Ninety percent of that deferred revenue balance is made up of deferred maintenance contracts.

Total liabilities at December 31 were $67.4m, an increase of $12.3m during the quarter.

This increase is primarily due to one-time restructuring accrual along with new capital leases entered into during the quarter related to our new corporate facility.

Cash used in operating activities in the quarter was approximately $1.8m in Q4.

Capital expenditures totaled $6.3m in Q4, and $14.2m for the full year 2002.

We ended the year with approximately 785 employees including 64 quota-carrying sales reps.

Now I'd like to turn to the guidance section.

I'd like to remind you that this guidance is forward-looking information and is subject to risks and uncertainties including those identified in our SEC filings and those mentioned earlier during the call.

We feel that Q1 will see some downward seasonality from our Q4 '02 results.

We also feel the larger portion of software spending will be aimed at integration projects in 2003.

Verticals that we expect to be strong in 2003 include manufacturing, healthcare, financial services, and government.

We are focusing our internal efforts in early 2003 on three priorities - first, market share growth; second, the successful launch of our new 5.0 product release; and, third, cost control.

We have successfully brought our expenses in line with current demands and our return to profitability.

We are still expecting to break even on a GAAP basis in Q3 of 2003, however, depending on the growth of our pipeline and the ability to close new deals in conjunction with our new 5.0 shipment in the June quarter, we can see that breakeven point accelerate by a quarter.

For the first quarter, we are guiding a revenue range of $37m to $40m and a loss per share in the range of 4 cents to 6 cents per share on a pro forma basis.

Gross profit should be approximately 67% to 69%, and we expect operating expenses to be in the $30m to $31m range for the quarter.

Now I'd like to turn the call over to Ray Lane for some comments and then for some Q&A.

Thank you, Barry.

I don't think there's a whole lot to add to the detail that Jim and Barry have provided, so I'll just add two things on top and not be repetitive.

The first is, I guess, looking back on 2002, I don't know of anybody that's not happy it's over, and there really have been a lot of issues that have confused the opinions that have influenced opinions on the way you view companies' performance, not the least of which are IT spending or corporate ethics or accounting or bubble economics and what have you, and my belief is all of that is over - that there will still be issues haunting us out there in the marketplace running around but, for the most part, that's behind us, and what is happening more and more that I can see day by day is that what counts is real value delivered to customers, and customers are being more intelligent about the way they sort through and evaluate technology companies, and if you - you know -- they get quicker, too, and more senior people are evaluating the actual products that get delivered, and the price that they pay for them, the cost that they pay for them, is delivered on a more routable basis.

At the end of Q3, I joined the SeeBeyond conference call for the first time, and I think I focused a little bit on market share exchange, and that's where we were going to focus, and while I was not making any forecast, I was, I think at that time, fairly bullish on our ability to gain share after the FUD that was created around Q1 cost us some market share.

I felt that the focus was going to be back on our products, and that has always been SeeBeyond's strong suit.

When we announced 4.0, you saw tremendous market-share gain from SeeBeyond because of the features that were offered, and over the last three years our competitors have caught up.

And 5.0 is expected to do much the same thing - create a gap with competitors that should produce market-share gains, and we've already started that process.

What is important to customers now, to CIOs and enterprises at large, is to have an enterprise architecture where there hasn't been any - there really has not been an enterprise architecture.

There's a lot of departmental architecture and ERP architectures, but most enterprises have inadequate architectures for addressing all of the services and needs that they have out there.

That's why you see so much focus on service-based architectures to accommodate external and internal needs for the integration of Web services.

Security is obviously a big one - and information access - how to get access to whoever needs a customer's partner's employees to the information that's available at the enterprise.

This places SeeBeyond kind of at the heart of whatever IT spending will be done.

I agree with what Barry said, that the level of spending on integration will go up in 2003, because it is necessary to bring about enterprise architecture and to get information access.

Integration is as necessary as security software.

So I think we'll see spending go up in this area.

Secondly, we're at the heart of that spending, we're at the heart of the integration platform, if you will.

So it's not going to be about adapters and connectors and messaging and communications between applications.

It's now become business processes end-to-end, from customers through suppliers, and we're at the heart of that, especially when you see the 5.0 product rolled out.

Thirdly, I think we have, in the last half of 2002 and going into 2003, have managed the business well.

The board has worked closely with Jim and Barry to assure that we put the proper amount of expense into R&D so that we create the differentiation that we've always created in this industry through release 2.0, 3.0, and 4.0 -- that we create that same gap with release 5.0.

So we have placed an increased amount of expense in R&D during the second half of 2002, and Barry can share the numbers he wants to share with you on that, but we've managed the expense in a quarterly basis so that we don't let it get away from us, and so it allows us to guide forward toward this year and toward greater profitability.

So with that, Barry, I'll turn it back to you.

Okay, I guess now we can open it up for questions.

Thank you, sir.

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 touchtone phone.

Thank you, our question comes from Jordan Klein from UBS Warburg.

Please state your question.

Hi, good afternoon.

Congratulations, guys, very nice quarter.

Jim, maybe you can start out talking about a little bit of the pipeline as you go into Q1.

After such a strong Q4 with such strong license growth sequentially, I guess there's always concern in the marketplace as company's head into the seasonally slower first quarter of the year.

But your guidance seems pretty stable in terms of relative to what you did in Q4.

Can you just help quantify what you're seeing out there and in that answer, do you think some of these larger deals are maybe here to stay even though you didn't have a lot of concentration?

Do you think you'll see more of that into '03?

What I can say is that we really seem to be gaining a lot of momentum back.

I think, as Ray pointed out, buyers are coming back to real value and real technology purchases, which is in our area of strength.

I think questions around viability are decreasing, as a matter of fact, with our cash position and after our performance in the fourth quarter.

With the types of businesses that we're now presenting to, we're actually seeing a really good pipeline of really big-name accounts that have, by the way, already selected SeeBeyond, for example, that we're in contract negotiations with, and I think it's in a variety of verticals.

So our ROI models are certainly starting to gain credence.

For example, two of the five largest automotive companies are enterprise customers now -- General Motors and BMW.

We've got a lot of presence in healthcare; a lot of the biggest insurance companies; the consumer packaged goods companies; the pharmaceutical industry -- the biggest players in all of those industries, actually, are SeeBeyond customers now.

So supply chain and CRM integration, solution sets -- all of these are really helping us build a good pipeline.

So I'm very pleased with the names and quality of the pipeline; in fact, more so than last quarter.

And I think, Jordan, I think we're trying to be conservative.

I think we did see a strong Q4.

We did see better linearity in Q4, which definitely helped improve the DSOs, which is something we've been striving to get down, definitely, over the past year.

But we're trying to have a cautious outlook on Q1 because we know that typically we're back to the old days, where that is seasonally soft.

So that's where we stand today.

Okay, great, and then maybe if I can ask a little bit on Siebel -- I know you said it contributed but there was a lot of discussion last conference call about the new relationship with the call center and ERM product.

I was just curious -- I think, Jim, you talked about maybe having 100 potential business leads in Q3.

Is there any way to quantify what you've done so far -- just to kind of monitor and how you see things progressing throughout '03?

I think right now we're just beginning to see the beginning of the impact with Siebel, you know, the first quarter of getting this done during Q4 was about getting the sales forces trained, getting the two teams integrated together, getting the offering integrated, and also getting on the proper price lists and the different areas that are important to the Siebel sales reps to make this happen.

So I think we're just at the -- although, it started to contribute in Q4, we really haven't gotten the huge impact yet that we expect, and that's going to be towards the end of Q1, Q2, Q3, as those opportunities then start to gel and turn into the deals.

This is Jim -- all of our Sales SE that were going through training, really, just got certified recently, and I had dinner with the whole group, and they were very excited about the ability to sell integration solution into Siebel's customer base for the first time, coupled with the UAN business processes.

They think the opportunity is huge, and I'd say it is the number-one focus for Siebel this year.

They have a dedicated sales force and dedicated quotas around selling integration of UAN.

Okay, great, and then just one more before I let you go -- Barry, why was PP&E up so much?

It just seemed unusual.

I know you did stuff on the building front, but what caused that spike?

Primarily, it's around the new building and around all the lease holds and the new customer visitor center and demo facility that we put in there.

It's something we've been working on for the past year and half, and we just moved in in Q4, so it's the culmination of all that purchase happened during the quarter.

Okay, so we shouldn't expect something like that next quarter?

No, I think we're really -- I hate to say this in the tech-spending world -- but we really put in the foot on IT spending internally here, especially around those types of things, and it should get back to that million-dollar range per quarter -- so -- it's much, much lower.

The demo center is designed specifically for demonstrating around all the capabilities of our 5.0 product launch later this quarter and, in fact, we'll be inviting a variety of people to come and see that launch later on in the next month or two.

Okay, thank you very much.

Thank you.

Our next question comes from John Marsold from CIBC World Markets.

Please state your question.

Actually, this is Yun Kim for John DiFucci.

Great quarter, guys.

Actually, first of all, did you guys mention the average selling price for the quarter?

I don't know if I missed it or not.

We did not have that in the opening comments, but it was -- you know, for new deals outside the healthcare space this year -- or this quarter -- it was in that good range where we were last quarter -- around 3.50 to 4.50.

Okay, and just looking at some of the trends around the ASP, can you comment on which verticals are contributing more bigger-sized deals and also whether or not which verticals that you think you have the most close opportunity to acquire new customers in the coming fiscal year?

I think that manufacturing remains a very strong area for SeeBeyond.

We saw a lot of good pipelines of opportunities throughout last year and the fourth quarter -- you know, the Samsungs, Toshibas, General Motors, Dupont -- the world's largest companies and their respective industries.

I know we had the utility industry -- just a variety of industries, like Nike -- the world's largest sporting apparel company.

So we think the same thing will apply into the coming year -- that you'll see good strength in a variety of verticals.

That's one of the strengths of SeeBeyond is that we also have the healthcare sector, which we pretty much own with numerous customers around the world.

So I think that gives us a really good, deep -- a broad and global penetration.

So I think it will be very much like we saw this last year.

And also, finally, geographically, it looks like Asia has been cut up on the single-digit percent range for your overall revenue contribution.

Is there any kind of specific plan to try to be a little more aggressive out there in Asia?

Yes, there is.

In fact, we've recently brought on teams covering a variety of new countries in Asia, and marketing will be sending out a press release about that shortly, but they've been on board for the last few months.

So half a dozen new countries almost are now covered by SeeBeyond and our sales force in AsiaPac.

Okay, great.

Thank you very much.

Thank you.

Our next question comes from Michael Marzolf from U.S. Bancorp.

Please state your question.

Actually, Jen Swanson calling for Mike.

My first question is kind of a strange one, but I was just sort of trying to reconcile these two metrics.

Your new customer count was up pretty strongly in the quarter, but also your contribution from existing customers was up strongly, and I'm just trying to figure out what the dynamics between those two are.

We have probably more deals this quarter than we had, by far, the last quarter in terms of number of license deals.

There's a lot of add-on business by existing customers.

So that's 64% existing customer base during the quarter, you know, those deal sizes can range anywhere from $50,000 to $1m.

So there's a big disparity in terms of what's being purchased by that group in terms of the product offering.

It could be anywhere from a couple of e ways to actually the whole suite in terms of starting off a new division or a new project that really contributes to that wide range there.

Like Smurfit Stone might be upgrading to an enterprise license and another company might just buy two adapters.

Okay, great, and secondarily, what have you guys been seeing in the competitive front in the field?

Have there been any changes, anything different?

Or is it still sort of seeing the same old guys, same run rates?

You know, when we introduce our eGate product four years ago, and everybody pooh-poohed us as a pure healthcare integration provider, that's what leveraged our growth from the $30m revenue range to the $150-plus million revenue range.

We saw that in the last year the competition has released products that have gotten -- well -- not exactly up to SeeBeyond -- have gotten pretty close.

I think WebMethod's latest version is now getting up to something that we had three years ago, and I think that Tibco -- and that's with, by the way, diluting themselves and their shareholders 40% of the variety of acquisitions.

And I think Tibco -- the same sort of thing.

They've made half a dozen acquisitions now, and they've caught up very close to what it is that we released three years ago.

We're seeing less Vetri and less Mercator out there, and we're still seeing quite a bit of IBM and all these big accounts -- let's say IBM is still our number-one competitor.

But that said, I think WebMethod and Tibco have gotten closer to what it is that we released three years ago, and that's why for the last three years we've actually been working on something completely new, which is our 5.0 release.

And so let's just say it will create as big a gap between us and our competitors as eGate did three years ago, and we're much better positioned as a corporation to capitalize on that launch.

When we launched eGate three years ago, we had, I believe, $5m in our bank.

Today we have $95m, and we have many of the world's largest businesses as our customers.

So I'm very excited about the 5.0 release and the implications that it will have against the competition.

And speaking of the 5.0 release, what kind of functionalities are you looking to add in that release.

We're going to have a separate conference call in the next few weeks that will be addressing that, because it would take a long time to relate.

Well, I'll be looking forward to it.

Thanks.

Thank you.

Once again, if you have a question, please press the 1 on your touchtone phone.

If you're on a speakerphone, please pick up your handset before pressing the numbers.

Thank you.

Our next question comes from Greg Kleiner from Soundview.

Please state your question.

Mr. Kleiner?

Yeah, I'm all set, thank you.

Hi, Greg.

Can you hear us?

Actually, his question was answered, sir.

Okay.

Thank you, our next question comes from Mark Verbeck from Think Equity.

Please state your question.

Thanks a lot.

Nice quarter, guys.

Thanks, Mark.

Jim, early on the call you said that different players in the space would be differentiating a number of factors.

You talked about your technology.

Could you go in a little bit more detail in terms of how strategically you're positioning SeeBeyond across those factors that you enumerated earlier?

Yeah, I think one of the interesting differences about SeeBeyond is our platform's openness.

We do not require that you be an exclusive SeeBeyond user.

This is a good example where Toshiba might have bought a copy of WebMethod's for some B2B work but has bought some other copies of SeeBeyond technology for other work.

So I think what we are looking at are things like IBM, where you can use a queue series as their queuing layer, or you can use BEA as an apps server, and we can make all of these technologies work together.

So I think with our 4X architecture, we became Java compliant and basically working with Oracle queuing, Microsoft queuing -- it's a flexible architecture, a scalable architecture.

This is really getting us many of the world's largest companies, which are selecting SeeBeyond.

So I think those are some of the 30,000 foot views of why that's happened in the last three years.

I think what you'll see shortly is that there are going to be a lot more businesses interested in some of the new leading-edge capabilities that we're introducing in the next month or so.

The DI space, in general, had a pretty good quarter, but your rebound was, I think, much larger than most -- at least sequentially.

What factors would you attribute that to?

I think a year ago, as we described at the end of our Q1 performance, the pipeline of opportunity that we were working on was definitely being impacted because we had a much smaller cash balance.

In fact, at the end of -- about a year and a half ago, I think it was -- a year and a quarter ago -- we had about $20m in the bank.

That affected our pipeline in ways that we couldn't see because we were just in there as calm fodder, and we did not win our fair share of deals.

I think once we closed on our secondary, we put a significant amount of cash on our balance sheet, and that's given us the pipeline now of companies -- the confidence that they can select the right technology for them and that company is not going away.

So I think that's contributed, frankly, to the growth.

That's despite the competition getting closer to where we are technically -- so I think -- with our 4.0 version -- so I think that is -- that cash balance sheet is really starting to have a positive and calming effect on customers buying our software.

And let's add that SeeBeyond does control its own destiny with management having 40% of the shares outstanding.

So I think that's a very calming effect.

Finally, I think that because we have been selected as an enterprise standard, as so many now of the world's largest companies -- in fact, more than anybody else in our industry -- we are able to go back into those accounts now, and once they've successfully deployed our technology, and they will buy more because typically they need more adapters, more connections, more servers running our technology.

So it creates a good, recurring revenue stream and annuity.

Did you see a change in closure rates as well as then?

Yeah, I think we saw a good change.

Barry, did you have some specific insights on closures that you wanted to talk about?

I think we saw, overall, the number of deals improved for us, along with better win rates.

Since our low point at the end of Q2, Q3 improved, and then Q4 definitely improved over that.

So we're seeing much better win rates overall, and now we're starting to get into more and more deals whereas before we were slipping out of deals early on or not even getting into the sales process.

Okay.

Barry, how many transactions total in the quarter, existing and new?

It was over 100.

And then, if I could, one last question -- services margins have been declining pretty steadily throughout the year.

It looks like your building capacity with no demand.

Can you explain what's going on there and what we should expect, going forward?

I haven't had a chance to work through the gross profit margins you gave us.

It was definitely low in Q4.

We're just taking action towards the end of the quarter to clean that up so that in Q1 we should see that get back into the lower to mid teens in terms of service profit margin.

We definitely were impacted in Q4 by the holidays and utilization rates.

That's coming back in Q1.

We've done quite a bit of things here in the last 30 to 45 days to ensure that we hit better targets on that line item.

Okay, great.

Thanks a lot, guys.

Congratulations.

Thank you.

Your next question comes from Tom O'Halloran from Lord Abbett.

Please state your question.

Hi.

Can you talk about the adjustments that the sales force has made in view of this tough IT spending environment and how you feel their positioned on the verge of a new product cycle here?

Yeah, I think what we launched early last year was a focus in vertical selling, meaning trying to reuse the deployment of our technology in specific vertical industries and make that available to new buyers of our technology in those vertical industries, and we've also created solution selling so that we can train the sales reps on how to approach customers and say, "What you need is a solution set that applies to specific business issues that you have."

And that's given us the value-based selling proposition.

So I think that's also started to have an effect in the fourth quarter where these big corporations are starting to realize, yes, integration is not just about making two systems park together, but it's actually about defining the business process and optimizing how that process can minimize expenses within the company and maximize revenue and increase margins.

So I think we've seen a lot of that over the last few months start to come back and fundamentally affect our messages and the way our sales force sells.

And are you satisfied with the progress to date?

I'm never satisfied with our progress.

I think that we have improved dramatically in the last nine months to see in a very difficult business climate, and I think we have room to continue to improve.

We have added quite a few regions, sales regions, with quite a bit of very senior and seasoned talent.

In fact, I would say today, with the changes that we've made over the last four to six months, we have the best sales force and the best management team that we've ever had, and I think we're better positioned than ever before to really kind of grow and scale the business as we introduce new technologies.

Could I also ask a couple of financial questions -- where do you hope to maintain cash levels at and, related to that, at various times you have talked about acquisition opportunities.

What are your thoughts on that at this point?

In terms of the cash, we're guiding break even in Q3 of '03.

We feel our low point on the cash is going to be somewhere in the $83m to $87m range.

It depends on if we're able to beat our expectations or just meet them.

So that's on the cash front.

We'll probably burn between $4m to $5m over the next two quarters and then it will break off from there to generating cash.

On the acquisition front, we evaluate a lot of companies and a lot of different technologies from public to private to how we can augment our own technology offerings and product offerings, you know, really depends on the climate at the company and the match between the cultures and what the product can offer and what the synergies can be between the two companies that's really important, and I want to say we're overly picky but we're also, at the same time, very cautious about really going into anything that hasn't been really fully evaluated from top to bottom.

So that's happening, but it's a slow process.

Okay.

Thank you, nice quarter.

Thank you.

I'd like to turn the call back to Ms. Williams for any final statements or closing remarks.

So let me just summarize -- basically, I think we start 2003 in better financial condition than we ever have.

We have $94m in the bank, we have increased that from $47m at the end of '01.

We have a very strong and successful customer base; new and exciting strategic partnerships; and our 5.0 product launch.

I think all of these together will truly differentiate SeeBeyond as dramatically as our 4.0 product line did over three years ago.

With that, I'd like to turn the call over to Andrea.

That concludes our call for today.

We look forward to talking with you again next question.

I'd like to remind everyone that this call will be available for replay from tonight at 8 Eastern, 5 Pacific until February 4th at midnight Eastern, 9 Pacific.

Here's the replay number: 888-843-8996 domestically, and 630-652-3044 internationally.

The access code for the replay is 6651346.

In addition, following the conclusion of the call, a rebroadcast will also be available on the SeeBeyond website.

Thank you very much.

Thank you.

Ladies and gentlemen, this concludes the conference for today.

You may all disconnect at this time.