Pegasystems Inc (PEGA) 2003 Q4 法說會逐字稿

Good morning.

My name is Jeff, and I will be your conference facilitator.

At this time I would like to welcome everyone to the Pegasystems fourth quarter and year end 2003 conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question and answer period.

If you would like to ask a question during that time, simply press star, then the number 1 on your telephone key pad.

If you would like to withdraw your question, press star, then the number 2 on your telephone key pad.

Thank you.

I would now like to turn the conference over to Beth Lewis, Director of Investor Relations.

Please go ahead, ma'am.

Thank you.

Before we begin I would like to read our Safe Harbor statement.

Certain statements contained in this conference call may be considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995.

These statements involve various risks and uncertainties that could cause the company's actual results to differ from those expressed in such forward-looking statements.

These risks and uncertainties include the impact and the volatility of our quarterly operating results; difficulties predicting the completion of product implementation and consequently the timing of our license revenue recognition, the timing of termed software license renewals; customer acceptance of our new PegaRULES process commander technology; our ability to develop new products and evolve existing products; interest rate market trends; the impact on our business, and the ongoing consolidation in the financial services market, historically our core market; the our ability to attract and retain key employees; reliance on certain key third party relationships; managements of the company's growth and other risks and uncertainties.

Further information regarding these and other factors which could cause the company's actual results to differ materially from any forward-looking statements contained in this conference call is contained in the company's most recent filings with Securities and Exchange Commission.

Investors are cautioned not to place undue reliance on such forward-looking statements and there are no assurances that the matter contained in such statements will be achieved.

The forward-looking statements we make on today's calls are based on our beliefs and expectations as of today, February 17th, 2004 only.

We do not undertake any obligation to revise or update publicly any forward-looking statements expressed in today's conference call.

With us today we have Alan Trefler, Chairman and CEO;

Chris Sullivan, Chief Financial Officer; and Henry Ancona, President and COO.

Henry, would you like to begin?

Thank you Beth, and good morning everyone.

In 2003 we produced record revenue and profits, $99.3 million in revenue and $21.8 million in pretax income.

That's a growth rate of 22% excluding FDR and a 27% increase in pretax profitability.

We spent the year focused on our Smart technology, real customer demand, and the disciplined growth strategy, and you see that in the numbers.

We had significant new license bookings growth in 2003 over 2002, although somewhat less success closing deals in Q4 as some deals were delayed.

Our focus for 2004, and I will provide additional detail, is to focus on sales.

We are bullish about our business prospects and are committed to additional spending in sales and marketing.

We have expanded our sales force significantly and focused it on target accounts.

We are seeing increasing acceptance of our technology by partners.

At our annual sales kickoff meeting last week, almost 90 partner representatives were in attendance, twice as many as last year and the meeting included presentations by Senior Executives from both IBM and Bearing Point.

During the fourth quarter we signed CFC Healthcare as a channel partner for our PegaRULES Process commander platform as part of a solution for small and mid-tier health plans.

We overcame stiff competition and this is a great achievement for our team and an exciting opportunity.

CFC Healthcare is the health care solutions piece of the $10 billion Computer Sciences Corporation and they are committed to a customer focused healthcare strategy.

The commitment by one of the industry's leading suppliers to this market is a powerful validation of our Simply Smart BPM message and further demonstrates the competitive strength of our product.

Also on the partner front, in November, we sponsored a great event at the Plaza Hotel in New York with IBM and with Bearing Point.

The event brought together 50 leading executives to talk about the importance of business process management to business success, as well as the importance of linking new processes to existing systems.

To further leverage our partners, we have also enhanced a great set of partner tools, including comprehensive training and developer, product, implementation, and other support.

We understand, and our partners understand, that customers today want to leverage their previous IT investments, and they want to take control of their processes and make changes as the business changes.

Our RULES based BPM technology provides this.

During the fourth quarter, we also continued to delight our customers with flexibility and functionality, resulting in renewals and or extensions with customers like Allstate, Blue Cross, Blue Shield of Rhode Island, Hospitals Contribution Fund in Australia, HSBC and Societe General, a great mix of world class, leading edge customers.

For the year as a whole, we continue to garner awards, including, for example, recognition by Intelligent Enterprise as a "Company to Watch", and by Software 500 as a "Top BPM Company".

Most recently, we were designated by Garter (ph) Data Quest as number 2 in BPM market share in terms of license revenue.

The BPM market is attracting a lot of attention and we are clearly positioned as the leader in that market.

So what is our game plan for 2004?

First, we continue to turn our patented RULES-based technology into winning BPM platforms and applications.

Two-weeks ago we announced three new products, all of which are shipping this month.

These products were developed in close cooperation with our customers and with analysts to provide the features and the functionality that the market requires.

We released, as promised, a significant upgrade to our PegaRULES processor commander platform,V4.

This new version has greatly enhanced functionality for developers, for business process managers and for users.

For example we have turned the business RULES engine on itself to create accelerators which help developers develop.

For business process management - managers, there is significant new BAM, business activity monitoring functionality, including a fabulous set of graphical reports.

And for users, there is a new consistent, powerful and easy to use GUI user interface.

We also launched two new cross industry applications, which leverage our years of experience in enterprise-wide exceptions management applications and customer process management applications.

The first application is PEGA Quality and Exception Manager, an enterprise wide application built on PegaRULES Process Commander V4 platform that enables large organizations to maximize operational performance and improve quality and compliance through proactive exception management.

PEGA Quality and Exceptions Manager is a cornerstone of Pegasystems's enterprise suite of exceptions management BPM solutions.

It turns back office operations into a front-line customer service advantage, spanning existing systems to give companies a unified view of customer issues and transaction errors across products and lines of business.

The other application is the PEGA Customer Process Manager, an enterprise wide crossing the Street BPM application also built on the PegaRULES Process Commander V4 platform.

A multi-channel process oriented contact center application, PEGA Customer Process Manager features packaged business processes and RULES that ought to make complex service requests by integrating with, and driving value from, back end systems in real time.

All three new products are available this month.

In 2004, we will execute with a disciplined focus on accounts.

In January, we announced changes in our sales organization designed to maximize growth opportunities for our BPM platform and related financial services and healthcare BPM applications.

With the ongoing and rapid technological conversions of our BPM applications and platform products, we consolidated our sales organization to more effectively sell solutions.

This enables us to build a world class enterprise software sales organization and implement our strategy to sell all of our products to target accounts.

So we now have one sales team selling our platform and applications to target accounts.

In 2004, we are going to continue to be very focused on directing our world class domain expertise to our customers's business problems.

So you can expect more new products based on our domain expertise in exceptions management and customer process management, focused on the financial services and healthcare markets.

You can also expect us to continue to improve our service margins and enhance our partner relationships as we look forward to announcing continued customer success.

With that, I will turn the floor over to Chris, who will review the financials.

Thank you, Henry.

We are pleased to report our third consecutive year of revenue growth, improved profitability, and positive cash flow.

Our financial performance in 2003 was solid, driven by increased services revenue related to growth in new license installations, our total revenue in 2003 increased 2% over 2002.

It should be noted, however, that this represents growth of 22% when excluding the $14 million year over year decline in revenue associated with the restructured First Data Resources agreement.

Our license revenue for 2003 declined $6.2 million or 10% versus 2002, again excluding FDR, however, our license revenue grew 17% in 2003.

Profit before taxes improved from $17.2 million in 2002 to $21.8 million in 2003.

We generated $21 million in cash from operations ending 2003 with $87.9 million of cash and short-term security investments.

Our financial performance in Q4 2003 was solid with total revenue up 10% and profit before tax of $3 million or 13% of revenue, compared to 17% in Q4 2002.

Total revenue in the fourth quarter was $23.1 million compared to $21 million in the fourth quarter of 2002.

License revenue increased to $12 million versus $11.7 million for Q4 2002, primarily due to a $900,000 increase in revenue related to perpetual and subscription licenses.

Services revenue increased $1.8 million or 19%.

The services revenue increase was equally split between consulting services, a 14% increase over the fourth quarter of 2002, and maintenance services, a 33% increase over the fourth quarter of 2002.

We realized higher, new license signings for 2003 versus 2002, and license revenue for the majority of these signings will be recognized only after the customer implementations are complete.

To amplify the the earlier point on implementations services, services revenue grew, in part, due to new license sales.

Of the $23.1 million in total revenue, $9.4 million or 41% was from implementation services and licenses related to new customers, including our first user extension from implementations of Pega RULES and Process Commander.

New license revenue may require customer acceptance, which can occur months after contract signing.

As a result, the majority of our license revenue in Q4 2003 was from existing customers who chose to renew, add on to, or extend their use of our software.

Our year over year improvement in profit before tax in 2003 was due in large part to the services gross margin improvements of $10.3 million.

We ended the quarter with a strong balance sheet, including $87.9 million of cash and investments with no debt.

In addition, we ended the fourth quarter with $82.2 million in combined short and long-term installment - license installment receivables.

As a reminder, these receivables are related to unbilled term licenses and are indicative of future payments.

Our average deal size over the past 8 quarters has ranged between $900,000 and $1.9 million of license revenue.

The small number of license deals causes fluctuations in the average deal value in the quarter.

Our average deal size from the fourth quarter was just over $1.2 million of license revenue.

International revenues have historically been in the range of 20 to 25% of total revenue.

International revenue represents 20% of total revenue in 2003.

Our recent SEC filings include more information on the composition of our revenues.

For the quarter, gross profit improved to $16.2 million in Q4 2003, from $13.3 million in Q4 2002.

The year over year increase was due primarily to the improved services margins and reduced license costs.

Service gross margin was $4.4 million or 39% of the fourth quarter of 2003.

This represents a significant improvement compared to the gross margin of $2.4 million or 25% for the fourth quarter of 2002.

This improvement was driven by a $1.8 million increase in service revenue combined with the slight increase in cost of services versus Q4 2002.

For the full year 2003 our service gross margin was 35%, a significant improvement over the 13% margins achieved in 2002.

R&D spending as a percent of revenue increased to 26% in Q4, 2003, versus 22% in Q4, 2002.

The increase is primarily due to the ramp and expenses associated with the major set of product releases announced for Q1, 2004.

These new products relate to our PegaRULES technology and applications built on that technology.

I would anticipate that our R&D spending will settle back into the 20 to 22% range in the near future.

Selling and marketing expenses as a percent of revenue increased to 30% in Q4, 2003 versus 25% in Q4, 2002.

The increase is primarily due to increased spending on marketing and sales programs, increased service activities for presales support, and increased staff to support growth plans for 2004.

For 2004 we expect to continue this higher level of spending.

G&A expenses as a percent of revenue increased to 11% of revenue for Q4, 2003, versus 10% in Q4, 2002.

For the full year our G&A is $10.8 million compared to $9.5 million for 2002.

The increases were due to employee compensation related expenses, corporate governance programs and business development initiatives.

Our timeless model for G&A expenses is 10% of revenue.

Profit before tax was $3 million in Q4, 2003, a $600,000 decrease from Q4, 2002.

This decrease was driven by increased R&D and sales and marketing expense, partially offset by improved service and license gross profit.

For 2003, profit before tax was $21.8 million, a $4.6 million improvement over 2002.

The improvement was primarily driven by the $10.3 million improvement in services gross margins, offset by $3.9 million decrease in software license gross margin, and a $3.2 million increase in our operating expenses.

The provision for income tax was a credit of $500,000 for the fourth quarter of 2003 due to the reversal of $1.8 million of valuation allowances.

We expect our tax rate to level off at or near the statutory rate between 30 and 40% for future periods.

For those interested in a more detailed discussion of the tax provision, I refer you to our 10K filed today.

During 2004 we will focus on profit before tax as an indicator of business performance.

As noted earlier, profit before tax is up 27% for 2003 versus 2002.

Accounts receivable days billed outstanding as of December 31, 2003 was 30 days.

Deferred revenue at December 31, 2003 primarily new client license and / or unearned service or maintenance fees, increased to $14.2 million from $13.3 million as of December 31, 2002.

Primarily due to an increase in the unearned portion of services revenue due to service milestones.

Having established a foundation for solid financial performance, we look to achieve 2004 revenue of $105 million plus or minus 10%, based on our expectations of continued new business success, tempered by fewer scheduled term license customer renewals and the anticipated further decline in FDR license revenue.

We are bullish about the business, and, therefore, investing in incremental sales and marketing spending.

This is likely to result in somewhat lower pretax profits in the first few quarters of the year compared to 2003.

We expect profit before tax in 2004 to be in the range of $12 to $24 million depending primarily on the revenue achieved, and we expect the positive cash flow of $10 to $18 million.

As a reminder, our tax rate will be normalizing between 35% and 40% in 2004.

This is contributing to an expected EPS decline on a year over year basis.

That concludes our financial summary.

And now I will turn the floor over to Alan.

Thank you, Chris and Henry.

As I step back and look at where we are, I would like to go back about 12 months and last year at this time we were really the loan proponent of RULES-based BPM.

Our experience in financial services and healthcare had taught us there would be excellent opportunities to go and take what we had traditionally done in those verticals and broaden it horizontally, as well as drive it more deeply into those verticals, but in terms of being a proponent of the vision and having a full understanding of the rules of the BPM story, we were the company with that as a message.

Now, increasingly, we see more people understanding the fusion that they are really two sides of the same coin, and that it is important broadly and deeply to bring the rules, how you make decisions, on on the processes, how you execute them together.

As other organizations scramble though to talk about how they are really BPM players, or how they can somehow partner with another organization that provides the other side of that same coin, let's not confuse bolted on with built in.

We continue to make sure and work hard to have the Market understand that bolted on means separate systems, with separate deployments, separate programming, separate testing, not really conducive to the flexibilities and functionality of the true message here.

The message that organizations need to build for change.

In contrast, a separate solutions and integrated RULES- based business process management approach builds command and control in, and this, from a bottom line point of view is what we believe the market wants, what we call Simply Smart Business Process Management.

Now, technology is great, but it has got to be applied.

What Henry spoke about was some terrific applications.

First in the area of customer process management, thinking of the way that organizations interact with their customers is being a part of the process.

A process might begin in the voice response unit, transfer to the floor of the call center, and then also reach into the back office for various fulfillment functions, and being able to do that at the enterprise level and having our own specific applications built on top of that.

And then the quality exception management process, being able to handle the exceptions that fall out of standard processes with the sort of specific six sigma orientation that it takes to be able to rectify at root cause and develop a real foundation of quality.

Taking the BPM core, supplementing it with CPM and QEM vision and then delivering some point applications that bring profound functionality in areas like credit card or healthcare claims, is a strategy that we believe will allow us to both pursue broader markets and allow us to build on our traditional strengths.

As I said last quarter, I will say it again, we are continuing to put Simply Smart BPM to work.

To work in more products and in more markets and we are thrilled the way the product line is coming together as we've engineered this transition.

Customers want to leverage their previous IT investment in a strong BPM system can help different parts of the organization work together better.

It can leverage the existing infrastructure, leverage the other applications that they have installed in either the front office or back office and help IT break down and bridge the the user IT divide by allowing them to turn over selectively, certain functions and certain controls to the business user while still maintaining a key and strong infrastructure.

Being able to let customers take control and make changes as business requirements change, is a must have today, and it is increasingly important theme as we talk to senior business and senior IT management.

So that's what it's about.

Simply Smart BPM, the intelligence control that lets you build for change.

So we have been working hard for you.

Our products have been have been built on a foundation that we have developed over the years.

We think we have a richness and understanding of how that foundation will work and needs to work in the future.

We have been working hard to strengthen the team, to bring products to market, to get the visibility in the marketplace, both directly and through partners, and to deliver strong financial results.

It's, I think, a message that suggests that the team has worked hard for you in 2003 and we will continue to work hard in 2004 as we go forward.

And with that, let me turn it over for questions.

Thank you.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone key pad.

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

Your first question comes from Richard Davis of Needham and Company.

Hi, actually, it is John Maietta(ph) for Richard.

I was just wondering if you could provide the RULES license number for the December quarter?

Hi, this is Chris.

Hi.

We are not disclosing the RULES revenue number for a couple of reasons.

One is we have made a significant effort in the last year, in particular, to migrate most of our technology to the PegaRULES and Process Commander base, so most of our applications that we are now selling will have in fact the technology underlying it, and it becomes a less, less important distinction.

The sales reorganization that was announced in January is a reflection of that view.

So we won't be breaking it out.

We will say we have had success in both selling the stand alone platform and in selling the underlying technology on the applications.

Okay.

And then if I could, you know, if operating income or earnings per share come down from 21.8 to around 18 for '04, you know, just back of the envelope, that gets you about 11% operating margin.

What would be, sort of the target margin you'd like to get back to and how do you get there?

Well, I think as you know, we are selling a style and the duration of our selling cycle is such that, when we sell there is often a gap between when we make the sale and when the revenue hits the P&L.

So that timing is something I want to make sure people are aware of.

But the reality is we are making a significant investment anticipating that the opportunity out there is a -a good one for us, and so the number, the midpoint of the range is - do indicate an 11 or 12% PBT.

We do think that that number, though, on a timeless model is still somewhere in the 15 to 17% range over time, but we need to establish the level of growth and we think that requires the investment that we are indicating.

Okay.

Thank you.

Your next question comes from Gideon Kory of Roth Capital Partners.

Hi, good morning, everyone.

Good morning.

The first question regarding the improvements in the service margins and, Henry, you mentioned that we can expect continuous improvements in service margins.

My question is, how much of it will be as a result of increasing maintenance revenue and how much of it will be of continuous improvement in the professional service organization?

Hi, Gideon.

I expect, actually, to increase, certainly revenues in maintenance.

I also expect gross margins in maintenance to improve, and I also expect professional services gross margins to improve, although we are getting pretty close to what these sort of normal profits for professional services.

So, I don't have the date in front of me to give you the percentages, I'm not sure we would break that out any way.

But you can expect professional services revenue to go up and gross margin percent to improve, and you can expect maintenance revenues to go up and gross margins to improve this year.

Okay.

The second question is regarding guidance, and, which you mention is few scheduled customer renewals in 2004.

If you take into consideration that there will be fewer scheduled customer renewals in 2004, what kind of growth do you see in 2004?

The scheduled renewals refers to our line of sight.

We have obviously a portfolio of term license customers who have a calendar around their expiration and renewal dates.

As we have said in the past, that is not a fixed date, and so often times the customer will, will decide for reasons that benefit their business, to accelerate or change the dates.

But we do want, we did want to point out that in terms of the scheduled renewals, this is a leaner year than in more recent years.

In terms of the overall growth, I think the important thing is to look at the growth in total.

In license revenue growth, we are looking to have the similar kind of growth or maybe even slightly stronger growth than we saw this year, excluding FDR.

As you recall in, I think -- and, I think, your model shows, there is an FDR decline of about $10.6 million anticipated in 2004.

It's a slightly smaller decline than in 2003 over 2002, but, nonetheless, substantial.

So, we are looking to grow in the same range in the high teens to 20% license growth rate, excluding FDR.

That would indicate, given most of the market information we have seen, market growth information, that we will be able to take market share with that kind of growth.

And in terms of service revenue,as a restructuring and new partners that you bring on board, you mentioned in the press release, that you don't expect to see similar growth in the service.

What kind of growth do you expect to see?

This is Henry.

We expect services revenue to continue to grow as I mentioned in my answer to the previous question.

The interesting thing is that in spite of our continued inroads with partners, even when partners are heavily involved in the project, they are still looking to us to provide some expert services, and so we continue to expect our services business to grow, although probably not at the rate it grew last year.

Thank you.

PegaRULES Commander that has been announced and the one that you are rolling right now, how important a driver it is in your revenue plans for 2004?

And what role did it play in the delays that you mentioned of closing some deals in the last quarter as a result of customers waiting for the newest of the greatest vertical release?

In 2004, we expect the, the new license bookings built on either application platform, built on PegaRULES Process Commander, to be the majority of the business, in terms of new license bookings.

That's quite a different statement than around revenue, which appears is a lagging effect that understand very well.

Now, as far as the delayed sales, some of them were due to the fact that some of the customers were expecting PegaRULES Process Commander version 4, which we are shipping this month, and that I think was a contributing factor to the delay, but not the only factor.

And the last question I have, is, Chris, regarding the visibility that you have for renewing existing contracts.

Can you give us, share with us kind of percentage wise, if you look at the three - five year horizon, what percentage of those renewals are falling into '04?

Yes.

That is something, again, we have been reluctant to discuss, primarily because the way that our customers traditionally have looked at the renewal, is they dictate in large measure the timing.

So we know, in terms of contract expiration, and when scheduled renewals are meant to occur , and so we did want to provide insight this year is a leaner year, but it is not helpful to predict or to project from a visibility standpoint, percentages, simply because it is really variable based on the customer needs that arise over that horizon you asked about.

You mentioned that it is material, meaning that the material is 10% change?

You mentioned the report that it is material.

Yes, in that order of magnitude, yes.

Thank you.

Thank you.

Your next question comes from Philip Rueppel of America's Growth Capital.

Yes, thank you, good morning.

Regarding the reorganization of the sales force, where are you in implementation of that?

You just had the conference, you know, and, in terms of the account reps knowing their new territories, as well as hiring, you know, from a hiring perspective, how long do you think it's going to take to get new sales reps fully productive going forward?

Hi, this is Henry.

The restructuring of the sales force is done.

We now have the sales force organized into, in geographic units, Europe, North America, Asia Pacific.

All the sales reps have signed their goals for the year, every single one of them, and they all have their assigned territories which are a set of target accounts.

So we are all done with that, and we are very pleased with it.

That is -- the goal we had was to be done with all of that before the sales meeting, which was last week.

You had another question but I have forgotten it can you ask again?

Just that you had an aggressive plan to expand the sales force, where are you?

And -- how long will it take to get a new hire fully productive and up to speed with both the product set and being able to sell the solutions?

Well, as far as the sales growth for the first half of the year, we are almost there in terms of hiring.

We still have a couple more people to go, but we are almost there today.

Generally, a new sales rep takes six to nine months to become effective, and that's the model, actually, we use a model of around nine months, you know, the first quarter, they are not effective at all, second quarter they are effective at the 33% level, third quarter they're effective at the 66%, and by the fourth quarter effective at 100% level.

That's the model we use for planning purposes.

If I could just add that we are investing in a significant move from about 20 salespeople, from 20 to close to 30 by the end of Q1, because we both see the potential and frankly, it is a great time to be hiring top talent.

When I take a look at the quality of the overall sales force, both the new leader leadership and reps we brought in and how they are blending in and getting enabled, I will tell you that I have never seen, in Pegas' history, a sales force anywhere close to as effective or as jazzed about what the potential here is for them.

Okay, thanks.

And then, Chris, maybe in looking at 2004, kind of from a quarterly perspective.

You know, if we strip out FDR from '03, is that the kind of seasonality that we should expect in '04, or is there anything in particular that could cause one quarter quarter to be stronger or weaker than we have seen in the past?

Because of the volatility of the small number of deals, large value deals, we have not provided quarterly guidance, although it's probably important to understand that we do anticipate that the growth in the year will be towards the latter portion of the year.

And we talked to that in terms of the implications for profitability before tax in the first few quarters of the year as well.

So, seasonality in this business, in our business historically, is not, there isn't a predictable seasonality per se, but in terms of 2004, we do expect that the growth is going to be geared towards the back end of the year.

Okay, finally, just to get a perspective on, you know, what could cause things to be at the higher end of the range, or at the lower end of the range, is it more internal execution that, you know, the product acceptance of the new products, or, is it, are you still concerned about the overall market and software spending in the financial services and healthcare segments?

Well, I think that the market is clearly beginning to improve, although we are still cautious, to be honest with you, particularly with the big ticket orders from financial services institutions.

On the other hand, I am very excited by the acceptance of our new product lineup by analysts, primarily and by the early stage customers, who have seen it in the last few months.

That, together with a response by our partners at the sales meeting last week, makes me very excited about our future prospects.

Whereas the economy, I am not quite sure is all back, and I would be cautious about that, particularly in financial services.

I think that we have -- we are getting lots of very positive signals from other people about our new product lineup.

So I am quite excited about it.

Thanks.

Your next question comes from Andrew Schopeg of Nutmeg Securities.

Thank you and good morning.

A couple of questions quickly for you, Chris.

Amortization of acquired technology, what was it for the year and where do you typically include those amortization costs?

G&A?

Primarily the cost of license.

Cost of license.

And it's primarily related again to our acquisition one line, and it was about 350 K.

For the year?

For 2003; correct.

Okay.

I see that it's very little, seems to be less now to amortize.

Also, on the allowance for the valuation allowance, you reversed 1.8 million.

What was your original allowance, what is left?

Is there any -- under what conditions could there be any future possible reversals?

We don't anticipate any additional valuation allowance as benefiting the P&L.

There are some remaining that are unlikely to be utilized before expiration.

So the simplest response is that we don't expect any additional valuation allowances to benefit P&L going forward.

Well, what is the valuation allowance that's on the books still?

Approximately 1.9 million, but I need to check.

That does not include the full full value NOLS.

Okay.

And, I think there was one other thing that that I had wanted to ask, just lost my train of thought.

Let me get back into the queue.

Your next question comes from Joseph Halpern of Halpern Capital.

Good morning.

Can you give me the breakdown of license between term and perpetual, if you can give that?

And also, if you can give us some more color on how the horizontal products are doing, I guess how many partners are active with customers, with the horizontal products and that sort of metric?

Okay.

The breakdown between perpetual license and term is something that is actually available in the K, but for benefit of the listeners, the perpetual license in 2003 was $27.5 million of our $57.7 million.

The term license was $30.2 million of that $57.7 million in license value.

Again, that is available in the K but those are the numbers as they break down.

And the second part of your question was again?

Just some more color on the horizontal , I know specifically you have 90 partner reps, how many of them are active, I guess, with the RULES and Process Commander with clients?

I will tell you, this is Alan.

I will tell you that we are getting quite a bit of enthusiasm for the horizontal.

Remember the horizontal is sold both outside of our industry, and also sold inside of our major customers.

So we have had a number of sales and follow-on opportunities, both with partners and directly, both in financial services and healthcare.

But also in terms of a number of customers who would have never been customers of ours two or three years ago when we were still being viewed exclusively in those vertical niches.

The uptake is good, we've had 100 partners certified, in terms of services people who've gone through a level of formal certification.

We're working hard on enablement and the overall tone of the sales meeting we had, to which we had about 90 partners last week, was wild enthusiasm from both the ones focused in the verticals that we are working with us on and and some of those that have broader horizontal field work or new market area view.

Thanks.

This is Chris, just one correction in terms of the tax valuation question.

In the K, it is listed as $3.1 million,$3,056,000 is the actual remaining valuation related to the tax valuation allowances.

Again we don't anticipate those benefiting the P&L before expiration.

Once again, if you would like to ask a question, press star, then the number 1 on your telephone key pad.

You have a followup question from Andrew Schopeg of Nutmeg Securities.

Yes, a question I had wanted to ask concerned FDR.

I would just like to put some specific numbers around it.

What was the actual contribution from FDR in 2003 versus 2002?

Again, I would refer to the prior Q filings with the detail, but let me just summarize.

In 2003, we recognize approximately $10.6 million in license revenue.

There's an additional $900,000 of maintenance revenue in 2003 associated with the FDR contract.

That compares in 2002 with $23.9 million of license revenue, and the maintenance in 2002 was slightly over $1million.

So the going forward, there is no license revenue anticipated from FDR, none attributed with the restructured agreement that will be in 2003, and we do have a maintenance stream, annual maintenance stream of just under $1 million.

Henry, just to add that the FDR license revenue stream ended at the end of quarter 3.

There was no license revenue recognized in quarter 4.

At all.

At all.

And what was it in 4 Q of 2002?

The license revenue of 4 Q of 2002 was $5.4 million.

Okay.

The most important thing about the FDR contract adjustment that we made a couple of years ago is that it enabled us to reenter the credit card marketplace, and that is the most important thing from my perspective about it, and that when we are beginning to see the the fruits of that and we will continue to see the fruits of that in 2004.

Yes, and I understand that those of us who really need to adjust these numbers and understand them properly as a result of reflecting the company's P&L.

Thanks.

This is Chris.

The revenue in Q4, 2002 license only for FDR was exactly $3,539,000.

Not 5.4?

Right, 5.4 was the quarterly amount in the first three quarters of 2002. 3.539 for the precise amount in Q4 of 2002.

All right.

Thank you.

At this time, I would now like to turn the conference back over for closing remarks.

Thank you all very much for your time.

We are looking looking forward to 2004, and we believe we are the right company and the right market.

Please note, that we are going to be at the Roth conference on the West Coast tomorrow with a 5 P.M.

Pacific time presentation, and we encourage you to access the webcast.

Thank you, operator.

That concludes our remarks.

This concludes today's conference call.

Thank you for attending.

You may now disconnect