Pegasystems Inc (PEGA) 2005 Q4 法說會逐字稿

Good morning. My name is April and I will be your conference operator today. At this time I would like to welcome everyone to the Pegasystems 2005 earnings results 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 session. (OPERATOR INSTRUCTIONS) Thank you. Ms. Lewis, you may begin your conference.

Thanks. Before we begin, I'd like to read our Safe Harbor statement. Certain statements contained in this conference call may be considered forward-looking as defined in the PSLRA Act of 1995. These statements involve various risks and uncertainties that could cause some of these actual results to differ from those expressed in such forward-looking statements. These risks and uncertainties include the volatility of our quarterly operating results; difficulty of predicting the completion of product acceptance and consequently the timing of our license revenue recognition; the level of turns software license renewals; our ability to develop new products and evolve existing ones; interest rate trends; the impact of on our business on the ongoing consolidation in the financial services and healthcare markets; our ability to attract and retain key employees; reliance on certain key third-party relationships; management of the Company's (indiscernible) 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 the SEC.

Investors are cautioned not to place undue reliance on such forward-looking statements. There is no assurances that these matters contained in these statements will be achieved. The forward-looking statements we make on today's call are based on our beliefs and expectations as of today March 8, 2006. We do not undertake any obligation to revise or update publicly any forward-looking statements expressed in today's conference call.

Alan Trefler, Chairman and CEO, will provide opening remarks. Chris Sullivan, CFO, to review financials and Alan will return with additional remarks prior to opening the call for Q&A. Alan, would you like to begin?

Thank you, Beth. I trust everyone has seen the release and knows that we broke through the $100 million mark with record revenue of $102 million. To me that means that our sales strategy is working. As we've talked about in the latter half of the year we began executing on a quick value strategy working to deliver customer benefit through smaller initial licensed sales and accelerated implementation cycle and then having customers want to come back for more. We've been able to do this with organizations like HSBC, Computer Sciences Corp., TD Banknorth, helping them achieve productivity and growth thinking about starting with a sliver of Business Process Management and working towards a goal of an extended relationship with additional licenses and services going forward.

Proof points, well, in the second half of 2005 the license signings were dramatically higher than in the first half and we have the repeat customers coming back for additional purchases representing almost half of our 2005 license signings; building on strength, using us in new areas, moving us into new parts of their businesses. So our technology is working. We made a bed entering 2005 the customers care about process and the PegaRULES Process Commander with its unique unified process and rules technology could solve the problems customers care about. Problems like being able to introduce their products more rapidly making it easier for them to do marketing to the right people to the right organization. Handling multi geographies, handling different locales, places, countries and languages and being able to specialize for different bodies of groups of customers.

So what we see is the customers are selecting us as the winning bed now and the world's most sophisticated organizations are selecting Pega to power competitive advantage both in their sophisticated operations and across their mainstream businesses.

With that, let me turn it over to Chris to talk about the numbers.

Thank you, Alan. I'll begin with a quick overview of the fourth-quarter results and then provide a more detailed review of the full-year results. Total revenue in the fourth quarter was $27.1 million compared to $26.2 million in the fourth quarter of '04. Services revenue in 2005 increased $4 million or 31% over the prior year while license revenue decreased to $10.3 million versus $13.3 million for the fourth quarter. It should be noted that during the fourth quarter we structured term license agreements valued at approximately $3 million in a manner that caused revenue to be recorded ratably over the life of the term rather than recording the present value of the term license up front as has been the norm historically.

Going forward, we plan to structure the majority of our new and renewing term licenses in a manner that would cause the revenue to be recognized ratably typically five years over the term of the license. This will simplify our revenue accounting and make it easier for our salespeople to sell new software to existing term license customers. It will also have the effect of reducing the value of revenue recognized at the beginning of the term and provide a more predictable future stream of license revenue over the life of the license term.

Gross profit in the fourth quarter was $16.6 million, compared to $19.1 million in the fourth quarter last year. The decrease was due primarily to the decline in license revenue. Higher professional services and maintenance revenue of $4 million was largely offset by significantly higher cost of services resulting from our continued investment in the number of professional services employees and contractors in anticipation of future demand for license implementation services.

Profit before tax in the fourth quarter was $800,000 compared to $4 million in the fourth quarter of 2004. The decrease was driven by the decrease in gross profit and nearly $1 million unfavorable impact of currency on operating income partially offset by increased interest income and lower operating expenses.

During 2005 we engaged outside tax experts to review certain significant tax positions. Some of these tax-related projects were completed during the latter half of 2005. And during the fourth quarter of 2005, we recorded a net income tax benefit of $2.1 million due primarily to changes in estimates upon completion of the study of benefits related to extraterritorial income exclusions, recording of tax refunds overpayments and changes in deferred tax items.

And now for the full year 2005 view. It's important to remember the extent of the underlying business transformation we undertook at the outset of 2005 as we shifted our focus from application sales to BPM platform sales. This shift required a corresponding change in sales strategy which began to gain traction in the second half of 2005. The value of license signings in the second half were significantly up from the first half resulting in a total of 51 deals signed in 2005, up more than 30% versus 2004.

For the full year 2005, total revenue increased 6% to $102 million. License revenue for 2005 was $40.8 million, down 2% compared to '04. This $800,000 decrease was primarily due to weak new license signings in the first half of the year. Significant increase in new license signings during the latter part of the year contributed to improved license revenue performance in the second half of '05 as well as to an $8 million increase in the year-over-year license backlog as compared to 2004.

Professional services revenue for 2005 grew to $40.8 million, or 5% over 2004. We continue to support our customers in many new license implementations while at the same time expanding our network of partners to assist customers with their implementation needs. Maintenance revenue was $20.4 million compared to $15.9 million during Q4 2004. This 28% increase is due to a larger installed base and an increase in the proportion of perpetual licenses in the installed base which provide a higher annual maintenance rate than term licenses.

For 2005 gross profit was $66.4 million, a decrease of $3.6 million compared to 2004. This decrease was driven primarily by significantly higher cost of professional services partially offset by higher maintenance revenue. As noted earlier, the higher cost of professional services reflects an investment in trained employees and contractors to address anticipated demand for our license implementations.

R&D as a percent of revenue was 19% versus 21% for 2004. We expect to competitively invest in R&D though our spending levels will depend on new product development schedules. Selling expenses increased 6% to $34.2 million in 2005 from $32.1 million in 2004. The increase was primarily due to increased sales commissions and the hiring of additional sales personnel.

G&A expenses were at $12.2 million and essentially flat from the prior year. Other income and expense was an expense of $1.4 million in 2005 compared to income of $.5 million in 2004 due primarily to the unfavorable impact of currency exchange rates. Profit before tax was $4.6 million in 2005, a $6.5 million decrease from '04 driven by the $3.6 million decrease in gross profit, a $2.1 million increase in selling and marketing expense and a $1.9 million unfavorable impact from currency, all partially offset by lower research and development expense and improved interest income.

We recorded a net benefit to income taxes in 2005 of just $100,000 approximately compared to a provision of $3.6 million in 2004. Our effective tax rate for 2005 was negative 2% or a benefit from 2005 compared to 32% in 2004. The fourth-quarter 2005 tax entries discussed earlier significantly decreased the effective tax rate for the full year 2005 compared to the statutory rate. We expect the remaining open tax projects to be completed during the first half of 2006 and any additional adjustments resulting from their completion will be recorded at that time. Please see our 10K for an expanded discussion of the topic.

Accounts receivable days billed outstanding as of December 31, 2005, was 74 days. This is up significantly from December 31, 2004, due to slower payments by some large customers. Deferred revenues at December 31, 2005, increased to $18.7 million from $9.1 million as of December 31, 2004. The increase is due in large part to new license arrangements for which acceptance of the software or completion of fixed priced services had not yet occurred and an increased value of the unearned portions of our annual maintenance fees paid in advance.

We generated $25.3 million in positive cash flow from operations during 2005. Net cash provided by operations benefited from a $9.6 million increase in deferred revenue and a $17.8 million reduction in short- and long-term license installments partially offset by a $10 million increase in trade accounts receivable.

At the end of 2004 the Pegasystems Board of Directors authorized the repurchase of up to $10 million in our outstanding common stock. During 2005 the Company repurchased 957,112 shares for a total of $5.9 million in open market purchases under the program.

The guidance for 2006 is as follows. As mentioned previously, we intend to structure most of our new term licenses and term license renewals in a manner that will result in revenue being recognized ratably over the term of the license rather than recording the present value of future payments upfront as has been our approach in the past. This will reduce the upfront revenue associated with term licenses in favor of a stream of future recurring revenue. The estimated revenue associated with term licenses scheduled to renew in 2006 is approximately $10 million. The majority of which, assuming those licenses are renewed, is expected to be recorded ratably over the term of the agreements.

Bearing this in mind we expect full-year revenue to be between 105 and $115 million. The broad range of our revenue estimates is attributable to a small number of large value license opportunities.

We are committed to becoming the world leader in BPM software and are continuing to invest in sales and services capacity into 2006 believing this investment will better position Pegasystems to achieve accelerating growth in the future. But we also anticipate it will continue to result in lower profit before tax in 2006 as compared to 2005.

As a result, we expect 2006 profit before tax to be between a $3 million loss and a $3 million profit. The expected 2006 results reflect an anticipated cost of approximately $1 million associated with the expensing of stock options under the revised FAS 123(R) rules.

As we close out the open tax studies we may see continued fluctuation in our quarterly provision for income taxes. Accordingly, we believe pretax results to be a better measure of operating performance than earnings per share. Full year cash flow from operations is expected to be in the range of 12 to $20 million.

In the 2005 10-K, Pegasystems has exposed material weaknesses in internal control over financial reporting relating to revenue recognition and income taxes as of December 31, 2005. The 2005 Form 10-K and previously reported financial results reflect the appropriate accounting. I encourage you to refer to the information contained in the 2005 Form 10-K.

And that concludes our financial summary. Now, Alan, back to you.

Thank you, Chris. I'm going to talk a little bit more about 2005 and where we are and then set the stage for some of our future plans as we enter 2006.

In 2005 we saw many examples of target accounts buying and then buying more of our best in class technology, PegaRULES Process Commander. An international insurance company customer for a little over year has now begun rolling out multiple parallel projects across their domestic brokerage group, across their automobile insurance line, across their overseas property and casualty operations that let them introduce new products into that market much, much faster. And direct to consumer online insurance where Pegasystems technology supports marketing and fulfillment and residential mortgages. We've got these customers who are now seeing how this technology can begin to be used across different parts of the organization and are beginning to build centers of excellence and [compentency] centers themselves to help them take advantage of that.

We've had I think success with the strategy picking the right customers, focusing on them. And all of these customers, the ones that frankly have already bought in some large quantities and the ones who we have just broken into, all represent significant additional opportunities. Because you can use our PRPC technology for any type of process involving pretty much any type of content, system and human interactions. Where content doesn't just mean documents but it's really the integration of information where it is leveraging the existing systems, taking advantage of their infrastructure, their Oracle, their SAP, their other technologies and being able to add tangible business value.

Being able to work in the system-to-system realm where we can actually intermediate and we can actually add value as data information and requests flow across the pipe, working across platforms, taking advantage of the extremely open architecture of this technology. And then finally dealing with people, humans, who have to either route work between each other or any time that a human has to actually update something that is really going to impact a bunch of systems across the back office or the front office, our technology can make that interaction more robust, more friendly, more guided and more secure.

We're going to continue to build on these relationships, focusing on getting into the right accounts. In some cases doing mission critical things and in some cases doing smaller things and then having been able to penetrate those accounts and working with those customers to show how the technology can be successful, finding opportunities to cultivate more. We call this our Quick Win strategy so that customers who have been burned by slews of shelfware and promises and the big digs that so often represent technology projects, can actually get results sooner; can actually have software that lets the business and the IT teams work together better, to as we say, build for change. Because that is our key message. We let organizations build for change so that they can be more responsive, more agile, make money now, make money into the future. It's all about being rules and process based not code based. Rules based BPM delivers.

Now as we go forward, we're going to continue to invest. We think this market is at an interesting point. We're seeing more attention in the market, though frankly it is still an early market, it is still diffused market and it still a tough market to sell into. But we're thrilled that recently we have seen from companies like Gartner and Forrester that our technology and the rules in BPM space has been respected and is going to be seen as a key, key, key factor, or a leader in all of their thinking at this stage.

We're seeing that the customers are understanding the applicability of this technology, can in fact be pretty radical. And we're moving out our efforts to continue hiring salespeople, services people, etc.

Starting to give you some color on the sales function, we've been hiring people who have experienced selling to the exact customers, the exact types of systems we went to sell, sophisticated systems that drive value. We've been able to attract them from IT services companies, other significant software companies and in some cases hardware companies; people with a solution focus, people who know the people who they're selling to and who really care not just about the initial sale but about seeing things through to customer success.

I'll tell you that the quality and caliber of sales candidate that we have seen in recent months has been extraordinary. We get the feel that in the market place sales are talking among themselves about Pegasystems being a great place to work with great technology.

I'm sure many of you saw the announcement regarding the appointment of Edward Hughes as our global head of sales. Edward was most recently at IBM having been acquired as a result of his work at Rational where he built the North America operation, sales and service operation in excess of $450 million. He's a very sophisticated fellow who I think is going to be able help us take the successes to date and continue to drive them forward.

We ended 2005 with 37 salespeople up from 26 at the end of 2004. And we plan to hire additional salespeople as demand warrants and frankly we've already increased that number through today to be in excess of 40. So, we're looking to get more top caliber salespeople to complement the folks we have now, domestically we're really focusing them throughout the U.S. at the key customers so that they can be up close and personal with them.

And we're also expanding our overseas sales force. We've hired a team. We've hired a fellow into Brussels to be able to handle the Benelux and the French-speaking regions. We have an operation in Madrid. We've just opened up Germany both directly and with one of our key partners, a company called Steria. And we continue to target the industries and the specific accounts that we think are going to be important to establishing thought leadership in the BPM arena.

In financial services we've worked on banking but we've gone beyond banking into things such as ratings agencies, mutual funds, lots of opportunities. Insurance has turned into a terrific market for us where we have won a number of very, very tough competitive engagements and really showed how we can add value there. We've licensed the IBM frameworks as part of our partnership with IBM for both their insurance framework and their financial framework for banks and are now able to offer that as an adjunct to our customers who want more out of the box function which has helped.

We're working in government both domestically and in the U.S. We've had a great success with Medicare Part D in the U.S. And in healthcare more broadly we have sold to a number of Blue Cross/Blue Shield and other large insurers our technology.

We're seeing that our BPM technology is getting legs and we think that by targeting certain accounts and responding to the market when they come to us when there is an inquiry or demand but putting most of our effort on targeting, assigning people to accounts, having them really focus on client success, we think we can continue and we're hopeful we can continue the good work that was started in 2005.

Per the above you can tell that we are investing. We've hired a number of folks. We're putting a lot of work into sales training and enablement trying to make sure that the sales team has the right marketing support, has the right sort of capabilities to make it easy and possible for them to sell. This year we're going to have a Pegavision World User Conference in the fall. We're going to make sure that we're supporting the sales force to build a community that can grow.

We're putting a lot of work into services. Chris has mentioned that there has been services margin pressure and of course it's critical that we have a service force that is ready and able to meet the market demands of our sales force. We are doing a lot of work here in enablement and training both creating new courses and new tools. We're introducing a new [rough] based methodology and we're working hard here to make it so that we can build for success so we can improve the way that we deliver systems and make it possible so that our partners can improve the way that they deliver systems as well.

And of course we do continue to invest in the technology. Ultimately our goal is to make PegaRULES Process Commander extremely easy to use, while not losing the power that it has to really drive mission critical global operations. We will be releasing our new version, 5.1, in the next quarter our so. And I'm going to note three features that we think we're pretty excited about. One is we've really got advanced internationalization, localization features that make it possible for a global organization to have a single backbone to the way their processes and rules work and to readily localize that for different countries, different variations in law, custom and language. And make it so that they can have the benefits of a distributed operation with the power of a central centralized background.

We've introduced a hot new technology called Ajax which is a way that web screens and user interfaces in the back office can actually dynamically refresh themselves, in our case based on changes to the rules, without people having to hit submit and wait for long return times like we all do on the web today. This will really make it so that the system will have a lot more frankly glitz factor and also will improve the productivity and the accessibility for people we work with.

And finally we're really working on the efficiency of development. Working to make the ease of use of this system better so we can be more broadly deployed, consistent with its what we believe potential. We're putting on autonomic diagnostics in so it can become more self-aware of when and where it needs to be able to improve performance, being able to have sort of preflight checks to make it possible for the system to actually advise people how best to implement things and really working on the look, feel and friendliness of the developer desktop.

It's an interesting market. It's actually a very exciting market and I'm personally confident that BPM, the path of really focusing this Company on BPM was the right decision and that it is a winning strategy. And right now I can tell you that in key engagements we are winning with the right products, the right people, the right partners and we're getting the right customers.

So with that, let me turn it back to the operator and see if there are questions.

(OPERATOR INSTRUCTIONS) Michael Kern with Canaccord Adams.

Good morning, you guys. I'd like to talk to you a little bit more about the investments in the services part. I had thought that you had talked about moving some of those implementation services off the partners and was just trying to get a better understanding of where you are ramping up your investments there?

Yes, sure. I can speak to that. We've actually had a number of partners who have decided that they were going to build extremely large Pegasystems practices. So for example when I was recently in India one of our large partners there, Satyam, actually has in excess of 200 people, trained people in their PRPC practice where they are second-largest practice after SAP. And they are looking to significantly grow that. Other organizations like Kanbay and IBM is adding people etc. The partner channel is very important.

But what we have come to realize is that both make sure these partners get off on the right foot and also frankly to try to hit a higher bar around getting our customers delighted which ultimately we've got to do if we're going to be successful. We really be to have our own services team extremely deep and extremely capable. We've been pulling services people out of the field. We've created some advanced training programs. We're going to continue to do that. We're really trying to make it so that those folks can be people who don't just do projects but who leverage our partners who can work with our partner and help make it so our partners can kind of learn by doing with some Pega people with them. And that frankly takes an investment and that's also leading us to make a number of changes in how we deploy people, how we organize and structure projects, and frankly updating our methodology.

So that is what the basis of the services investment was in the latter half of last year and as we go into the first half of this year.

Okay. And with that, do you have any guidance on what your services margins are going to look like for '06?

We have not specifically guided to the service margin. We expect though that the services margins that we saw in '05 are indicative of the margins we will see for at least as we continue to have our investment in advance of demand. Those pressures we expected to see continue through the majority of 2006.

Okay. Moving over to the pipeline. You talk about this anticipated demand. Can you give any more color on your pipeline? And also can you give any more color on expanding into additional markets outside of the insurance, healthcare in financial services?

Yes, so I can give you color on both of those. I would say that our view of what the pipeline is has changed pretty significantly since a year ago. A year ago despite the fact we said we were a relationships sales organization, we were very focused on leads that were received from our customers. And a lead driven business is driven off of the volume of the pipeline with a certain conversion rate. What has happened is our pipeline now is very much around account relationships so the people who are putting things into the pipeline now are putting them in because they actually have in many cases outreached to the customer, know the customer, know a completely different level in terms of quality.

I'd say the pipeline is up modestly in terms of year-over-year. But from a quality point of view it's up massively and we're feeling like we instead of just responding to things where you've got a very low probability we're actually guiding exactly what goes into the pipeline in a different way. That is how we've described the change in the pipeline and frankly the busyness of the sales force is outstanding. These people are going completely nonstop. There's an enormous level of excitement in the sales force bank and opportunities (inaudible).

That is how we describe what's going on in the sales force. So we are hiring, and it is an investment. It is a risk, but we're hiring into what we perceive is strong demand for those folks. I'm sorry, the other question?

Can you give any additional color on expanding into other markets outside of the healthcare, financial services, insurance?

Yes, so insurance which became a big push for us two years ago has just lit up and we're really very excited. We've just now broken into a couple of large global telecom companies so that we've actually now got that on our resume here in terms of customers that we're working on which we're very excited about. We think that's a huge opportunity. And government where we have invested both in the U.S. and in the UK is a place where we have sort of -- we've proven, for example, in Inland revenue in the UK that we could do work. Now we are actually trying to take that and move that both domestically and in Europe and we're seeing a lot of pull there. Manufacturing finally with companies like AMD and GE Energy is another industry that we've now been able to break into.

Okay. Moving over to guidance. If I do a quick analysis of it, it looks like your 2006 guidance implies that you're going to have an operating loss. Is that correct? And can you give any guidance on what your interest income is going to be in 2006?

The guidance does imply an operating loss and I think it's important to really understand one of the biggest changes that is driving that is in addition to the investment strategy that we've talked about, the decision to move the majority of our term licenses is something that is responsive to investors as well as something that we think will simplify the selling to existing customers. Those term licenses we have both renewing term licenses and new term licenses in '06 and we've assumed that somewhere in the range of 6 to $10 million of term license that otherwise would be part of our revenue stream next year will not be in the '06 revenues based on the anticipated change in the accounting for term licenses. So that is impacting the number.

Your question on interest income is we expect that it's going to be largely similar to '05 in total though the mix will change a little bit. Our interest income on our investments will continue to we expect to increase based on both yield and cash balances. And the interest income associated with term license installments will probably decrease a little because as we mentioned in the analysis of the balance sheet that our installment receivables balances is lower.

Okay. And then two other just quick questions. Any 10% customers in Q4? And what was your average ASP?

There were no 10% customers in Q4. And the average ASP is just under $800,000 per revenue transaction in the fourth quarter.

Okay, thank you very much. I'll turn the call over to someone else.

[Joel Nyes] with Needham & Co.

Thank you. Actually those questions were just answered just in that last caller. I appreciate it.

Pan with Pantheon Capital.

I signed on a little late so I'm sorry if you've already covered some of this. But the term licenses that are now going to recorded ratably, when did this new approach start? And this is going to be with respect to older existing term licenses that you put in a new contract or is it only applies to new ones going forward?

This is Chris. The decision really was made as we approached the year end. In the fourth quarter we had the opportunity with a couple of customers to structure the term licenses in such a way that we would (indiscernible) about $3 million of term license that otherwise would have been recorded at present value in the fourth quarter that is now going to be showing up. And this is identified in the 10-K. You'll see that this amount is broken out.

It's a decision I think that we've been thinking about for a while, investors for a significant amount of time have been suggesting that we should try to simplify the accounting. It is not completely within our ability to modify the structure every time of the agreements. The customer obviously is party to the negotiations. So the agreements we can't be certain that all of the agreements going forward will be structured that way. But we do intend to structure the majority of both new and renewing licenses in such a way that they would -- we would create this future revenue stream associated with the term license basically in line with the payment schedules. And then some portion would still be recorded present value based on the structure and the accounting rules that are applied.

Does this get around the problem that you've historically had with the high accounts receivable and not being able to recognize it as revenue upfront but the cash flows were showing up?

What it will do, as you are aware, Kelly, on the balance sheet we have installment receivables and that number is there. That represents the value of the future cash flows associated with term licenses. And that number as we move to a ratable number, that will decrease. But you will also see that we will report in the K the amount of cash that we expect to see also with these term licenses that will be recorded ratable. We will try to provide disclosure and visibility to that as well.

So the difference is in that the ratable licenses you don't actually even collect the money up front? It comes in installments?

The way term licenses are structured today the cash comes in over the life of the term. They were always done that way. And the collection is actually very good. The installment, the trade receivables only relates to what's been billed. The unbilled portion of these term licenses sits on the balance sheet and those are disclosed. But as we change our accounting, the cash flow will not change at all. Cash will continue to come in over the life of the agreements and what we will see and I think this will benefit investors is you will see a tighter correlation between our cash flow and our profit streams.

Okay. All right. You're saying that fourth-quarter revenue was reduced 3 million due to this new recognition of the policy?

Again, in the fourth quarter there were agreements, term license agreements that were signed that were structured in a way that we took -- the revenue is going to be recognized ratably for those. Had we recognized those on a present value basis it would have been approximately $3 million in revenue in the fourth quarter.

So, I went back through some of my old notes and basically your term licenses were averaging five years. So when you say 6 to $10 million will be reduced in 2006 revenue, should I be multiplying that by four or five to get --?

The best way to think about this is guidance is in and of itself by its nature it's not precise. But what we've done is we've looked at the scheduled renewals that we anticipate renewing in '06 and we've assumed the majority of those will be recorded on a ratable basis, so the majority of the revenue will not hit the P&L in '06. And likewise we've made some estimate as to what new term licenses we may sell in '06 and again we will assume that the majority of that revenue ends up being recorded ratably. From those, the combination of those two factors we've said a reasonable modeling estimate would be 6 to $10 million (multiple speakers).

So when will be the next big year of renewal of your term licenses?

If you look at the scheduled renewals and what we've talked in the past about the fact that it's difficult to predict exactly what those amounts will be, but '07 is a number for which we would have a higher than normal -- higher than average amount of renewals in this renewal calendar. But again that number is subject to variations based on customers' decision (multiple speakers).

And when you say it's a big year, how much bigger is it than the norm?

We haven't, I haven't disclosed that particular side. But it's probably as much as double what we've seen as sort of an average. It just happens to be that way based on the timing of what happened four or five years --.

Got you. Thank you.

(OPERATOR INSTRUCTIONS) Richard Davis with Needham & Co.

Thanks. I'm in the car so hopefully you can hear me. Alan, I would concur with you with regard to demand and BPM. I guess three hours from now I'm going to go visit a company here that's grown from kind of a standing start and almost half your size in about five years. So I think you are exactly right that BPM is of interest among corporations. Do you see with regard to the BPM opportunity, do you see that the biggest competitor that you actually face is a homegrown or guys running their own IT shops or individual IT shops and that is really with whom you are kind of competing?

Yes, which I think that is exactly right. What the choice is for most folks is to kind of do it the old-fashioned way in code or do it with BPM. Some of these companies that have grown fast, they are obviously much smaller. It's much easier to get high percentage increases off of a low base. We think though that we can beat any of our competitors head to head in the BPM deal. And so what we really end up competing against is somebody who says, well I'll just go in and I'll modify the code in my legacy system directly instead of putting a BPM layer between or around it.

And the last question, you're adding a bunch of really cool technology, you're adding a bunch of salesmen and things like that. So I have to ask the hard question is, when do you think this is a business that should be generating 15% margins, 20% margins, those kind of things? What is the timeframe on that in terms of kind of out years?

Well, just as a comment. I do believe the businesses should generate money but on the other hand at certain times in the life of a market it is appropriate to invest, and we're not bubble people. But we do believe it's appropriate to invest. If you want to think about the real strength of the business and one of the ways I've started to think about it, I would take a look at operating cash per share. I mean our net operating cash of over $25 million, divided by our share gets us a number -- where would that be? $0.69 a share.

Now not all of that of course correlates to income but one of the reasons we want to get our accounting simplified and really focus on the guts of this business is so that we can have cash flow and our financial records and frankly our growth in the markets all sort of approximate each other. And obviously that sort of return if it had been a bottom-line return I think would have addressed your margin desires quite nicely.

Got it. Okay, well thanks a lot.

[Mark Gomes] with [Pipeline Data].

I wonder if you could talk a little bit about BEA's acquisition of Fuego coming sometime after Tibco's acquisition of Staffware? What does that mean for the market? What does that mean for you?

I think a lot of the companies in the platform or EAI space have gotten at times I think a little bit desperate. And they've been looking for some way to try to put some lipstick, as it were, on their businesses. I think that the Staffware acquisition by Tibco really is largely viewed to not have been very successful. They lost a lot of their key people. And we don't see them as a major threat here at this point. And we will have to see what the execution is by BEA. I don't think of the BEA sales force as being particularly the right sales force to sell BPM as we think about it. We think of BPM as being more business oriented than technology stack oriented. I think that in terms of really leveraging it they're going to struggle.

It was intriguing how much they were willing to pay for that company though if you actually know what some of the amounts are which I know I have been reported. As a multiple of revenues it was really quite staggering. So I think that tells you something at least some people think this business is hot.

Okay, and what role -- I think obviously this has something to do with service oriented architectures and the role that the BEAs and the Tibcos of the world play there. Where is the nexus point?

Well, you know it's interesting. I think that services oriented architectures as a technology architecture is an important thing. All of our technology under its covers is services oriented. We built to that standard when we built our fourth generation product. I would tell you that I think though that -- and this is frankly a bet that we're placing that is different than what I think some of our competitors are doing. I think we believe that BPM is less of a stack thing than it is a business operating system thing. It is a way that the business can define a new set of metaphors to drive change into their organizations.

We are really working to position what we do at a different tier and different level of the business with a different value proposition than what I would describe as the folks in the integration or deeper platform layer. We think that is right and obviously that is one of the things that both customers and investors are going to have to choose.

Great, thanks.

(OPERATOR INSTRUCTIONS) Donald Collins with Ironwood Capital. Management.

Good morning. Will the change in accounting remedy the material weakness in internal controls that you are disclosing in your 10-K?

Don, this is Chris. I think it would not that particular change will not completely eliminate it in and of itself. The material weakness that we disclosed related to the fact that we have complex highly negotiated contract terms. And on occasion there are interpretations of GAAP that we apply to the specific terms and conditions of a contract which ultimately we thought and modified after the auditors review of those particular deals.

The remediation for that really -- and its disclosed in the 10-K is just a continued enhancement of the capabilities of my financial accounting staff to interpret the GAAP for those nonstandard terms and unique terms. So it's a combination of training and the right set of resources. And I'm confident that we will get there. I'm also confident that the controls that we put in place over the years have been excellent improvements in the overall capability and confidence of the finance team. As it happens we haven't identified -- particular issue and we and we need to improve the overall confidence around the interpretation of GAAP and certain nonstandard terms and conditions of contracts. So that is it.

Okay, operator. I think we are ready to close.

Yes, ma'am.

Well with that, let me to wrap up by saying that I believe that our 2005 results really demonstrate that we are in a market that is a good market, that the investments that we have started to make are beginning to bear fruit. And we look forward to more success this year. I will tell you that it's an interesting, it's an exciting, it's a challenging market, lots of dynamics in it. It's actually a wonderful experience to be able to be in a market that actually has as much potential as we believe the BPM market does.

So with that, let me say thank you and I look forward to talking to you again soon.

Thank you. Operator, that concludes our call.

Thank you. This concludes today's conference call. You may now disconnect.