psft 07/18 2nd qtr conference call notes
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Lori Varless VP IR, Craig Conway Pres CEO,Kevin Parker CFO
CRAIG:
econ environment difficult, tech spending down, unprecedented factors
economy weakening 5 qtrs ago, sept 11, enron add to uncertainty in mkt
*Psft results in Q2 *
EPS .14, operating income increase y/y 60mm, op margin increase y/y 12.4%
74mm cash from operations
totall deferred rev 525mm$$
DSO 60 days lowest in industry
1st half profit ahead of 1st half 2001 on lower revenue
Psft 8 pure internet architecture perceived as superior to competition, total cost of ownership less
Psft winning/gaining mkt share in 5 core product lines
-Product strength-
Encouraged by gains in CRM and supply chain
CRM- Telstra, future electronics, longeberger,ETS, Dell, lifecare, Sun, waste mgmt- 80 customer wins total
in Q2 + 23 existing customers upgreaded to psft 8
**6 customers replaced sebl with psft8 CRM**
supply chain: broadcom, sprint, CVS, duke energy, trane, fannie mae, kanamatsu, societe generale , united nations
110 scm wins in Q2
-Cost containment-
cost control, upgrade our own internal system
we will carefully monitor expenses
psft will invest in new markets
a number of new products/initiatives coming in late august user conf
positive: psft can navigate well in all mkt conditions. Psft has remained stable and financially strong
during this contracting mkt.
most companies this qtr that reported positive earnings attributed earnings to improved efficiency.
Intl paper CFO, .09 of .15 quarterly profit = improved internal business processes
Psft8 is superior process architecture, moves business processes online
Psft broad product line, not vulnerable to single segment slowdown
Experiencing success in CRM, SCM and application infrastructure
Psft is outselling ariba and commerce one all over the world , 18mos ago they were #1
Psft is in a horserace with i2 wrt license revenue (michelle: i2 did only 25mm license revs last qtr), 12 mos ago i2 #1
Psft has more enterprise portals than plumtree, 12 mos ago Plumtree #1 in portals
Psft expanding into intl markets.
Psft does no barter competitors, no factoring- one competitor has increase barter transactions
over a high level last year. (michelle- he is talking about Siebel, increasing barter transactions)
The only way to compare tech companies is on a comparative basis. If tech spending increases,
psft will be in the srongest position to benefit.
KEVIN:
License revs consistent with guidance and ahead of WS expectations.
Op income form recurring ops +5% y/y
74mm in operating cash flow
Op income 20% ahead of last year
We have positively impacted the metrics we control.
132mm license revenue, in line w/Q1
38% intl, the rest domestic.
Psft won deals against competitors- ex
ABM Amro, Cingular, Dell, DOD, Duke Energy, Mitsui, Societe Generale, Sunw, Swift, Toronto Dominion bank...
30 deals in excess 1mm
avg deal size increased to 650K up from 600K in Q1
No barter or concurrent transactions (like siebel?)
installed base generated 99mm license revs same as Q1
new customers 25% license revs unchanged Q1
72 new customers this qtr, same as Q1
license margins improved 92% up from 89% last year, should be 90-91% going forward
service revs 350mm
split equally between maintenance vs prof services
maintenance increased 4% from prior qtr
Q2 service margins 51%, vs 52% in Q1
no revenue from dev svs or cost of dev (momentum is gone)
Total op ex 422mm unchanged from last qtr, declined 13% from Q2 last year.
Expense management op profit increased 12.4% up from 10.5% last year
Q2 mktg exp 126mm$$, sales and mktg expense 26% of total revenues
product dev exp 88mm$, down 2% sequentially, 18% of revs for quarter
G&A expense 6% of total revenue
interest income 8mm$$- foreign exch gains
tax rate 34.5%
-profitability-
op income 60mm- 5% increase over last year
op margin 12.4% of revenue
net income .14, equal to Q1 (proforma)
gaap net income .11 - acquisition charge
-balance sheet-
74mm cash flow from ops.
1.8bb in cash
DSO 60 days as of June 30
no factoring of receivables
deferred revenues unchanged from prior qtr
deferred licenses 9mm at qtr end
momentum business apps purchase completed. 29mm attributed to capitalized software amortized over 5 yrs.
no impact from momentum in the future. More momentum accounting details (I will skip these)
GUIDANCE-
Expect Q3 licenses 120-130mm with eps .13 (decline due to europe vacations)
Q&A
Neil Herman- What is the competitive environment, are you gaining mkt share
Craig- Brutal competitive environment, some are desperate. Competitive pricing is suicidal. Psft enjoys no
competition from small or midsize companies, all integrated enterprise software companies now.
-which competitors are you seeing more or less-
Craig- not seeing Oracle as much in US as we used to but we see them in Europe. Psft experiencing difficulty
in Latin America and asia
Ed Mendelson - seasonal pickup in Q4? Budget flush?
Kevin- no guidance for Q4. Focussing on Q3. Q2 a little less backend loaded than Q1.
Brent Sill, CSFB
-HR and portal product lines, comments?
Continued strength in the psft tools and portal lines. HR and financials continue strong. Almost a spike in
interest in HR and financials (no revenue associated). Companies are thinking internal infrastructure management
is only way to grow earnings.
-Common characteristic for Siebel replacements? what caused the switch?
Customers not as successful as they hoped with the competitive product, and an awareness of integration of
CRM, SCM and financials perceived as a benefit.
Steve Kal? Goldman
-elaborate on strategy new product rollout
Looking forward to user conference for announcements, expanding core products. Also major initiatives planned for
announcements at user group. 11,000 attendees.
-How are you attracting new customers, is it new product driven or are you waiting for improvement in economic environment.
The latter, definitely. New customers can't spend money. Very few of psft customers run even 2 of psft core suite products.
Greg Matthews Solomon
-Are you concerned about any verticals. also is it getting weaker in Europe
Europe- slightly more challenging than the US. US is same as Q1. Europe, otoh is getting slightly worse.
Verticals- telecom is second largest vertical. Psft is the largest app vendor in financial services. Psft strong in education and
govt which is offsetting the telecom draught. Ed and govt is becoming larger and larger in terms of gross revenue. No
discernable patterns between retail, CPG, tech etc.
Tim Dolan DBAB
-Product line success in supply chain, are you getting the "I2-like" deals? Also which verticals are you selling into and
are they integrated
Supply chain, half are traditional oracle, SAP (non-i2) deals. The other half are standalone supply chain deals (michelle-
he lists ariba, commerce one, manugistics as best of breed supply chain which is NOT best of breed except manu - I don't
think psft is selling into traditional SCM)
CRM- Q1 started to win standalone non psft CRM deals. the 80 deals CRM is reflecting a different CRM landscape.
Robert Maynar CIBC world markets
-Govt vertical what is the DOD status have you won the second piece
Yes we got it, 2 year he doesn't recall the size of it
-Is psft assuming a lower conversion rate going forward
To get guidance its increase in pipeline, decrease conversion rate minus seasonality plus government spending = GUIDANCE!!
Kash Rangan Wachovia securities
-What were the large deals in the qtr 5-10mm$, number of live psft 8
30 deals in excess of one million$, no deal greater than 10mm whereas last 3 qtr had at least one 10mm deal.
800-900 live psft 8 customers, CRM has psft 8 CRM 30 live customers
Cameron Steel rbc capital
-better traction CRM and supply chain incorporating bigger license sales number? Why are you seeing better traction in
supply chain since its a meltdown in SCM
vs. 2001 SCM and CRM is a bigger % of revs for sure. 1st half of this year vs last year SCM/CRM is incresing, since
Q1? don't know.
-SCM why strength, ans: viability concerns with other SCM vendors. Psft has been chosen as strongest SCM technology
from Meta. Customers see psft strength technically in scm and customers seeing scm companies have never been profitable
in their history.
Last year SCM sold with financial in salesforce. In 2002 SCM is now a separate sales org.
Schwarts, Tomas Weizel partners
-why was avg deal size up in the qtr?
It is beyond the term buyers mkt. The buyer is presented with almost a blank check with competing companies. Competitors
were giving software away in exchange for maintenance revenue. Happily most customers participating, a genuine awareness
of dilemma, not damaging to psft in the process. Psft has been ranked up near the top in flexibility in pricing in research rpts.
-deal size about where it was a year ago but down from Q3/Q4 last year which was 700K. The broad suite keeps the deal size up.
Customers knew from the beginning what they wanted to do. Terms were the difficult term in the deals.
-visibility today vs what you had in Q1 or Q2.
Kevin- its not improved, no improved visibility challenging close rate. Visibility in pipeline good, visibility in conversion rate
is problematic.
Chuck Phillips Morgan Stanley
-comment on siebel comment about psft discounting aggressively their CRM suite
Conway: Siebel goes in to deals as the price aggressor. Psft is enterprise-wide licensing. There were at least as many cases
where sebl was in assault mode from a pricing point of view. There is more elasticity in CRM, Sebl's price model has
never had competition. Today CRM/Sebl has pricing competition. Conway crowing about psft CRM, says its "technically
better" than Siebel CRM. Not true that psft is only winning on price.
Jamie Friedman Fulcurm global partners
-share count decreased this quarter?
Share count did not decrease. Its about the same as last qtr.
-Q2 marginally less back-end loaded.
Nothing significant there.
-what is the key aspect of sales now integration, best of breed, etc?
Criterion by far- customers can reduce their expenses with an ROI that pays for itself within 12 mos. If a product
can't do that it won't sell. Integration does play into it- but it depends on the customer.
David Fallal Friedman Billings
-Competitive wins in supply chain and CRM, which of these were already psft customers
CRM % higher and higher to non-psft installed base
SCM has more existing psft customers since SCMand financials are so aligned.
Craig doesn't have specifics.
-headcount endof Q - 8579.
Nathan Schneiderman Wedbush Morgain
-Pricing pressure in services?
Significant pressure on consulting side - hourly rates are as low as hes ever seen, but its not the same magnitude on the
license side because there is a fixed (body) cost associated with consulting. The ramifications of remaining profitable in
consulting has caused growth to subside. Consulting is still profitible while other companies are not profitable now.
-Maintenance renewal, pricing pressure there?
Some pricing pressure on managing maintenance increases. Customers want the longest period of time with no
increase. Maintenance is sold on enterprise basis so customer lower headcount doesn't matter.
***Conway takes a slam at Sebl- 1100 layoffs and how psft doesn't have to explain to customers how laying off 1200 people
won't effect their support***
R&D spending will stay in dollar terms high 88 million$, same as last q. R&D as a percent in rev will decline from current
18% to closer to 15%.
Chris Kwok Bear stearns
-large deals, what products and verticals. Crm which products strength in the family.
No predominance in one product in large deal- HR, Financials, CRM and SCM no trend really.
No trend in CRM one module vs another. Calico acquisition helped with configuruator in CRM to fill out the product
line weak areas.
Thanks a lot we'll see you next qtr! |
