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Executives

Keren Ackerman – Investors Relation

Joseph Cowan – Chief Executive Officer, Director

Scipio Carnecchia – President

John Calonico – Chief Financial Officer, Senior Vice President, Secretary

Brian Murphy - Sidoti & Company

Analysts

Chad Bennett – Northland Securities

Shyam Patil – Raymond James & Associates

Mark Schappel - Benchmark Company, LLC

Barbara Coffey – Kaufman Brokerage

Derrick Wood - Pacific Growth Equities, LLC

Interwoven, Inc. (IWOV) Q3 2008 Earnings Call October 23, 2008 4:30 PM ET

Operator

Good morning. Welcome to the Interwoven third quarter financial results conference call. Today's call is being recorded. At this time I would like to turn the conference over to Ms. Keren Ackerman, Investor Relations Director at Interwoven. Please go ahead, ma’am.

Keren Ackerman

Thanks Jason. Good afternoon, everyone and thank you for joining us as Interwoven discusses its results for the third quarter ended September 30th, 2008. With me on the call today are Joe Cowan, Interwoven's Chief Executive Officer; Max Carnecchia, our President; and John Calonico, our Chief Financial Officer. Joe will provide an update on our strategic progress, Max will summarize our Q3 business highlights and customer momentum and John will review our third quarter financial results as well as provide our financial outlook for the fourth quarter of 2008.

Our presentation today contains forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from what we expect. Some of those risks are mentioned in today's filings with the Securities and Exchange Commission others are discussed in our Forms 10-K and 10-Q, all of which are available at www.sec.gov.

On today's call we will also be presenting non-GAAP financial information. This information is not calculated in accordance with GAAP and may be calculated differently than other companies’ non-GAAP financial information. Quantitative reconciliation’s of our non-GAAP financial information to the most directly comparable GAAP financial information appears on our web site at www.interwoven.com in the investor section and in today's press release. Also we are providing guidance for the fourth quarter on a non-GAAP basis with the reconciliation to GAAP appearing in today’s slides.

Now, I would like to the turn the call over to Interwoven’s Chief Executive Officer, Joe Cowan. Joe?

Joseph Cowan

Thank you, Keren and good afternoon everyone. The story of our third quarter is that Interwoven continues to build a track record of sustained performance quarter-over- quarter. Our record top line revenue of $65.9 million rapidly its growth of 19% and it is our 20th consecutive quarter of year-over-year growth. We also continue to increase profitability as our non-GAAP net income grew about 14% to a record $8.4 million in Q3. I hope we continued this momentum quarter after quarter, first, we have a proven ability to execute. We performed well in every region and added over 100 new customers worldwide in Q3. Our global sales team is very adapt at securing strategic competitive wins, which you only hear more from Max in a few minutes. Clearly, customers recognize the business impact that our solutions deliver and our sales team is very effective at communicating our unique value proposition to customers and prospects.

Second, we have the right strategy. We are focused on being the leader in two vibrant and exciting markets and we continue to strengthen that leadership through in-house part innovation, as well as strategic partnership and acquisitions. In fact, the pace of innovation over the past months was specially impressive. Two days ago, we announced the release of Interwoven Optimost Adaptive Targeting. A new solution that dramatically enhances the ability of businesses to identify the best combination of contents for each web based on a wide range of audience’s characteristics and behaviors.

Earlier in the third quarter we also announced the general availability of updated versions of Interwoven TeamSite and Interwoven LiveSite, which provides a wide range of innovations that allow marketers to create more dynamic, compelling websites with speed and agility..

Last week we announced an enhanced version of Interwoven MediaBin to engage customers on the web today, you have to be able to leverage all forms of hunting it and rich media asset, such as video, and MediaBin is a perfect tool to enable the kind of rich experience our customers are looking to deliver.

We also continued to innovate and deliver new products for the professional services industry solutions business. We announced enhancements to Interwoven record manager strengthening our offering for helping organizations govern and manage their ever-increasing volumes of information assets.

We also announced an agreement with global business information provider LexisNexis to intergrate Lexis Search Advantage, a new offering that improves the value of search with Interwoven Universal Search. The combined offering was roundly praised by industry analyst and press as a smart move that will dramatically improve how lawyers access and share information.

Notably the ability to execute comes down to the very strong team we have in Interwoven. They are committed and passionate about serving our customers and growing our businesses, and I am delighted to say that in Q3, we welcomed a very valuable set of new team members - the employees of Discovery Mining.

Let me take a moment to update you on the great progress we have made in integrating that business since the close of the acquistion in early August. The Discovery Mining acquisition is a perfect example of our various strategy in action. eDiscovery is a high growth business and is a natural extension to our set of market leading solutions for law firms and corporate legal departments. In the month since we announced the acquisition, all the early signs indicated that this was a terrific move.

First, eDiscovery is here to stay. It is now the dominant phase of any litigation or investigation including government driven regulatory investigation. You can pick up the paper and read about any high profile case without reading about how that litigation hinges on some email or electronic documents. And as governments wordwide get more engaged in regulating the activities of corporations. This will naturally increase the need of businesses to have their digital house built on a solid foundation. So, the high growth of eDiscovery is expected to continue.

Second, we see eDiscovery as an opportunity for Interwoven to seize a very lucrative leadership position in this high growth market. Interwoven is already the cleear leader in the legal market. We count over 1700 organizations as customers. So we expect to leverage these strategic relationships to help our customers deliver eDiscovery services to their clients.

When it comes to litigation, the stakes are so high and these firms are looking for a reliable, dependable provider they could trust. They worked with Interwoven for years, so a bit far fetched for them to turn to us for eDiscovery. Since the acquisition, Discovery Mining has already seen an increase in participation in a large number of opportunities as the Interwoven brand is giving our team entree to a whole new set of opportunities they may not have been before.

Finally, we are moving fast to capitalize on this opportunity. We have integrated the Discovery Mining team with our professional services industry solution organization. The combined team has a clear direction of where we would take this business and we are aggressively marketing it to our install-based as well as new prospects. I am confident that the acquisition of Discovery Mining will play an important role in helping accelerate a momentum of Interwoven for years to come.

In summary, I am very pleased with our Q3 performance. And now, let me turn the call over to Max, who will provide some additional color on our results and key customer wins in the quarter. Max?

Scipio Carnecchia

Thank you, Joe. To pick up on Joe’s commentary by virtually any metric you look at, we executed across all aspects of our business. Let me review some key Q3 highlights.

First, we achieved year-over-year growth in license revenue of 14% and added 114 new customers, clear signs that we continue to take share from the competition. Interwoven now has 4600 customers in over 70 countries around the world. Secondly, our SaaS businesses, which now include the Interwoven Optimost and Interwoven Discovery Mining offerings are thriving and adding to our top line. Additionally, thanks to our strategy, we have enjoyed success in selling solutions that address the complex challenges of our customers, which is enabling us to win more deals than encompass our full suite of software solutions. And finally, we had a strong performance across all geographies, the Americas, Europe, and Asia Pacific.

In Q3, we continued to secure new and repeat business from some of the world’s best known brands and leading professional services firms, including AXA group, Blue Cross Blue Shield of Tennessee, Caterpillar, Cathay Life, Choice Hotels, Cox Communications, Digi-Key, Hunton & Williams, J&A Garrigues, Kao Corporation, Kawasaki Motor Corporation, and Montgomery, McCracken to name a few.

Let me share some additional color about some of these fantastic wins starting with our Professional Services Industry Solutions Business. Earlier this week, we announced a very strategic win at Akin Gump LLP, one of the world’s most prestigious law firms. The firm made a decision last quarter to replace their legacy Open Text Hummingbird Technologies with Interwoven. Akin Gump will use Interwoven WorkSite, Interwoven Universal Search and Interwoven records manager to create a unified information management system for its 2400 employees in 12 offices around the world.

Our Interwoven Universal Search Solution is a key driver for our ongoing momentum in the professional services industry. Similar to the situation at Akin Gump, it continues to play an important role in helping us win new business. Two other noteworthy, universal search wins last quarter were Fulbright & Jaworski and Townsend and Townsend and Crew.

Turning to our web solutions business, I would like to highlight a few key wins in Q3. We secured a strategic win that expanded our footprint at Kao Corporation, the largest consumer goods company in Japan with over $10 billion annual revenue. Kao is using our Web Solutions to build an extremely cutting edge web presence incorporating the use of blogs, mobile phone content and traditional media to drive traffic and revenue on their site. In Q3, the company made an additional investment in Interwoven MediaBin to ensure that marketers throughout Kao can deploy rich media assets efficiently while maintaining brand consistency.

Additionally, Choice Hotels, a global hotel chain, whose brands include Quality Inn, Comfort Inn, and Clarion, selected Interwoven. In another example of a transaction that encompasses more of the overall web offering, Choice Hotels will use Interwoven TeamSite, LiveSite, MediaBin, MetaTagger and OpenDeploy to transform their web presence and drive revenue growth for the Company’s 10 hotel brands.

We also continued to close this significant transaction last quarter with one of the world’s largest insurance companies. The organization recognized that they needed to significantly increase conversions on their website and selected Interwoven TeamSite and Interwoven LiveSite to deliver much more targeted engaging content to customers. This customer plans to expand its deployment across all their websites worldwide.

I would like to conclude with a bit more commentary on our SaaS businesses. As I mentioned earlier, these businesses which consists of Interwoven Optimost and Interwoven Discovery Mining offerings are healthy growing contributors to our top line numbers. Our Interwoven Optimost business is performing quite well. And the appeal of this offering continues to expand to larger brands who are seeking measurable ROI for their online marketing investments.

In Q3, we secured some very important wins with several global blue chip brands in the airline, automotive, consumer electronics, and telecommunications industries. One factor that makes Optimost, the utmost offering so compelling are the measurable results we can provide. For instance, After Honda Motor Company improved content on their site with Optimost; consumers were 34% more likely to reach for the request for quote page for the Honda Accord, 26% more likely for the Honda CR-V, and 19% more likely for the Honda Civic. By helping Honda continually optimize their content and move more customers closer to the buying stage, Interwoven is playing an important role in helping Honda increase sales.

Likewise, the performance of our newly combined Discovery Mining and Interwoven pieces team in the first two months since the acquisition gives us an exciting glimpse into the potential of this business. As of the end of Q3, the Discovery Mining Offering had over 5 terabytes of matters under management, an impressive figure.

As you can see, Q3 was another great quarter where we had very strong execution at Interwoven. I would like to take a moment and thank our global team who every quarter proves why they are the best in the business, and thanks to our continued strong performance we are attracting topnotch talent to join our team all the time.

And now I would like to turn the call over to John who will discuss our financial results in greater detail. John?

John Calonico

Thank you, Max. Before I begin, let me refer you to the financial statements contained in today's press release filed on Form 8-K. This release provides our financial results for the third quarter ended September 30, 2008 as well as a reconciliation of non-GAAP financial information to the comparable GAAP financial measures.

In the third quarter, Interwoven continued its track record of solid financial performance, in fact, as Joe mentioned, Q3 of 2008 marks our 28th consecutive quarter of year-over-year revenue growth. For the quarter, total revenues were $65.9 million up 19% from Q3 last year. Of third quarter revenues, 37% was generated from software license fees and 63% was from customer support, consulting and training.

License revenues for the quarter were $24.2 million, an increase of 14% from Q3 last year. For license transactions in Q3 in excess of $50,000, our average deal size was approximately $250,000. In the quarter, we had three transactions in excess of $1 million but no single customer accounted for more than 10% of revenues in Q3.

Support and services revenues for Q3 totaled $41.7 million, an increase of 22% from last year. Support revenues totaled $27.8 million, an increase of 15% over Q3 last year consulting, training and software-as-a-service revenues were $13.9 million, an increase of 37% from Q3 last year, with the increase principally due to our Web Optimization and eDiscovery business offset in part by a continued decline in consulting revenues from our global capital market business.

Non-GAAP gross margin in Q3 was 74%, consistent with Q3 last year. Our license gross margin was 96% while our non-GAAP services margins were 62%. Total non-GAAP operating expenses $37.1 million up from last quarter due in part to the inclusion of Discovery Mining.

Our overall head count at quarter end was 991 employees, an increase of 69 employees from last quarter. Of that increase, 46 were related to the acquisition of Discovery Mining and the remainder was related to increases in our support, services and development organizations.

Our non-GAAP income from operations was $11.8 million for the third quarter as compared to $8.9 million in the third quarter of 2007, an increase of 33%. As a percentage of revenues, non-GAAP income from operations was 18% an increase from 16% last year.

Interest income in the quarter decreased to $900,000 from $2.2 million in the year ago quarter. The decrease in interest income was primarily due to a lower yield on our investment portfolio and a lower average balance of cash and investments on hand due to the acquisition of Discovery Mining. After considering interest and taxes, our non-GAAP net income increased to a record $8.4 million or $0.18 per share versus non-GAAP net income oft $7.3 million or $0.16 per share last year.

On a GAAP basis, our net income for the quarter was $7.7 million or $0.16 per share as compared to net income of $4.1 million or $0.09 per share last year. For the quarter, weighted average shares outstanding were $47.1 million while actual shares outstanding at quarter end were $46.1 million.

Turning to the balance sheet, we ended the quarter with cash and investments of $163 million a decrease of $24 million from our closing balance at June 30th. This decrease was due to $34 million paid to acquire Discovery Mining.

Cash flows from operations in the quarter were $10 million and for the first nine months of 2008, we generated approximately $40 million in free cash flow. At quarter end, day’s sales outstanding were 62 days an increase from last but still in line with our stated target range. The increase was due in part to the inclusion of receivables from Discovery Mining.

Deferred revenues, which consist principally of deferred maintenance, were $70 million at quarter end, essentially flat with the balance at June 30th. Our maintenance renewal rates in the quarter were in line with our historical results.

In summary, our Q3 performance reflects another outstanding quarter for Interwoven. We posted record revenues continuing our strength of 20 consecutive quarters of year-over-year revenue growth, record non-GAAP net income and solid cash flows.

Now, let me provide our outlook for the fourth quarter of 2008. After considering economic conditions and our current quarter visibility, we provide the following guidance. For Q4, we expect total revenues to be in a range of $69 million to $71 million. We anticipate non-GAAP net income per share to be in the range of $0.18 to $0.20. On a GAAP basis, we anticipate net income per share to be within the range of $0.15 to $0.17, and this per share estimates are based on a fully diluted share count of approximately $47.5 million shares.

Now, let me turn the call back to Joe. Joe?

Joseph Cowan

Thanks, John. Now you may have noticed that throughout our prepared remarks, we have not commented on the current state of the global economy. Obviously, there is much concern on Wall Street and around the world on the direction of the economy and where things are headed. As it relates to Interwoven, I would say that we expect to navigate through this period of economic uncertainty with caution and confidence. We feel we are operating through this period in a position upstream and that based on the fundamentals of our businesses, we will have gained ground on our weaker competitors and be in an even stronger position when the market does begin to rebound.

As we have demonstrated throughout this call, this confidence comes from our own target strategy and our ability to execute. Due to our strategy is that we have chosen to focus on to vibrant and dynamic markets for we see a continued demand for our software in good times and bad.

Today, effective web solutions are no longer optional. They are imperative. That is because they deliver business critical marketing advantages in the form of customer engagements, business agility and measure ROI. In an environment where literally every marketing dollar spent is being evaluated, the ability to deliver measurable results that improved business performance is absolutely essential.

Moving to our professional services, industry solutions business, savvy principles understand that there is no better time than the present to invest in next generation technology that helps them streamline business operations and serve their clients better. Improved operating effectiveness is an imperative that never goes away, but it becomes even more critical when tightening corporate budget increase the pressure on law firms to cut costs. And while other industries may feel the pinch from an economic slowdown, law firms were the new opportunities in the form of having businesses deal with increased government regulations and unfortunately, as litigation increases as result of this turbulent time.

Challenging times also raised the standard for selecting technology providers. Now more than ever, businesses are looking to partner with an industry leader with strong, financial performance and the ability to deliver proven solutions with predictable costs and predictable outcomes. We are already reaping the benefit of being the recognized leader in our two-core market and we planned to press this advantage aggressively in order to increase our lead on the competition in the months ahead. That concludes our prepared remark.

I look forward to seeing many of you at our Annual Analysts Day in November in New York where we are already have a record turnout of analysts planning to attend.

Now we would like to open the call for questions. Operator, can you please open the line?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Chad Bennett with Northland Securities.

Chad Bennett - Northland Securities

Just a couple of questions, first of all, can you talk a little bit and I do not know if it is John, Joe, or Max but can you talk a little bit about linearity of the quarter? If you want to do it by segment, that would be great or overall. And in kind of what you saw there and maybe talk about on the professional service piece of your business, if there is any difference in the demand environment especially more recently between legal versus or maybe more of the accounting and other sides of the professional service business?

Scipio Carnecchia

Sure, Chad. It is Max, thanks for noticing the performance in Q3. Let me take them in the order you asked them. Linearity of the quarter, I think for Q3 which of course there is some seasonality associated with holidays there, we experienced 2008 Q3 linearity very consistent with what we have seen in the last three or four years, so no change there. On the professional services industry solutions demand from a legal versus accounting, accounting is a relatively new market for us that we continue to expand in and we have continued to make good strides there. I tell you that the demand in legal continues to be strong. I think we have covered this many times, but Chad, the dynamic there associated with the Legacy competitor who has literally exited or abandoned the market, has continued to create more and more opportunity for us. So, there is what I would call thousands of law firms out there of just about every size around the world, who with every passing months and every passing quarter, have a bigger reason to move to another offering as the legacy system that they have is no longer supported on an operating system, a piece of hardware, an application server, a data base, a web browser. So demand, our pipelines continue to grow.

Chad Bennett - Northland Securities

Okay. Good. And then maybe question for John. John, can you express in a simple line, can you give more detail in the impact of Discover Mining and kind of back that out how things look?

John Calonico

Yes. So if Discovery Mining added three or four days of additional DSO to our number and so, if you took that out, what you would see is that we are right in line with what we have said is our normal range, which typically runs anywhere from the mid-50s to the mid-60s. So, collections continue to be very, very strong for us. Our cash flows were very good in the quarter and Discovery Mining because we did not have full quarters of revenue but we had the entire receivable balance added a few days.

Chad Bennett - Northland Securities

Yes, I understand. And on the deferred John, now I am assuming that you still have some off the balance sheet that you are recouping as you go along here, but new orders for Discovery Mining post close should be in the deferred balance, right?

John Calonico

That is correct

Chad Bennett - Northland Securities

Okay. Was that even material to the deferred line?

John Calonico

No, I would not say it was material to the deferred line at this point.

Chad Bennett - Northland Securities

Okay. Just one last question on Discovery Mining, I have to imagine the eDiscovery market and addressable market and prospects, you guys probable thinking are even better in the last month, than they might have been even when you did the deal. Can you talk about kind of what has changed there? How excited are you? It sounds like you are, but what has been the feedback? I know Discovery Mining is more of a direct model, but some of your legal channel partners and customers, can you talk about traction there?

Scipio Carnecchia

Sure, Chad. It is Max. So the deal closed right at the beginning of August, and August hosts one of the largest trade show events for us, the International Legal Technology Association, it was held down in Dallas, mid to late August this year. So we had a very nice platform for a coming-out party if you will, around the combination of Discovery Mining and Interwoven. So we had our joint sales organizations down there. We had gone through all the value propositions, all of our new messaging, everything had been re-branded. And the reception was extremely positive.

The thing you have to remember here is that, whether it is our channel partners or whether it is our direct organization, by and large today most Discovery decisions are still being made by the chief litigators in the big firms and Interwoven, 1700 of the largest law firms in the world, I am sitting on their desktop. I am sitting on their Black Berry. I am sitting on their, the laptop they take home every evening. So just at brand awareness has really, really started to show up in our pipelines and the market reaction whether it is the analyst, whether the market place, the customers, the partners have been very positive.

Chad Bennett - Northland Securities

Great. One quick, last one for John. John, are we assuming that same type of dilution impact from Discovery Mining in Q4 that we were, I do not know, two or three months ago when we talked about it?

John Calonico

Yes. I think we are I did indicate that I would give the numbers for Discovery Mining this quarter and so just to make sure that we live up to our word, the Discovery Mining revenues were about 3 quarters of a million on GAAP basis this quarter. And on the bottom line, they had a negative impact on our operating margin line of about $1.2 million.

Operator

Your next question comes from Shyam Patil - Raymond James & Associates

Shyam Patil - Raymond James & Associates

Could you talk about what the organic growth rate was in the quarter?

John Calonico

Sure. Well, all of our license business is organic business. So when we look at quarter-over-quarter it is at least on the license line, it is 14%. Now, we do have included in the support and services line at the SaaS businesses. But the growth rate in our consulting revenues and in our support revenues worth 15% as we mentioned on the call. That is clearly all organic growth. And then the consulting revenue is a little bit modeled in there, primarily, because we really have two offsetting dynamics. One is the increasing business related to the software as a service businesses offset by a continued decline in the global capital market consulting side of our business. So, there is a little dynamic offset there. But if you look at the two lines that are purely organic growth, you can say that license grew by 14%, and the support revenues grew by 15%. So, by all accounts on organic basis, this was a really, really strong quarter for us.

Shyam Patil - Raymond James & Associates

I got it. And when you look at the organic growth rates for your Web business and then your PS business, were they about the same? Was there a material difference there?

Scipio Carnecchia

Shyam, it is Max. We tracked that. When you look back over the last two years, 8 quarters, it fluctuates within a couple of percent up and down, depending on seasonality, depending on individual performance. But they have both been growing, even now it kind of average out in that kind of period. They have been growing at about the same pace.

Shyam Patil - Raymond James & Associates

I got it. In terms of online marketing budgets, it seems like a commentary recently has been mixed around that. I imagine that is going to impact Optimost or it could impact Optimost. Can you just talk about what you are seeing there and if you have seen that show up in pricing at this point?

Joseph Cowan

We continue to see an aggressive move to organizations to use the websites in a more strategic fashion. And if you really think about it, as there is pressure spot, the way I look at it is print media, for example is that in New York Times, announced that they lost money and their revenues are declining. We continue to save more dollars being spent on the web. Maybe there is some pressures being put on it, but those pressures just put more burden on the corporations to make sure that they leverage and utilized those odd budgets in a better way, and how in the way they do that is by making sure that their websites have been optimized to the fullest. So, we still see all of that being very positive from the standpoint of saying companies need to, and I can maybe say half to spend money on their websites if they are going to get full advantage of these margin budgets. Max?

Scipio Carnecchia

I completely agree with what Joe said, and if you get to the second and third order in there, what you see is, it does come back to the measurability and the accountability of your marketing spend and obviously when you do that online. It is much easier to be precise around whether you are getting a return on your keyword buying through Google, than necessarily maybe your display advertising through Yahoo. And what we have seen in the course of the last two or three quarters with Optimost is really a surge in the stronger, bigger brands coming to Interwoven for optimization and that has increased, that has not leveled off or come down the other side of the hill. The optimization, multi variable testing is all about being able to bring measurability and results orientation to online marketing.

Shyam Patil - Raymond James & Associates

Great, I have just one more question. Is it that the second quarter in a row you have had three seven figure deals, which is pretty strong. Can you just talk about what your large deal pipeline looks like? And then, whether you see any change in terms of scrutiny or sales cycles or pricing, or even customers trying to potentially break these down into smaller deals?

Scipio Carnecchia

Yes. So, again, it is Max. And we look back in the last four or five quarters. We have always had an approach here where we want to do the over million dollar transactions but that is not integral to our business model. Internally, we call them antelopes, the deals between $200,000 and $800,000 that were focused on and the life cycle with Interwoven is typically, you start with a new relationship with a new customer with $200,000 and we get them successful over the first two or three quarters and then they are back buying another $200,000 or $300,000 and within a year after that we are looking to do a $500,000, $600,000, or $700,000 expansion with them, and that has been consistent. Now, along the way, we have been able to do some place between $1 million and $4 million deals a quarter and we are continuing to make that happen. I have not seen any change in our ability to do that focusing on that large install based that we have. As a matter of fact, in Q4, we have already landed a greater than a million dollar deal right out of the box. But the scrutiny question, I do not think there is a big difference in the pipeline. But the scrutiny question, we have seen for, gosh going on a year now going back to Q4 of last year, tighter scrutiny, different levels of approval, more people in the approval process, tighter on the ROI. I think, we talked about this 3 conference calls ago where we went back into the archives and broke out all of the approaches and disciplines in the sales function that we were using in the 2002 and 2003 to ensure that we were doing paper justifications that had type ROIs that we were asking myriad of more questions around process and who is involved in anticipating kind of the trap doors that can come out from under you. So, we have definitely seen more scrutiny, and it is not just last quarters. It is probably over the last 10 to 12 months.

Operator

The next question is from Mark Schappel – Benchmark Company.

Mark Schappel - Benchmark Company, LLC

Hi, good evening, and nice job on the quarter. Joe, we will start off with you, has the Company’s internal hiring plans changed over the course in next 6 months or so, with what has been going on in the economy? Have you made any changes there lately?

Joseph Cowan

Mark, we always manage our headcount of very, maybe the word is tight, but very carefully. I mean, I have always had the philosophy and John has always had the philosophy that, we want to make sure that we get optimum use of our expense dollars. So, have we really changed from the same way we manage it based on what has happened in the last month? The answer is, no. We will continue to control it very well. We will only invest where we think we can get a return on investment. One of the focuses we always have is direct quarter carrying salespeople and revenue generating people. We always give that the top priority. And if they are an expense dollar that is used in budget but not generating revenues then we look at it and say, “Is it something we have to have?” So have we changed? No, we will continue to monitor the economy and we will continue to look at that process.

Mark Schappel - Benchmark Company, LLC

Okay, thanks. And Max, you mentioned the Akin group displacement deal in the prepared remarks. Wondering if you could just give us the total competitive displacements you had in the professional services side of the business this quarter?

Scipio Carnecchia

Sure. So pieces this quarter, it was 14 convergence that approximately 7000 seats and I will try to remember last quarter it was about half of that in number of seats in a year ago and we had about a same number of convergence but the seat count was substantially lower. So we are at we have been or growing in as far as the number of firms and number of seats converting.

Mark Schappel - Benchmark Company, LLC

Would you say that the conversions that you are seeing now versus the conversions you were seeing say 12 to 18 months ago, are they larger costumers or can’t you tell?

Scipio Carnecchia

It is across the spectrum. I think they are more forced conversion.

Mark Schappel - Benchmark Company, LLC

Okay. And then John, one for you here and then I will get off. What was the deferred write down for Discovery Mining in the quarter, did you mention that?

John Calonico

No, I did not mention it, Mark. I would estimate that number to be about a million dollars for the quarter.

Mark Schappel - Benchmark Company, LLC

Okay. So that was pretty much in line with what you expected then.

John Calonico

Yes. It was very much in line what we have expected. The number we gave earlier with the $700,000; three quarter of a million numbers is based on GAAP results. We have never really pro formed it in the write down revenue numbers.

Operator

Your next question comes from Barbara Coffey from Kaufman Brokerage.

Barbara Coffey – Kaufman Brokerage

Good afternoon guys. A couple of quick questions here, when you were taking a look at as the quarter was going through, did you see any changes in the buying or procurement process like more sign offs or more chunking of deals, and as you look graphically, did you see any changes by country, like is Europe falling down or Asia acting differently than the United States?

Scipio Carnecchia

Barbara, it is Max. Good to hear from you. I would say just as far as the sign offs, we did not, through the course of the quarter, we did not see anything different than we have seen probably for the last 3 or 4, which has involved prior scrutiny, more threshold, more people involved, larger teams, tighter on the ROI. But as I had mentioned earlier, I think we have done a pretty good job of breaking out the play book from 2002 and 2003 with a very mature sales organization to put the right disciplines and processes in place and just kind of re-top-up on that, if you will, that approach. From a geographic perspective now, nothing different, I will tell you that we continue to hear concerns out of Asia Pac that they think they are going to not just around Interwoven, but just more broadly economically that they are going to suffer whatever happens here is going to get there very quickly beyond just the stock market but in the economy as well.

Operator

Your next question comes from Derrick Wood – Pacific Growth Equities.

Derrick Wood - Pacific Growth Equities, LLC

Thanks, nice work on the quarter. So we are going to get through the prepared remarks with that any comments on the macro environment but wisely. So, I guess, on that front on the website, just curious, how you guys are able to perform so well when a lot of other companies out there are struggling. Is it the space that you are in or do you have some superman sales people or you are gaining some accelerated market share? Any kind of comments around that, and then are you seeing any kind of pockets of weakness in any verticals?

Joseph Cowan

I will take the first part and then I will let Max comment. And the answer is all of the above. When you look, typically when you enter an environment like this, we see that companies are really start looking at who their partners are, who they are buying from. If there is any kind of financial issues, or long term viability, we have found that those companies can to get taken off the list, and we have found those companies are more willing and more desirable to go with a stronger partners. So, we believe that this environment only allows for us to get stronger. We do have an ace sales team. They have been around a long time. They have got a lot of experience. We talked about that before, in terms of how sales is key to a software company, and that is the real strength of this Company, so that continues to be a strong part for us. The markets that we are in, we love the markets we are in. We think they are markets where people will continue to spend money. If I was an investor and I do invest, but I think one place that I would chose not to invest right now would be what I call back office software companies such as the ERP people, such as the Oracles, I do not think those areas are areas that companies are going to spend money. I do not think that is going to give them ROI during this return. I think, they are going to be careful and that is what we are seeing. Where they spend their money in areas such as the eDiscovery and the law side, the law firms are going to continue to spend. And then corporations, that web is strategic, that is where their dollars are starting to flow to, the more strategic areas, and that is where they are investing in. That is what we are seeing. Max, you want to comment?

Scipio Carnecchia

Can I just add to that Joe that we have a differentiated offering; I mean it is substantially differentiated to what else is in the market. And from a competitive perspective, the market has spoken. The laggards are going to continue to lag and there are certain companies that used to be vibrant and important in this industry and they are no longer relevant. Now, as far as your pockets of weakness, I think, John touched on it in his remarks. We continued to struggle in the global capital markets area for obvious reason.

Derrick Wood - Pacific Growth Equities, LLC

How about in the financial services vertical, as it relates to TeamSite and Company?

Scipio Carnecchia

No. To Joe’s comment, I am not doing back office. I mean global capital market is back office. But on the web content optimization, I am helping them be more efficient with how they engage with customers and convert those online visitors to some sort of very important business outcome, and that is usually a very revenue or brand customer satisfaction related event.

Derrick Wood - Pacific Growth Equities, LLC

Okay, well great. John, on foreign currency, any impact there on deferred revenue or forward revenue?

John Calonico

Derrick, no, I do not think there is going to be a whole lot of impact for us. I mean, the dollar strengthened over the last quarter, so that would have had a negative impact. We tend to be mainly US dollar denominated. So, it really does not have a lot of affect on us.

Joseph Cowan

If you look at our business, we are roughly two-thirds, one-thirds between US international so when the dollar was weakening, that was not all that positive to us. Now that the dollar is strengthening, it does not really have much of impact like it is on some of our competitors. And even some of the contracts we do in the one third sides are US dollar denomination.

Derrick Wood - Pacific Growth Equities, LLC

And then on consulting I guess there are two things going on the weakening in the capital markets business as well as the shift and some services after partner. Is there any point that you see that not becoming a drag and flattening out here?

John Calonico

Well, we continue to do very well in the software service businesses. I do not see that flattening out here in the near term for sure. The one area of consulting revenues that has flattened out has been in global capital markets, when we talked about that. The website of the business has done extremely well, when you look at on it in a year-over-year basis and you would expect that given the growth of revenues. So looking at that remember that in that numbers are fairly weak business in global capital markets, which has gone from about 5% or maybe a little bit more over our revenues down to about two. So it is a pretty big hit for us to absorb and still put up the types of growth rates that you are seeing.

Derrick Wood - Pacific Growth Equities, LLC

Right, I was just referring to the components within that line item that were declining, and wondering if that year-over-year declined.

John Calonico

Yes. The only one that is declining is global capital markets.

Derrick Wood - Pacific Growth Equities, LLC

Okay, yes. And then anymore commentary about the new customers very, very strong in the quarter especially for the Q3 was there anything that struck out that drove that number?

John Calonico

I think it is pretty consistent with what we have seen the last 3 or 4 quarters. I do not think I am just trying to play it through in my mind geographically or vertically industry wise, nothing coming to mind that stuck out.

Derrick Wood - Pacific Growth Equities, LLC

Okay. Last question on the Discovery Mining business obviously we have seen some recent turmoil, and there could be a lot of litigation and increased regulation. Are you guys, in terms of how that is going to impact that business, are guys already starting to see some pipeline generation, and maybe some deals closing in the next 3 to 6 months as a result of what has been going on or that is going to be a driver that is going to be impact more 1 or 2 years out?

Scipio Carnecchia

Derrick, we definitely believe it will be a driver, I think that the point that we have today is since we have splashed on the scene as Interwoven with our brand and again the relationships we have. The increased in pipelines were seeing for Discovery Mining in somewhat difficult to discern is that a direct result of potential litigation based on what is happened the last 6 to 9 months or is it increased pipeline because Interwoven is a more, we are better known brand, we have got these relationships. When you pick at that with a team, you sit with Chris Junker and Neil Oraja, those guys will tell you that it is more Interwoven being involved and the litigation associated with some of the unfortunate-ness in the economy is yet to show up in the pipeline.

Derrick Wood - Pacific Growth Equities, LLC

Okay, that is it. Well guys, once again great job at managing the business here.

John Calonico

Thanks, Derrick

Operator

Your question comes from Brian Murphy – Sidoti & Company

Brian Murphy - Sidoti & Company

Hi, thanks for taking my question. Max, this is probably for you. I just want to follow up on the linearity issue. I mean last couple of weeks of September, probably that is the office closing environment was seen in a long time. It is just a bit, you did not see any deals slipped into this quarter were that you did and maybe you just had enough pipeline coverage there to hit your numbers?

Scipio Carnecchia

Brian, I do not believe that, that was an issue. We always have spillage. We always have what we call split deals. We track them very closely by the noon on the first day of the new quarter. I am sitting with the VPs from around the world, going over those lists, seeing where we are, what our close plan is to scoop those things back up. And Joe and John have me very accountable against that. I did not see, and so that always happen every quarter and I would tell you that I did not see anymore or any else of that in Q3 of 2008 and we have not seen in the last 2 years.

Brian Murphy - Sidoti and Company

Great. You know some certainly strong tailwinds potentially they are behind your eDiscovery business, I am just trying to get a sense for the size of the opportunity for you guys. How long would it take for that to be 10% of your business?

John Calonico

Well we hope it takes a long time because that means the other businesses are going quite well. The size of the market is enormous I do not have the statistics. But I am sure Joe and Max have a better numbers on that. Right now it is a very small part of the business, like less than a million dollars. We expected to more than double this quarter and we will expect to continue at a very healthy clip over the next several quarters as we continue to cross sell that service into our rather large install base. So look for that to put up some god numbers over the next year.

Scipio Carnecchia

That market I forgot the exact number, I think it was something like $3.5 trillion to 5 $trillion so it is quite of a large market. We are very excited about I, was down in the legal conference in Texas right after we announced that and I can see excitement was just tremendous, how buzz about across that conference with what we are doing and a lot of talking of CEOs of those law firms, and talking even some of the litigation attorneys they were all very excited about the fact that we had decided into the market. We really believe that it would be very good business going forward.

Brian Murphy - Sidoti and Company

Okay great. Just to follow up on the new customer adds, does that include eDiscovery Mining?

Scipio Carnecchia

That is a good question, yes it does and I got a number on that. I am looking at the paper work here. Little over a dozen, Brian

Brian Murphy - Sidoti and Company

It is still a pretty good number. Are you guys getting more new business from new customers now?

Scipio Carnecchia

I think this quarter is consistent with what we have seen 70/30. Seventy existing business thirty from new business. But that number will fluctuate in any quarter for as much as 50% on new business down to about 30% but that really depends on the quarter. I mean the good news here is we continue to bring in a very healthy percentage of our license revenue for new costumers, right?

Brian Murphy - Sidoti and Company

Okay great. And just finally I think I missed a couple of data points. Did you guys give a headcount number?

John Calonico

Yes we ended with 991 so we added 69 in the quarter, of that 46 was from Discovery Mining which was 34 in the other businesses and of those they were all in costumer facing type of applications and development.

Brian Murphy - Sidoti and Company

Okay great. And maybe one more, Max on the 5 terabytes of data under management, I appreciate the metric there but could you give us a little context? You said something that you should be tracking, is that is a good proxy for certain growth for that business?

Scipio Carnecchia

There are some elements on how much data is under management because that is the hosting, that is the on-going monthly fees that we collect from those customers. And there is the new gigabytes that come over the as new business for us that needs to be processed. Those are really extreme money makers in eDiscovery, there is the hosting, there is the initial processing and there is the exit processing. There is a lot of things along the way but the two things on our dashboard that are leading to revenues, how many terabytes under management on the hosting and how many new gigabytes are we processing every week and I am sure John is not going to tell me we are not going to release any of that information. Anyway, it is growing and we think it is going to accelerate our growth.

Brian Murphy - Sidoti and Company

Okay thank you.

Operator

(Operator’s instruction)

Keren Ackerman

Thanks everyone for joining us today. We look forward to talking to go you again in January. Let me turn the call back to Jason.

Operator

That does conclude today's program. We do thank you for your participation. Please enjoy the rest of your day.

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Source: Interwoven, Inc. Q3 2008 Earnings Call Transcript
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