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Executives

Jack Noonan - Chairman of the Board, President & Chief Executive Officer

Raymond H. Panza - Chief Financial Officer, Executive Vice President, Corporate Operations & Secretary

Douglas P. Dow - Senior Vice President, Corporate Development

Analysts

Steven M. Ashley – Robert W. Baird & Co.

Nathan Schneiderman – Roth Capital Partners

Peter Goldmacher – Cowen and Company

Nabil Elsheshai – Pacific Crest Securities

Ross MacMillan – Jefferies & Company, Inc.

Frank Sparacino – First Analysis

John Maietta – Needham & Company

SPSS Inc. (SPSS) Q3 2008 Earnings Call November 4, 2008 5:00 PM ET

Operator

Welcome to the SPSS 2008 third quarter earnings conference call. With the exception of historical information the matters discussed on this conference call include forward-looking statements that involve risks and uncertainties including, but not limited to, market conditions, competition and other risks indicated in the company’s filings with the Securities and Exchange Commission.

A full Safe Harbor statement is available in the SPSS 2008 third quarter earnings press release posted at www.SPSS.com. At this time I would like to introduce you to Mr. Jack Noonan, Chairman, President and Chief Executive Officer; Mr. Raymond Panza, Executive Vice President and Chief Financial Officer; and Mr. Douglas Dow, Senior Vice President in Corporate Development.

Jack Noonan

Thank you for joining us to discuss our 2008 third quarter performance. I’ll give some opening remarks and then Ray Panza, our CFO, will comment on our financial results and provide guidance for the fourth quarter. We’ll end with a Q&A session. Before I comment on the quarter I think it’s important in this very challenging economic environment to review the core strengths of SPSS.

First, we have a large and loyal customer base that has continued to buy our software in previous economic downturns. Second, we’re operationally nimble have moved quickly to implement cost savings initiatives and third, we are financially strong with a very solid balance sheet and strong cash flow. This is why we remain confident in our ability to manage through this global economic downturn.

Turning to our third quarter results as I commented in our press release issued this afternoon in the face of a very challenging economic environment we met our revenue and earnings expectations for the quarter. As larger transactions became more difficult to close we were able to offset this by focusing on smaller ones. In fact we closed 11% more transactions and sales under $25,000 in the quarter. We also saw a good uptick in sales from SPSS Statistics 17.0 which was released midway through the quarter to good customer reception.

With the global economy expected to remain challenging for the foreseeable future we will continue to focus on driving more sales trough our inside channel. It’s now time to turn the call over to Ray Panza to review our third quarter results and outlook for the remainder of the year.

Raymond H. Panza

Earlier today we issued the 2008 third quarter earnings press release including unaudited financial statements for the quarter and nine-month period ending September 30, 2008. It is those financial statements that I’ll direct my comments. The current global economic environment including increasingly less favorable foreign exchange currency rates has presented significant challenges.

While we expected much of this we in no way could have anticipated the events that have transpired over the recent months. For that reason alone we are especially satisfied with the results SPSS has reported for the most recent quarter and nine-month period. This is significant given the comparison against a relatively stronger operating environment that existed during the 2007 third quarter.

As a point of reference the largest single transaction in the 2008 third quarter was only slightly more than half the $1.1 million transaction completed in the 2007 quarter. To further illustrate this point in the 2008 third quarter the four largest transactions totaled less than $2 million while in the same 2007 quarter the four largest transactions totaled approximately $3 million. In the current economic environment we are seeing extended sales cycles, budget limitations by customers, delays in purchases and a shift to smaller deal sizes.

The results reported today reflect a strong customer base, a customer base not dependent on any one product family, business segment or geography. It reflects the ability to leverage our lower price point products through our efficient transaction based inside sales organization. The SPSS 2008 financial results reflect focused operational execution and sound financial management. SPSS possesses a strong financial foundation with a net cash balance in excess of $150 million, good cash flow and well-managed working capital.

With technology proven to add measurable value to a broad and loyal customer base and possessing a track record of disciplined operational and financial management SPSS has again delivered a quarter of record earnings per share and while there never can be any guarantee of future performance SPSS has once again proven an ability to consistently delivery revenue and earnings within or above our previously stated expectations.

Diluted earnings per share for the 2008 third quarter was a record $0.55. This represents a 34% increase over the 2007 third quarter despite the fact that the 2008 quarter includes a net $0.01 higher charge for unusual items. Specifically 2008 includes $0.03 higher cost per share-based compensation due to the 2008 absence of a favorable $800,000 adjustment recognized in 2007.

In addition the current 2008 quarter includes approximately $500,000 or a $0.02 earnings per share charge for the launch of cost management initiatives thereby bringing the total 2008 unusual items to $0.05 per share. This compares with a $1.2 million or $0.04 per share charge recognized in the prior year quarter for rationalization of our facility in the UK and closing of an R&D facility.

Also contributing to the 2008 increase in EPS was a lower than expected effective income tax rate compared to an unusually higher effective income tax rate reported for the 2007 third quarter. The 2008 lower effective tax rate was driven by a more favorable geographic income mix, availability of tax planning opportunities and improved utilization of tax attributes such as NOLs and foreign tax credits.

While a 5% lower number of shares used in the EPS calculation added $0.03 to the 2008 reported earnings per share the impact was partially offset by the lower available cash for investments and a lower average interest rate. The lower number of shares largely reflects the share repurchase program conducted during the 2007 fourth quarter and the 2008 first quarter.

Turning to revenue in the quarter SPSS reported total revenue for the 2008 third quarter of $74.9 million for a 4% increase over the 2007 third quarter revenue of $72.3 million representing the 20th consecutive quarter-over-quarter increase in revenue and the fourth highest reported revenue quarter in the history of the company. This revenue improvement includes higher total revenue in all major geographies, the Americas, Europe and the Pac-Rim with approximately 58% of total revenue coming from outside the Americas.

Total 2008 third quarter revenues benefited from currency exchange rates of approximately $2.1 million an amount totaling less than half the except benefit realized in either of the preceding two quarters. For the quarter total revenue excluding the effects of favorable currency exchange was up 1% over the same quarter a year ago. For the 2008 quarter new license revenue was down 2% compared to the same prior year quarter reflecting not only the more challenging economy and longer sales cycles for large transactions and a notable decline in average deal sizes especially in Europe.

Excluding the benefit of currency exchange rates new license revenue was down 5% from the same prior year period. As discussed however last quarter and as expected in the 2008 third quarter Japan new license revenue improved 32% a 24% improvement the benefits of FX over the prior year quarter. Also as expected Northern Europe while completing the ramp up of the relocated sales organization was down 11% with Holland down 23% causing total new license revenue in Europe to be down 14%.

Maintenance revenue for the quarter was up 18% including 3% for favorable currency exchange rates and a 10% improvement in maintenance renewal rates. Service revenues for the 2008 third quarter were $7.6 million an amount consistent with the preceding four quarters. However, at $7.67 million service revenues in the quarter were down $1.7 million or 18% compared to the 2007 third quarter. This decline was not unexpected.

In addition to the prior year third quarter being a difficult comparison due to timing of service projects last year service revenue generally trails license revenue as services are typically sold with larger transactions. As previously discussed those larger size transactions have been on the decline as we see the economy driving to shift from larger deals specifically with those having a value in excess of $250,000 to a greater number of smaller transactions. Those generally sold without a service component.

Total operating expenses for the 2008 third quarter were $62.1 million up $2.2 million or 4% compared to third quarter in 2007. This increase includes the previously discussed $800,000 of higher share-based compensation charges reflecting the absence of favorable adjustment recognized in the 2007 third quarter and a $1.4 million increase in the cost of revenue line largely including $600,000 higher R&D amortization and $600,000 for higher material costs related to [inaudible] hardware sales.

As expected the benefits of prior R&D facility rationalizations and productivity improvements resulted in lower R&D costs while a determined focus on G&A drove that cost lower. These savings were largely offset by higher sales marketing and services expenses related to the higher level of revenue and the previously discussed special $500,000 charge for management cost initiatives.

Overall operating expenses in total represented 83% of revenue an amount equal to the prior year period. As a result we maintained a solid operating margin of 17% equaling the operating margin reported for the 2007 period. For the 2008 third quarter operating income was $12.8 million of a 3.8% increase over the 2007 third quarter’s reported operating income of $12.5 million.

In the 2008 third quarter SPSS realized other net income of $1 million compared to net other income of $2.1 million for the 2007 quarter. This decline is nearly entirely due to lower interest income reflecting a decline in investment rates. As a result of the lower interest income able to be realized income before income taxes for the 2008 third quarter was down 5% to $13.8 million.

As previously discussed however a favorable change in the expected annual effective income tax rate from 36% to 32% drove a true up 24% effective income tax rate in the 2008 third quarter resulting in record reported net income for a 25% increase over the 2007 third quarter. The company continuously evaluates its expected full year effective income tax rates. Turning to the nine months ended September 30, 2008 total revenues were $228.8 million for an 8% over the $211.4 million in the same 2007 period.

For the 2008 nine-month period approximately 60% of the reported total revenue was generated from outside the Americas. For the 2008 nine-month period total revenue excluding the FX of favorable currency exchange rates was up 3% over the same period a year ago. New license revenues for the nine months was $107 million up 5% in 2008 over 2007. The reported increase in license for the nine-month period was led by an 8% increase in the US and a 12% increase in the Pac-Rim primarily Japan partially offset by a 1.5% decline in Europe.

Overall excluding FX impact new license revenue was down 1% for the nine month year-on-year period. For the nine months of 2008 maintenance revenue was $98.9 million for a 13% increase over the same prior year period. Excluding currency maintenance revenue for the nine-month period was up 7%. Total operating expenses for the 2008 nine-month period were up $14.6 million or 8% over the 2007 nine-month period.

These higher expenses include $4.8 million related to the impact of currency exchange rates, $3.2 million related to higher cost of revenue, higher R&D amortization and material costs and the previously discussed $1.3 million of unusual third quarter charges. The net balance of the year-over-year increase is primarily driven by higher level of sales.

For the nine months ended September 30, 2008 total operating expenses were 84% of net revenues equal to the same prior year period. Operating income for the 2008 nine-month period was $37.6 million or 8% higher than the $34.8 million for the first nine months of 2007. The reported operating margin defined as operating income as a percent of net revenues was 16% for the 2008 nine months ended September 30, 2008 equal to the reported operating margin for the same 2007 period.

As set forth in the Reg. G non-GAAP reconciliation schedule provided with the press release financial statements as a percent of revenue operating income excluding the effects of share-based compensation would have been 17% and 20% for the three and nine months ended September 30, 2008 respectively.

Other income and expense for the 2008 nine month period was a net other income of $3.8 million compared with a net other income of $4.0 million for the same 2007 period. The net decline is primarily due to less favorable interest rates largely offset by improvement and lower currency translation expenses. The effective income tax rate for the first nine months of 2008 is 32% compared with 39% for the first nine months of 2007.

As previously discussed the change in the effective income tax rate mainly reflects a more favorable income mix, tax planning opportunities and the ability to utilize certain tax attributes. Net income for the first nine months of 2008 was $28.2 million for a 19% increase from the $23.7 million for the same 2007 period. Reported diluted earnings per share for the nine months ended September 30, 2008 was $1.47 compared to $1.16 for the same period in 2007 for a 27% increase.

Moving on to the balance sheet at September 30, 2008 the cash balance was $307 million an amount equal to the 2007 year end cash balance. While cash flow from operations for the nine-month period totaled $45.5 million approximately $28 million was used for share repurchases and $18 million was reinvested in the business. The currency exchange rate negatively affected the cash balance by $7.2 million.

The only debt is a five-year non-callable $150 million convertible debt-offering due in 2012. Those bonds have a 2.5% annual coupon rate. The liquidity of the company is further supported by a focus on non-cash working capital. At September 30, 2008 non-cash working capital not including deferred revenue and deferred income taxes was 3.2% of trailing 12 months revenue.

Net accounts receivable at September 30, 2008 were $40.4 million resulting in days sales outstanding, DSO, of 50 days. This is down from net receivables of $56.6 million and 65 days at December 31, 2007. The balance sheet amount of capitalized software at September 30, 2008 is $37.1 million an increase of $3 million from the 2007 year end balance of $34.1 million.

The amount of R&D spend capitalized through the first nine months of 2008 is $1.2 million net of amortization specifically $10 million capitalized offset with $9 million of amortization. The balance of the increase in capitalized software on the balance sheet is approximately a $2 million one-time expenditure for purchased software whereby the company embeds third party software in its showcase product.

Turning to the statement of cash flow as previously noted net cash flow provided by operating activities was $45.5 million for the nine months ended September 30, 2008 or $6 million less than the $51.5 million provided during the same nine-month period last year. This decrease includes a $7.4 million payment related to accrued expenses recorded at year-end 2007 and paid in early 2008 relative to the timing of share repurchases under the authorized share repurchase program.

Net cash flow from operations for the 2008 third quarter was $16.7 million representing the highest quarterly operating cash flow for the year. Looking ahead we expect to face a continued slowing global economy including increasingly unfavorable foreign exchange rates. In response we have initiated cost management measures including expected staff reduction of approximately 10% by the end of the fourth quarter so as to better align our expenses with our revenue expectations for the near and longer term and to ensure continued solid operating margins and profitability.

For the 2008 fourth quarter we expect revenues to be between $73 million and $78 million. Before considering charges estimated of between $3.5 million and $4.5 million or $0.12 and $0.16 per share related to the cost management and staff reduction initiatives we expect 2008 fourth quarter diluted earnings per share of between $0.41 and $0.49. The 2008 fourth quarter EPS guidance includes an estimated $0.06 charge for share-based compensation and an estimated effective income tax rate of 32%.

For the 2008 fiscal year we expect revenues of between $302 million and $308 million with EPS in the range of $1.90 to $1.98 again before considering any special charges either already incurred in the third quarter or yet expected to be incurred in the fourth quarter. The 2008 full year EPS guidance includes an estimated $0.26 charge for share-based compensation and an estimated effective income tax rate of 32%.

Annual savings from the cost management initiatives and staff reductions are expected to exceed $10 million. In 2009 we will continue to focus on capital preservation to allow for acquisitions that satisfy our strategic filter and accelerate revenue growth. We will continue to drive productivity improvement efforts to grow operating margins and as we continually adjust to align expenses with our revenue expectations.

Specific guidance for 2009 will be provided with the announcement of our 2008 fiscal year results. Making a profit is core to our company values with a goal to drive revenue growth efficiently and not merely focused on reducing costs. As always we remain committed to delivering superior customer value and long-term shareholder returns through disciplined financial and operational management.

At this time I’d like to turn the meeting back over to Jack.

Jack Noonan

In closing I’d like to add some perspective to our fourth quarter outlook. We view our guidance as an expectation for solid financial performance when measured against a very challenging economic environment and strengthening dollar. The operational actions we’ve taken along with our go-to-market strategy should give us a solid foundation moving forward. We can’t change the current economic slowdown but we can execute effectively through it.

Christa, we’ll now open the call up for questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Steven M. Ashley – Robert W. Baird & Co.

Steven M. Ashley – Robert W. Baird & Co.

Maybe I could start with a couple questions, Ray, around the guidance. The midpoint of the guidance calls for revenue to be down 5% year-over-year. How much of that year-over-year decline is currency and would you be looking for a decline ex currency or maybe you could talk about revenue growth expectations ex currency in the fourth quarter?

Raymond H. Panza

Steve, as I’m sure you’re aware, nobody would have expected the Euro to be where it is today or the Pound to be where it is today. We certainly expected a strengthening dollar but this morning you’re looking at a Euro in the 126 to 127 range. You’re looking at a Pound under 160 and everything I’m reading indicates that that’s going to continue to drop. So you’re 100% correct.

We expect significant impact on our 2008 revenue driving down our revenue because of the currency challenges. So that was the primary factor. It is a difficult economic environment from a sales standpoint but I think as we’ve demonstrated now this past quarter we can continue to put up fairly solid numbers from a revenue perspective. We’re substituting the larger deals with smaller deals but I don’t want to take anything away from the global economy.

Steven M. Ashley – Robert W. Baird & Co.

Dos your currency assumptions apparent in your guidance, are they lower than where the Euro and Pound relationships stand today?

Raymond H. Panza

I’m expecting continued challenges from currency, yes.

Steven M. Ashley – Robert W. Baird & Co.

In terms of the cost savings $10 million a year, $2.5 million a quarter, how much of that savings if any will we see in the fourth quarter and is embedded in guidance?

Raymond H. Panza

Virtually none.

Operator

Your next question comes from Nathan Schneiderman – Roth Capital Partners.

Nathan Schneiderman – Roth Capital Partners

A handful of questions for you, first of all I was hoping you could talk about the decision to cut headcount 10% in a little more detail. What specifically are you seeing out there that’s driven you to make such a big adjustment to your headcount?

Jack Noonan

It’s an absolute unknown and the worst thing you can do within an organization is continue to trickle a reduction or cost cutting out. You get it over with, get it done and move forward and it’d be great if we cut too far and had to hire tomorrow, but I don’t see it on the horizon.

Nathan Schneiderman – Roth Capital Partners

Drilling down the guidance in a little more detail, that guidance is certainly for a negative comp for Q4, but do you think it’s reasonable for our planning purposes to expect down revenue in 2009? Do you feel like that’s the likely scenario?

Raymond H. Panza

When we give guidance for 2009 we’ll cover that [inaudible].

Nathan Schneiderman – Roth Capital Partners

If you’re not willing to talk about that, could you at least talk about what you think is normal Q4 to Q1 seasonality? The last couple of years we’ve seen total revenue down 1% to 2% sequentially. Is that normal or would you highlight anything unusual that drove such limited seasonality the past couple of years?

Raymond H. Panza

Nathan, the concern right now is there’s so many moving parts and where currency is, I’m certainly expecting to start 2009 with currency in a very different place than where it was at the beginning of this year and that’s certainly going to have a challenging impact on us throughout all of 2009. I think normalcy kind of goes out the window a little bit here when I try to compare what might happen in the first quarter versus the fourth quarter.

Separately our fourth quarter tends to be our strong quarter but at this point I’m looking at a fourth quarter where I’m expecting to see continued declines in FX and with roughly 60% of our revenue coming from outside US, there’s a lot of moving parts, a lot of unknowns. So we’re taking what we know, looking at our pipeline, taking our best estimates of where the currencies and gave our guidance accordingly.

Nathan Schneiderman – Roth Capital Partners

Are you able to perhaps speak to some of the dynamics you saw in late September? Also I’m curious during the month of October what have you seen specifically that drives your caution here just in terms of deal flow, etc.?

Jack Noonan

First of all, the large transactions are idiosyncratic and there are always things that move around at the end of the quarter and when you put a forecast together you plan for those. But we didn’t expect the Hurricane to impact us a $1 million deal that was closed and the funds were diverted by the government to Ike. Things like that are things you just can’t count on. They happen every quarter and you do what you can to manage around them.

What we see going forward is more of an unknown. We’ve got a solid pipeline against the number that we’ve given you but who knows what’s going to happen post-Election, who has any idea what’s going to happen with the economy. We look at our upside in growth in the future is our larger transactions with our deployment solutions sold into IT.

We know that across the board IT organizations are expecting to cut budgets next year. The great part of our offering is we have our smaller sized deals that well into line of business guys and we’ve been able to continue and pass downturns to manage significantly better than most of the software market, the enterprise software market specifically. But we also know that during the downturn and the dot.com bust when IT budgets were cut substantially they were cut on basic blocking and tackle offerings to spend some more money on things that would change the business.

Well we believe we are a thing that changes the business and we literally don’t know what to expect. We know IT budgets are going to be cut, we also know we’ve got a loyal customer base, that our line of business folks that buy in downturns. This is a big unknown for everybody. We think the forecast we’ve got in front of you we can see 90 days and we think we’re in line.

Raymond H. Panza

Just add on to Jack’s points here is you know as a management team we like to have choices, we like to always make sure that we give ourselves options, that we build a solid foundation, that we’re not managed as much by events as maybe some others are. On top of that I think what we’ve demonstrated the last several years is we’re willing to do the things proactively to ensure the long term values, to ensure that we meet our promises.

Once again we’re getting ahead of the curve here with some of the actions we’ve taken entirely from a cost management standpoint. We remain very confident about the future. We believe the company has good technology, good people, good market, good customers, comes down to execution through the unknowns and we’ll see what happens.

Nathan Schneiderman – Roth Capital Partners

Very final one for you, maintenance was up unusually strong year-over-year, I was just curious if there was any catch up payments or something one time in the Q3 number that would not recur in Q4?

Raymond H. Panza

As you know maintenance for us has continued to move around a little bit. You always have to look at this on a 12 month rolling. 18% is not going to be a recurring item. As I mentioned in my comments, a portion of that is currency, a portion of that relates to the fact that we did have good renewals during the period. You really have to look at that number on a rolling 12, a good single mid digit is the right growth rate for us.

So, no there’s no one special item that drove it, it’s things that happen on an ongoing basis for us. Again it still represents more than 40% of our overall revenue and it’s nice to have that kind of revenue stream.

Operator

Your next question comes from Peter Goldmacher – Cowen and Company.

Peter Goldmacher – Cowen and Company

Ray and Jack, can you help us understand a little bit about the breakout of the traditional package business, government and student business and then the more commercial business? One of the things I think you guys have shown over the last couple years is the ability to get involved in a sales cycle and then it becomes not binary, it’s an opportunity if they didn’t want the full seven figure deal, they could break it down into components and then buy some of the tools and many ways to skin the cat.

Can you help us understand what you’re seeing around that, what you saw in Q3 and how you think, I don’t really want to call it modular, but the ability for customers to break down the purchase into its components helps you guys in a tougher environment?

Jack Noonan

If I look at the breakdown between health care, government, higher education and commercial, if we look at the quarter, if we look at the distribution education grew a little bit, higher ed grew a little bit and I think the place that suffered was the commercial space, if we look at the two. Government was pretty much in line. Right, Doug?

Douglas P. Dow

Peter, if you’ll think of it as our usual split, runs somewhere around 60% commercial, heavy 20% academic and light 20% government, what we saw in the third quarter was an uptick in academic. It was a strong quarter, there were a couple of good sized deals in the academic world and that government performed a little lighter than that usual 20% pace.

Again Jack noted that there was $1 million signed, closed and loaded and it disappeared with the funds going away for Hurricane relief and a little lighter commercial. If you look at year-to-date what we’re seeing year-to-date for 2008 we’re running even with what happened in the third quarter. We’re running about 62% government, 23% education and about 15% all in around the government sector. That’s some numbers for you.

In terms of modularity of deals, let me turn it back to Jack.

Jack Noonan

No, no Doug just said 62% government and then he repeated government again. It’s 62% commercial and the healthcare and government together is approximately 15%. Did that answer your question, Peter or is there a second part to that?

Peter Goldmacher – Cowen and Company

The second part of the question was how does the ability to break down a sales process from an application sale to a tool/product sale help you guys?

Jack Noonan

The nice thing about the solution sale versus a tool sale is they’re all the same components and the nice thing of it is, we’ve got the ability to solve a business problem with a relatively low entry price to a very substantial price depending on how much the customer wants to do. That’s very, very good so we can walk in with an opportunity to solve a business problem and solve it potentially many ways depending on the customer’s expertise and capability.

That’s just terrific, it gives us a lot of flexibility on the ground with the sales effort. Also though when you look at our go-to-market because of our broad set of offerings we can look at what’s getting traction in the marketplace and move our direct marketing worldwide to focus on that, whether it’s a specific vertical or a specific technology that’s getting traction.

The neat thing about our transaction base business, especially the business under $25,000, 80% of those transactions close within 30 days. So within a specific quarter we can move around activity based on response from the marketplace.

Operator

Your next question comes from Nabil Elsheshai – Pacific Crest Securities.

Nabil Elsheshai – Pacific Crest Securities

The follow up on the cost cuts, could you give a little more color on where and what operating lines you expect those to fall on or is it going to be fairly evenly spread out?

Raymond H. Panza

It’s pretty broad, we’re looking at not so much cutting costs but making ourselves for efficient, aligning our operations around our channel strategies and so it is fairly broad. It’s focusing across the globe, it’s focusing in all functional areas. We’re just reviewing all of our businesses. We’re looking at certainly the go-to-market from a sales standpoint and how to better leverage our inside sales.

To go back to Peter’s question for a moment, we have a huge competitive advantage that we can offer a lower price point product when the customer wants to go to a smaller transaction. That means building up more on our inside. We also then when we do that don’t need certain other positions globally. We’re looking across the board, globally and functionally.

Jack Noonan

It wasn’t arbitrary and unilateral, but it was unilateral.

Nabil Elsheshai – Pacific Crest Securities

Could you give me the sales headcount?

Douglas P. Dow

The sales headcount through the end of Q3, total quarter carrying heads 223, 39 in the field, 184 in telesales. So you’ll see we’re down one from the previous quarter in field and up about nine in telesales on the inside channel.

Nabil Elsheshai – Pacific Crest Securities

I think last time we talked you said you were going to focus more on inside sales. Would you see cutting back more on the outside sales or do you feel like you’re pretty comfortable with where you are right now?

Jack Noonan

I think you’re going to see some transitioning between the named accounts and a transaction base sales.

Nabil Elsheshai – Pacific Crest Securities

Turning to the deployment solutions, Doug could we get the same numbers we’ve gotten in the past, how that broke down between tools and deployment solutions?

Douglas P. Dow

Tools were almost flat, about .9% negative in terms of revenue growth over the prior quarter and tools accounted for 91% of the total new license revenue. The solutions group which includes dimensions as well as the predictive line of products, that showed a negative 13% growth in new license and accounted for about 9% of the total new license revenue.

Nabil Elsheshai – Pacific Crest Securities

Do you think the deployment solutions business, given you focus on inside sales and that seem to be more of an enterprise sale, do you think you’d expect that to continue to struggle in this environment?

Douglas P. Dow

I’m going to ask Jack to help with part of the answer, but I think from looking at the numbers what we’re seeing is that the two product lines in that group are showing some different characteristics right now. If you look at the dimension survey line what you’re seeing is some growth there and that growth is coming more and more from the low end. We’re doing more transactions especially the small size, the under $25K size, we again saw substantial uptick both in terms of dollars generated there as the number of transactions.

That’s being offset by a change in the mix in the predictive line where what we saw in previous years is we’re selling things like predictive claims, predictive marketing, we’re selling a lot fewer of those at the higher ticket value and we’re actually selling more deals in that category with the PEZ offering and the predictive web mining. What you’re seeing is the bundle is coming together.

In fact when we looked at the total deal value that included these so-called predictive projects we were on a pace about $100K off the previous quarter. The number of deals we did that involved the predictive line was actually up slightly in the quarter to 27 deals as opposed to 23 the prior quarter. I think what we’re seeing the way I characterize it how does this fit with the bigger picture, more deals at a lower transaction value emphasizes the reinforcement we’re doing to the inside transaction channel.

That’s where we think we can continue to drive our growth.

Nabil Elsheshai – Pacific Crest Securities

If we could get an update on partners, that number influenced an indirect number has bounced around a little bit. Could we get a number for the quarter and then also just a higher level of thoughts on how the partner and direct channel is coming along?

Douglas P. Dow

Partner we’re seeing influenced revenue was 9% of new license revenue for the quarter compares to 7% in the prior quarter.

Operator

Your next question comes from Ross MacMillan – Jefferies & Company, Inc.

Ross MacMillan – Jefferies & Company, Inc.

Just looking at the approximate 10% headcount cuts which you’re saying will give you $10 million plus of cost savings annualized, you’re doing about $220 million plus of op ex per year right now, I guess I would have thought the 10% headcount cut would have maybe given a little bit of a higher savings. Can you just talk to that, just explain why we’re not going to see more than $10 million annualized?

Raymond H. Panza

Again, I’d have to go through the math and look at the individuals but we said in excess of $10 million.

Ross MacMillan – Jefferies & Company, Inc.

On this change, the 10% reduction and some of this extra investment on inside versus field, I guess I’m just trying to parse out how this could be just cyclical with the change in the environment going to smaller deals, but part of it could be strategic and a move away from that kind of effort around the enterprise sale. Is it one or the other? Could you just talk to that?

Jack Noonan

This is 100% opportunistic. We are continuing our focus on our named accounts as we have historically but what we’re doing is we’re following the money in the short term.

Operator

Your next question comes from Frank Sparacino – First Analysis.

Frank Sparacino – First Analysis

It’s not clear to me when you talk about the reductions. It sounds like you’re cutting revenue producing functions but I just want to confirm that that’s accurate.

Raymond H. Panza

No, I’m not sure how you’re getting to revenue producing functions, Frank. I’m just not sure how to answer that because we’re not cutting revenue-producing functions.

Operator

Your next question comes from John Maietta – Needham & Company.

John Maietta – Needham & Company

Jack, I’m just wondering if you could comment with prior releases of SPSS. Historically what’s been the uplift? Has that been a two-quarter phenomenon, we have seen a little bit of an uptick with a new lease, the economy notwithstanding this go around.

Jack Noonan

It’s difficult to say depending on the release and the acceptance in the marketplace. Ray mentioned that we were pleased with the effectiveness in Japan. Well one thing happened this quarter is this is the first time, and this is based on this investment we made started over two years ago to rewrite the entire front end of SPSS in Java so that we could release on all platforms in all languages simultaneously. This is the first SPSS product release that’s gone out in all languages on all platforms simultaneously and I believe that has helped.

That’s also when you do that you have much better opportunities for quality improvement, messaging around the technology, messaging around the world, you also have cost savings involved in that in the marketing efforts and in the sales efforts. This was the first release and I think we’re seeing some benefit from it.

John Maietta – Needham & Company

Ray, I just wanted to follow up on your response to an earlier question, the $10 million plus cost savings. Did you say very little of that will be recognized in Q4?

Raymond H. Panza

Very little will be in Q4 as the savings. Keep in mind there is legal requirements when you’re outside of the US where many of the people end up staying on the payroll for most if not all of the quarter.

Operator

At this time you have no further questions. I will turn this conference back over to Mr. Noonan.

Jack Noonan

Thanks everybody for joining us to hear about our third quarter results.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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Source: SPSS Inc. Q3 2008 (Qtr End 09/30/2008) Earnings Call Transcript

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