Deltek, Inc. Q3 2008 Earnings Call Transcript

| About: Deltek, Inc. (PROJ)

Deltek, Inc. (NASDAQ:PROJ)

Q3 2008 Earnings Call

November 6, 2008 5:00 p.m. ET

Executives

David Spille – Vice President, Investor Relations

Kevin Parker – President, Chief Executive Officer

Mark Wabschall – Executive Vice President, Chief Financial Officer

Analysts

Bryan McGrath – Credit Suisse

Aaron Schwartz – JPMorgan Chase & Co.

Corey Tobin – William Blair & Company

[Brad Silla – Barclays Capital]

[Andrea – Oak Tree Capital]

Priya Parasuraman – Wachovia Securities

[Analyst – Merrill Lynch]

Operator

Good afternoon, my name is Josh and I will be your conference operator today. At this time, I would like to welcome everyone to the Deltek Third Quarter 2008 Earnings Conference Call. (Operator Instructions) Mr. Spille, you may begin your conference.

David Spille

Thank you. Good afternoon everyone. My name is Dave Spille, Vice President of Investor Relations for Deltek. Joining me here today are Deltek CEO Kevin Parker and Mark Wabschall, our CFO.

I want to welcome you to today’s conference call announcing Deltek’s financial results for our third quarter ended September 30, 2008. The press release issued this afternoon containing our financial results for the quarter is available on our website at www. Deltek.com. This call is being recorded and will be available for replay on Deltek’s website or by dialing the following numbers: 1-800-642-1687 or 1-706-645-9291. The access code for the replay is 68882972 and the conference call replay is available through November 13, 2008.

During the course of this conference call, we may make forward-looking statements that involve substantial risks and uncertainties. You can identify forward-looking statements by words such as anticipate, believe, estimate, expect or similar words.

Actual outcomes and results may differ materially from what is expressed in these forward-looking statements for many reasons. Any forward-looking statement in this conference call speaks only as of the date on which it is made. We undertake no obligation to update or revise any forward-looking statements whether as a result of new information due to events or otherwise, except as required by law. Please refer to our earnings release for further information on forward-looking statements and for explanations on the use of non-GAAP financial information.

You can also obtain more information about Deltek, including reviewing our SEC filings and press releases by visiting www.deltek.com. And with that, I’ll turn today’s call over Kevin.

Kevin Parker

Thanks, Dave. Good afternoon everyone and welcome to our Q3 earnings conference call. Before I turn the call over to Mark for a detailed review of our results, I want to talk for a few minutes about the quarter, both the challenges and successes and share with you our sense of the market as well as what we’re hearing from our customers.

We entered Q3 with a good pipeline and good momentum after a strong Q2. Unfortunately, like many other companies, we say a significant change in buying sentiment among a number of our customers as September progressed.

That change in sentiment, which was the direct result of the accelerating economic crisis was almost exclusively felt in the A&E market. The developing financial crisis in the closing weeks of the quarter caused many of them to delay or postpone previously planned purchases of our vision products sweep. For those customers, the overwhelming sentiment we heard was to delay any decision they could while they watched and waited to see what happened next.

While it didn’t seem to affect many of them directly, the general sense of uncertainty and almost daily economic turmoil resulted in an extraordinary sense of caution on the part of many decision-makers. Deals that were in the final stages and had firm closing schedules were postponed as decision-makers grew more cautious by the day.

That impact was felt almost uniformly across both our direct and indirect A&E channels with our reseller partners contributing approximately 14% of our total license revenues, an increase from 12% in the prior year.

In contrast to the challenges to our A&E license revenue, we have a strong quarter in many other areas of our business. Most importantly, we grew our GCS and Costpoint license revenue from our government contracting customers by more than 30% from the prior year’s level as we continued to win new customers and expand our penetration within our existing customers.

To contrast their economic views to those of our A&E customers, our gov-con customers view the future as best characterized by a general sense of stability as they remain focused on the longer-term prospects for their businesses and the potential changing priorities arising from a new administration. Those results in the gov-con market were also very broadly based as we won a number of new customers and were not dependent on any large deals to achieve these results.

Our results were strong in both our GCS and Costpoint product families. Our discussions with these customers at all levels indicated most are unaffected by the credit crisis and have a strong backlog of business and are looking to the pending change of administration for new business opportunities. It continues to be a dynamic market and one that they expect will continue to grow in 2009.

Q3 license revenue results for our Enterprise Project Management product family were below our expectations due to a couple of deals that slipped out of the quarter as a result of the impact of Hurricane Ike on some Houston-based customers. We are re-engaged with these customers and anticipate closing these deals in the coming months.

We recently expanded our portfolio of EPM products with the acquisition of MPM. Deltek now has and provides critical project management capabilities at scale from department-level desktop applications to enterprise-wide products for global companies.

Q3 was also a good quarter for us from a product development perspective. Besides purchasing the MPM solution, we released new versions of our GSC and GovWin products and launched four package service plans designed to simplify and accelerate product implementations.

The newest version of our GCS product, GCS Premier 5.0, delivers significant enhancements to our industry-leading product accounting solutions for small to medium-sized government contractors. These enhancements enable our customers to more easily and more accurately process and manage accounting information while ensuring DCAA compliance.

Our newest version of GovWin is the only comprehensive solution on the market that supports the entire business development life cycle for government contractors. GovWin provides a full range of lead management, proposal automation and opportunity management capabilities that enable our customers to make faster and more precise bid decisions.

It also contains flexible reporting tools which empower our customers to analyze win rates, back log, revenue forecasting and other business metrics for greater visibility into their businesses. Before I turn the call over to Mark for more details, let me give you a quick update on two other important issues that we’ve talked about in prior calls: our international expanse and strategy and our focus on the professional services market.

We continued to make good progress in both markets. In Q3 we saw our deal pipelines continue to grow throughout the quarter. International license revenue represented approximately 5% of total license revenue, consistent with recent quarters in the prior year.

We continue to focus on increasing the number of referenceable customers that we have in these areas as well as increasing our brand name recognition of these important markets. We’re winning new customers in each market and we expect to see our 100th customer in the U.K. early next year.

Looking back on the quarter, while we’re very disappointed with our results in the A&E market, we’re encouraged by the continuing strength in our gov-con market and we continue to win new customers in both segments.

We had many successes in Q3, including growing our steady stream of maintenance revenue, significantly improving our consulting margins, generating strong EPS and cash flows and enhancing our product portfolio. We believe we have significant market opportunities in front of us and we’ll continue to work very hard to ensure we take advantage of those opportunities, even in a more challenging economic environment. And with that, I’ll turn it over to Mark so he can give you a detailed review of our financial results, Mark.

Mark Wabschall

Thank you, Kevin. The Q3 financial results that we reported today are in line with or better than the guidance ranges we provided in our preliminary announcement on October 15th.


Total revenue for the quarter was 71 million, compared to 70.4 million in Q3 of last year, which represents a 1% increase over the prior year period. Our increase in total revenue was a result of growth in both our maintenance and support revenues and our consulting services revenues offset by a decrease in our license revenue.

License revenue for the quarter was 18.5 million, which represents a 13% decrease from Q3 of 2007. While we had double-digit growth in our sales to government contraction customers, it was not sufficient to offset the decline in license revenue from our A&E customers. As Kevin previously mentioned, many of these customers delayed their purchasing decisions due to the financial crisis.

Looking at some of the details of the quarter, we added approximately 120 new customers, compared to 100 we added in Q2. New customers accounted for approximately 25% of our Q3 license revenue, which is slightly more than the 20% we reported in Q2.

We had approximately 1,100 license transactions in Q3 and none of these deals were over $500,000 as compared to three transactions in the prior year period. During Q3, sales from our reseller partners comprised 14% of our license revenue, compared to 12% in Q3 of last year and 17% in Q2 of 2008.

International license revenue represented 5% of the total license revenue in Q3, consistent with the prior year period and Q2 2008.

Our GAAP margin on license revenue was 91%, in line with our expectations and recent trends and we expect to report license margins in the low 90’s going forward.

Our Q3 consulting revenue was 23.1 million, representing a 1% increase over the prior year and 3% over Q2. The sequential increase is due to higher demand for both our implementation and training services. The increase in our consulting margins at 21% in Q3, from 14% in Q2 and 15% in Q3 of 2007 is due to higher utilization of our billable consultants and other cost savings.

Consequently, we were able to achieve slightly higher revenue with lower labor and labor related expenses. The 21% consulting margin we achieved in Q3 is greater than the high teens guidance we gave on our last earnings conference call and going forward, we will continue to work towards achieving consulting margins in the high teens or better.

Maintenance revenue increased 12% year-over-year to 29.3 million, primarily as a result of an increase in our total customer count and our ability to maintain a retention rate in excess of 90% in our maintenance-paying customer base. Our Q3 maintenance revenue increased approximately 4% from Q2 2008, which is in line with our typical 2% to 5% sequential increase. Our Q3 maintenance and support margin was 81.5%, consistent with our historical results and objectives.

In Q3, our gross profit margin increased to 64.2%, compared to 60.5% in Q2 and 63.5% in Q3 of 2007. The increase from these prior periods primarily is a result of our improved consulting services margin, partially offset by the decline in our license revenue.

Looking at the rest of our P&L, our research and development expenses in Q3 increased by 800,000 over the prior year period to 11.8 million. This increase was primarily driven by higher labor related expenses including incentive compensation for achieving product delivery milestones.

In addition, during Q3 we recorded a $290,000 in-process research and development charge that we incurred as a result of the MPM acquisition.

R&D expenses increased by approximately $200,000 from Q2 2008 levels as a result of the Q3 in-process R&D development charge. Our Q3 sales and marketing costs were 13.6 million, an increase of 2 million over the prior year period. This growth was primarily driven by an increase in labor and labor related costs as a result of increased headcount, offset by a decrease in commission expenses.

Our Q3 sales and marketing expenses were relatively flat from last quarter. Our G&A expenses in Q3 were 8.8 million, an increase of 1.4 million over the prior year and $400,000 over Q2. This growth is primarily driven by increased labor and labor related expenses as well as increases in various professional fees.

Our Q3 non-GAAP operating income of $15.1 million decreased by $700,000 from Q2 and by 2.6 million from the prior year. These decreases in our non-GAAP operating income are primarily the result of lower license revenues, offset by higher maintenance revenues, offset by higher maintenance revenues and improved consulting margins.

However, when expressed as a percent of revenue, our non-GAAP operating income margin actually improved in Q3 to 21.3% as compared to 20.4% in Q2. Our Q3 net interest and other expense was 2.3 million, which is relatively unchanged from Q2 and half the amount we reported in Q3 2007.

The $2.4 million decrease in interest expense from the prior year was due to lower LIBOR rates and a decrease in our debt levels as a result of our IPO proceeds.

While we saw increases in LIBOR rates during the recent financial crisis, the interest rates have recently subsided. We continue to be well in compliance with all of our debt covenants.

One of my first observations when I came on board earlier this year was that our 45% effective tax rate was substantially higher than our industry peer group. In connection with the filing of our 2007 U.S. tax return during Q3, we commissioned a number of tax studies over transfer pricing with our international subsidiaries, research and development tax credits and other tax initiatives.

As a result, we were able to realize $1.5 million of incremental tax benefits on our worldwide tax returns for 2007. This had the effect of lowering our annual effective tax rate from 45% to 39%, resulting in a $1 million true-up adjustment to the tax provision we recorded in the first half of 2008.

Consequently, we reduced our Q3 tax provision by a combined $2.5 million. Going forward, we expect to continue to benefit from the lower 39% effective tax rate.

Non-GAAP net income for the third quarter increased 35% to $10.2 million or $0.23 per share, compared to 7.6 million or $0.19 per share in the prior year. We were able to exceed our original guidance of $0.19 to $0.20 per share despite this shortfall in our license revenue due to a combination of strong margins, cost savings and tax planning initiatives.

On a GAAP basis, our net income increased 38% to 8 million or $0.18 per share, compared to 5.8 million or $0.14 per share in Q3 2007. Our GAAP EPS results also exceeded the high end of our original guidance range of $0.14 to $0.15 per share.

Turning to our balance sheet and cash flow statement, we ended the quarter with cash of 28.2 million compared to 32.9 million at the end of Q2. During Q3, we spent 16.4 million for the acquisition of the MPM solution and related assets. Because we’ve purchased the MPM assets in the last month of the quarter, the impact on our Q3 financial results was minimal.

Our Q3 cash flow from operations was $13.1 million. Only $500,000 of the operating cash flow was form working capital changes. The remaining 12.6 million was generated from net income and non-cash expenses.

As we completed several internal infrastructure improvements is Q2, capital expenditures and lease hold improvements decreased from 2.2 million in Q2 to .7 million in Q3. We do not anticipate any major capital expenditures in Q4.

DSO’s for Q3 were 61 days, compared to 59 days in Q2 2008. We have not seen a deterioration of receivables and collections remain strong. We continue to expect our future DSO’s to be within our benchmark range of 55 to 65 days.

We ended Q3 with a short-term deferred revenue balance of $22.1 million, which is down approximately $600,000 from Q2 2008 as a result of the recognition of previously deferred service revenues. At quarter end, our deferred revenues substantially consisted of maintenance and professional services, with only 5% of the balance related to license revenue.

Developing our guidance for the upcoming quarter was particularly challenging, given the difficult economic environment. Notwithstanding this uncertainty, our pipeline remains strong. We are actively engaged with our customers and our license performance so far this quarter is on track with previous periods. We expect license revenue to be in the range of 20 to 21 million and total revenue to be between 71.5 to 73 million.

Q4 non-GAAP operating income is expected to be in the range of 15 to 16 million, which results in an operating margin of approximately 21% to 22%. Non-GAAP earnings per share expect to be in the range of $0.17 to $0.18 per share.

A non-GAAP operating income and EPS exclude the impact of approximately $2.5 million of stock-based compensation expense and approximately $1.3 million of intangible amortization expenses.

Our Q4 GAAP earnings per share is expected to be in the range of $0.12 to $0.13 per share. Our Q4 GAAP and non-GAAP earnings per share targets assume a weighted average share count of approximately 45 million shares and we expect our effective tax rate to be approximately 39% in Q4.

Now, I’ll turn it over to the operator for the Q&A portion of the call, operator.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes by Bryan McGrath with Credit Suisse.

Bryan McGrath – Credit Suisse

Hey, guys, can you hear me?

Mark Wabschall

We can, Bryan.

Bryan McGrath – Credit Suisse

Hey, Kevin, I wanted to circle back. We talked enough about the Architectural and Engineering side of the business. I wanted to focus a little bit more on the government contractors. Can you maybe help us get a sense of kind of what is driving the underlying growth in that side of the business? Was it mostly just kind of a continued steady growth there or was there maybe pent up demand for the new GCS version or potentially the seasonally strong Q3 period for government spending?

Kevin Parker

Well, there’s a little bit of a seasonally strong period at the entry level. It’s not uncommon, Bryan to have a customer almost win their first order and have a big order placed with us in the same day. So, it’s almost as though the PO’s cross on the fax machine. I’m going to give you your order for GCS as soon as I get that order from whatever federal agency I’m working with at that point.

So, we’re seeing some of that, certainly. I think we did a very good job in the third quarter going back and selling some new products to our existing base of customers. High on that list is Deltek Performance Management, a suite of BI and analytical tools that we built around the Costpoint application that we’re now backselling into the install base. We saw a fair amount of success from that in the quarter; customers upgrading as well from GCS to Costpoint.

So, it’s just sort of the general ecosystem. There wasn’t really a lot of pent up demand in that sense. Government year-end, obviously, September 30th, we see a little bit more growth as companies expand and things like that, but it’s just the overall sense of what the market is and I go back to – and I think I’ve got this right – and when we talked about the most recent GDP figures that were released that if it weren’t for government spending, GDP would actually be down more significantly than it is and government spending is actually up and driving a lot of the growth. Our customers are experiencing that as well.

Bryan McGrath – Credit Suisse

Okay, great. Maintenance, obviously, was also really strong and continues to be strong. And I know you mentioned that you’re still 90% plus renewal rates, but have you seen any reason to believe that that would change going forward? Any customers pausing before renewing or does maintenance just continue to kind of just trudge forward?

Kevin Parker

Trudge isn’t word I’d use, but it tends to move forward pretty regularly. We are seeing at the very entry level at some of the very small A&E firms sort of sense that they’re looking for almost anything they can do to save a few bucks. Their maintenance may be $500 a quarter and they’d like to bring it down to $350 or maybe even smaller increments than that because their businesses might be a little bit challenged, but by and large, that’s an unusual phenomenon. Probably, if 12,000 – and I know this because I sign all of those personally – that if it’s 20 a quarter, 25 a quarter, it might be a lot that that happens and we’ve got 12, 000 and none of them are material in that sense, so we expect that to continue.

We expect that to move along and we’re not seeing much push back with regard to that and I think part of it is, too, understanding that there’s regulatory updates that are involved, there’s payroll updates that are involved and I think customers recognize that they need that maintenance to get those things and it’s important to stay current.

Bryan McGrath – Credit Suisse

Okay, thanks for the additional color, Kevin.

Kevin Parker

Great.

Operator

And your next question comes from the line of Aaron Schwartz with JPMorgan.

Aaron Schwartz – JPMorgan Chase & Co.

Good afternoon. If we look at the results through the year, you’ve had very good strength in the gov-con contracting station. You’ve talked to it, but with the change in administration, how do you look at managing that and to avoid potential disruptions or delays if that could come up and just wanted to get your view on the outlook there, given the changes that are going to occur.

Kevin Parker

Sure and we’ve actually been engaged with a number of our customers with regard to that. We recently hosted a CEO roundtable here in the D.C. area with some top customers and I think one of the things that some of the more experience folks in the room pointed out is that, remember, this is probably the first transition that we’ve really been through in the better part of 16 years, between Clinton and Bush’s presidency.

What their observation was – and I think it’s the right one looking back on history – that’s there’s a lot of continuity to what’s going on here from a federal spending environment and with a new administration coming in in January, they really don’t get up to speed for a year.

That we’ll continue along the same pace and tempo that we have today that there may be some new programs and some new priorities but a lot of the changes in the positions, new leadership, new political appointees really take some time to get going and it takes some time for those people to get up to speed and so we may see some changes on the margins but by and large 2009 is to a large degree already set. The budgets are in, there may be some changes on the margins but the real impact will be felt in 2010 and that’s where most of our customers are expecting to see if there’s increased spending and they reflect new priorities perhaps around things like energy and a variety of things like. The most of the development folks that are customers are very, very busy right now. They’re getting engaged with and trying to anticipate what the new administration is going to be doing and how they’re going to adjust their business development priorities around that.

So it’s a very time but, you know, I think that the sense is the federal government will be spending more and these folks are going to move their businesses to tailor around that. At the same time I think that particularly here in the beltway area there’s also a general sense that the DOD will probably remain a pretty important priority given the fact that the global threats that they see haven’t really subsided. And one of the things that they really focused around was cyber-security and the threats around cyber-security and things like that. So, they’re anticipating lots of changes but they’re also very entrepreneurial and will adapt to those changes. We don’t expect it to have a material impact other then perhaps positively on our business going forward but probably not until the second half of 2009 and into 2010.

Michael Wabschall

Yeah, if I could just add on to that, a lot of our government contractors pointed out that it’s unlikely that federal government will budget in an economic recession as based upon the impact it could have on the economy and there’s really not been an decrease in the federal budget since 1965 and so they really are not anticipating that. And in addition to the DOD it would be unlikely that Homeland Security budgets would be decreased too.

Aaron Schwartz – JPMorgan Chase & Co.

Okay that’s helpful, thank you.

Michael Wabschall

We’ll also probably will see a shift maybe from deep ends to infrastructure, especially with a Democratic president.

Aaron Schwartz – JPMorgan Chase & Co.

Okay, great and one last question for me. If you look at the deal deferrals that you’ve seen this, what are your assumptions for how those come in. Do you plan on those coming in smaller amounts or the same amount or just pushed out sort of outright or just kind of wanted to get your call on sort of the assumptions you’re making there.

Kevin Parker

(Inaudible 00:27:36) it’s a little bit hard to predict but some of them are already coming in. We’re not expecting them to all come this quarter, I think we are working with of those customers. The one thing that I would point is that there were very, very few absolute cancellations and we saw that very rarely and very few competitive losses so it wasn’t as though they said, well, I’m not going to get with you I’m going to with Brand X whomever that might be. We’re engaged in some of those, there coming in this quarter, not all of them will come in, some of them will come in next year but we expect there will be a good flow in the very near future.

Aaron Schwartz – JPMorgan Chase & Co.

Terrific, thanks for taking my questions.

Operator

(Operator Instructions) And your next question comes from the line of Corey Tobin with William Blair & Company.

Corey Tobin – William Blair & Company

Hi, good afternoon.

Kevin Parker

Corey, how are you?

Corey Tobin – William Blair & Company

Good, how are you? I wanted to ask a couple quick things. If you could help me reconcile something, you mentioned that obviously the licensing was a little bit soft in September but you’re seeing licenses, I think if I heard it correctly attract (ph 00:28:51) with historical levels thus far in October and early November? Did I hear that correctly.

Michael Wabschall

That is correct. If you take a look at the amount of deals we’ve closed here in Q4 to date, you know for the first month, that’s on par with out typical closing pattern of license deals in previous quarters.

Corey Tobin – William Blair & Company

Okay, great and then is that both for the A&E segment and the government contracts or is that more weighted toward government contracts?

Michael Wabschall

No, it’s really both the sectors.

Corey Tobin – William Blair & Company

Okay, excellent. So does that imply that you seen a strong rebound here since the end of September?

Michael Wabschall

Well, I think we’re encouraged by that it’s early days yet obviously in quarter and as Enterprise Software is that the bulk of the business tends to be later quarter so the early signs are strong and the early signs are good from our perspective but there’s a long way to go between now and December 31st, but I think the important thing that we drew out is that we’re engaged with customers, they’re engaged with us and we’re closing business. So it hasn’t frozen and we’re actively working the deals.

Corey Tobin – William Blair & Company

Got it, okay, good. And then the second question if I could, on the services gross margin, if you had to put a range around what the services gross margin could be, what would you say the high end of that range is, a(inaudible 00:30:16) anyway. What’s the upside potential from where the current service gross margins sit?

Michael Wabschall

As I think about it, the first step in our process is to get consistently at 20 or better, so we’ve been working around the issues in terms of taking costs out of the business, improving utilization and improving realizability of dollars et cetera, et cetera. So once we get to 20 I think we’ve got an opportunity over the course of the next year or two to continue advance to there probably into the 23, 24% on a consistent basis, a lot of that has to do with scale as well as we grow the business. But I think our first step and our first milestone is to have consistent result at 20% or better.

Kevin Parker

I think it will always be difficult to approximate the margins that you get from an independent consulting firm, because we basically have to the bandwidth to cover all the breadth of our products. We also have different sizes of customers and we have shorter implementations on our vision implementations and so the result of that, you don’t have the long, lengthy projects that you have with (inaudible 00:31:26) and those types. So we’ll never attain that level. But we really have focused on improving utilization for personnel, on improving the –we’ve raised our billing rates in mid-year of this period and we will be able to protect those rates so that’s why we are working towards getting out of the mid-teens to the low 20%s in the near future.

Corey Tobin – William Blair & Company

Very good and the final question if I may, in the past you’ve some cases in the terms of a little bit longer term outlook and I realize its very difficult in the current market to do but is there any commentary you make to 2009 and I guess at a high level would be helpful is would you anticipate license revenue at this point to grow in 2009 over 2008? Thanks.

Michael Wabschall

It’s early at this point to do that, you know we’re hard at work with planning process and I think without saying too much, there’s some bright spots in future that we want to make sure that we continue to focus on and the trick is going to how to make sure we accentuate those and if there is a more challenging throughout 2009 what does that mean to those sectors. So we’re not unambitious about it and I think we’ll have a successful year in 2009 but it’s a little early for us to provide sort of detailed license growth numbers. We’ll do that in the coming call or so.

Corey Tobin – William Blair & Company

Understood, okay, great, thank you.

Operator

(Operator Instructions) And your next questions come from the line Brad Silla with Barclays Capital.

[Brad Silla, Barclays Capital]

Hey, guys, good afternoon. Just a question on kind of the new market penetration that you guys are kind of after namely, international. If you could just comment there it sounds like a pretty consistent percentage of revenue coming out of the region, just maybe a little more color on some of the efforts that are going on there and when do you expect to see that really start to scale?

Michael Wabschall

Well, looking back on Q3, they were certainly as awe-struck about what was going on in the financial markets as our U.S. based customers were and they had their own versions of those and it certainly caught their attention and occupied a lot of cycles on decision makers parts. But I think we continue to see our pipeline grow and build. We’re very optimistic about 2009 in that sense. We’ve got some programs in place I think are starting to accelerate customer traction to our solutions. We’ve got the right people on the ground, we’ve done some special things from a pricing and promotion point of view for those early adopters because remember we’re not a known commodity in that market and that’s why I’m really looking to Q1 to hit that 100 customer milestone there and I think we’ll really start to see us move forward in that sense. So, its a good strong market for us and we are looking at 2009 of being a strong contributor to the overall results.

Beyond that towards the back half of 2009 we’ve got to think seriously about where we go next in particular because we’ve got at least in our car product plans foreign language versions of the products coming out in the latter half of 2009 and where do we take it from there? So, our beach head as we’ve always described it as has been in the U.K. but how do we expand beyond that and 2009 is a good year for us in that sense.

[Brad Silla, Barclays Capital]

Okay, great, thanks. And then just regarding the reseller channel as well. You’re getting some growth there as a percentage of revenue, is the focus still on kind of recruiting partners or are shifting more towards kind of managing partners that you have already/

Michael Wabschall

No, we’re still recruiting we’ve added 35 or so partners on a year-to-date basis, we’re still looking for a couple of partners in some very specific geographic areas where we don’t have coverage in certain parts of the U.S. but is not 100s of people it probably we’re down to the last five or maybe even 10 partners that we’d like to add in the U.S. We’re recruiting in the U.K. at the moment, we’ve added one partner I think this past quarter, it’s a much smaller market so we don’t need 30 or 40 partners there so we’ll probably add one or two in the balance of the year there as well. Our focus really at this point is getting those people trained and getting them productive and getting them winning new customers both in the A&E market and the professional services market and we track that very carefully. Some of those folks are coming with their first wins and their first customer wins and so we’re very excited about that and we’re tracking sort of their new sales to new customers in those markets and making sure we’ve got the right support in place, we’re training with them. We’ve also have Deltek Consulting resources working side by side, sort of a side by side learning experience for their consulting at reduced rates so that they can get up to speed so all those things are moving forward and we’re pretty optimistic about it.

[Brad Silla, Barclays Capital]

Okay, great, thanks.

Operator

And we have reached our allotted time for questions; do you have any closing remarks sir?

Kevin Parker

I know but if there is one or two more questions we didn’t mean to cut it short if there’s any more questions we’d glad to answer those if not we’ll look forward to talking to everyone after the end of the fourth quarter.

Sounds like there are no more questions.

Operator

Okay we do have a question form Andrea (inaudible 00:36:50) with Oak Tree Capital.

[Andrea – Oak Tree Capital]

Hi, gentlemen, can you hear me?

Michael Wabschall

We can.

[Andrea – Oak Tree Capital]

Hi, my question’s more on the maintenance revenue side. You know, we’re definitely very happy see that it continues to increase but I wanted to understand why its increasing this much. Is it because your retention rates are going up and/or is because as customers are delaying their new license purchases are you seeing an increase in picking up or win backs of old customers that previously did not renew?

Kevin Parker

I actually think it’s neither of those two things really. I think the primary driver for maintenance revenue growth or the primary drivers would be two things. One, winning new customers and certainly those new customers that we win every quarter and the new license revenues we’re generally charging 18% maintenance and we charge maintenance on list price of the product so even though we may discount the product a little bit, in a sales environment a customer generally plays on the list price so we’re getting 18% of list.

The other factor that I think is helpful to us and maintenance renewal rates have remained relatively constant and very good from our perspective but we’ve been very successful over the course of the company’s history of passing along maintenance revenue increases. And so the average customer typically gets on an annual basis of 5 or 6 or in some cases 7, 8% increase to their maintenance on a year-over-year basis. So we’ve got escalators built into contracts, we’re very successful at passing those along to our customers and those two things are the primary driving factors.

Michael Wabschall

If you take a look mathematically, you know, we’re getting a quarter’s worth of the maintenance on the license deals we just in Q2 which was a good quarter for us and if you don’t have large attrition rate then the incremental amount of maintenance you’re adding far exceeds the amount that goes out. And that’s why we’ve indicated that we anticipate getting a sequential increase quarter-over-quarter of about 2 to 5% over the prior quarter, in this particular we grew 4 %.

[Andrea – Oak Tree Capital]

Alright, that’s very helpful, thank you.

Operator

And you next question from the line of Priya Parasuraman with Wachovia

Priya Parasuraman – Wachovia Securities

Thanks, this is actually for Phil Rueppel, I was wondering are you seeing any changes in your customer contract terms or billing terms at all?

Kevin Parker

Well, in terms of changes the basic contract structure remains the same, we’re not doing anything unusual. I think in the smaller end market and the consulting market and some places where we’re looking at getting customers who are very cash flow sensitive in areas, we’ve been offering some 30, 60, 90 day terms those kinds of things on a very selective and sort of pre-approved credit basis. But those are really on the margins. Our basic license terms are the same and I think we’re very focused on putting terms together to allow us to recognize all the revenue up front and we’ve got a fairly strict process around that.

Priya Parasuraman – Wachovia Securities

And is it fair to say you seeing similar things on the channel side?

Kevin Parker

You know, not as much I don’t think. You know, we’re certainly in a better position then most of channel partners in terms of the size of the company to offer payment terms and things like that. They may be doing it on their own I’m a little bit less familiar with how they run their businesses and it’s entirely up to them how the work with their customers and so we do see a little bit of that but it’s really up to them and we’re not directly involved in most of that.

Priya Parasuraman – Wachovia Securities

Okay and could you talk more about the MPM acquisition and what that means to your EDM product line?

Kevin Parker

Sure, we were very delighted to acquire the assets of MPM. MPM is sort of one of the last remaining suppliers in the earned value space that wasn’t already part of Deltek and it was a great acquisition for us. We got a very good product line and MPM is sort of a earned value solution but the best way to think of that sort of in layman’s terms its almost desktop for departmental solution whereas this solution is intended to be Enterprise solutions, so it fits very well in the product portfolio, it provides a good entry point for some of our smaller customers to (inaudible 00:41:15) value that found our existing solutions a little overwhelming and a little complicated for what they were trying to do. We also picked up some very good customers, their customers include people like Raytheon and Northrop Grumman and a lot of folks like that so we picked up a good customer portfolio with it as well and a good maintenance stream. And so we thought it was a good addition to the product portfolio. More tactically important then perhaps strategically important to us but we’re glad to have the team on board and we’re already back selling MPM into some our entry level GCS customers as well and we think there is an opportunity there.

Operator

(Operator Instructions)

Kevin Parker

Why don’t we take one more and then we’ll look forward to seeing everybody else, if there is one more, in Q1 when we close Q4.

Operator

Okay. And we do have a question from (inaudible 00:42:19) with Merrill Lynch.

[Analyst – Merrill Lynch]

Most of the questions that I had are answered but one quick one on the acquisition of Premaver Oracle. Are you guys going to be having any change in the sales strategy et cetera to increase competition or what are you guys going to be seeing here, what do you expect, if you can give us some more color on that that. That’s it for me, thanks.

Kevin Parker

Sure, we’re not expecting a whole lot of that to be honest with you. Primaver and Deltek and actually didn’t compete with each other very much we had a very small overlap in terms of our capabilities but they’re actually as we look at in more in the construction market and more in markets that are sort of adjacent to ours but not directly in ours, we do so them a lot, it’s a very popular project planning tool probably second only to Microsoft Project in the markets that we’re in but again, we didn’t compete with them directly. We don’t expect that the combination of Primaver and Oracle is going to change anything for us in terms of the other applications that we sell. Today we see, if we go back and look at our pipeline data and our win/loss data we see Oracle in fewer then 2% maybe as low as 1% of the transactions that we’re involved in as a named competitor and their strategy continues to be I believe to be at the higher end of the market place. Deltek if very uniquely positioned in the mid-market and very well entrenched there so we’ll see them occasionally at very high-end levels of competition as we compete at a higher lever but for the core parts of our market and our customers, Oracle probably isn’t a very good solution for them. We’re not going to be blind to that and we’ll certainly keep very good track about but we think there’s opportunities to compete more effectively other areas and we think there may be an opportunity for us in other areas with planning tools now that Primaver is part of Oracle.

[Analyst – Merrill Lynch]

And one follow-on if I may, on the MPM side, so with MPM are you going to be selling incremental customer or is the existing customer base where you back sale into?

Kevin Parker

We can actually do both, I think with MPM particularly with its sort more easily utilized departmental solutions we’re going to go back into our install base of GCS and lower end cost point customers and sale them directly with regard to MPM and so we’ve got opportunities there. There are also opportunities that are completely outside our install base of Costpoint or GCS customers to sell MPM where they’re really looking forward to departmental or desktop solution. So we’re going to continue to invest in the product, integrate it with some or existing capabilities around earned value and business intelligence for earned value and will continue to sell it. So it’s an opportunity in both markets.

[Analyst – Merrill Lynch]

Thank you so much.

Kevin Parker

Well we appreciate the time this afternoon; we’ll look forward to talking to everyone and look forward to talking after the first of the year. Thanks very much.

Operator

And this concludes today’s conference call. You may now disconnect.

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