Guidance Software, Inc. Q4 2008 Earnings Call Transcript

Feb.24.09 | About: Guidance Software, (GUID)

Guidance Software, Inc. (NASDAQ:GUID)

Q4 2008 Earnings Call

February 24, 2009 5:00 pm ET

Executives

Bill Powell – Director IR

Victor Limongelli – President & CEO

Barry Plaga - CFO

Analysts

Phil Rueppel - Wachovia Securities

Mark Schappel - Benchmark Company

[Glen Coghill – Coghill Capital]

Brian Gesuale - Raymond James

Keith Weiss - Morgan Stanley

Operator

Good day everyone and welcome to the Guidance Software fourth quarter earning results conference call. (Operator Instructions) At this time, for opening remarks and introductions, I would like to turn the conference over to the Director of Investor Relations, Mr. Bill Powell; please go ahead.

Bill Powell

Good afternoon everyone. This is Bill Powell, Director of Investor Relations and we thank you for joining Guidance Software’s fourth quarter 2008 earnings conference call. In a moment, I will introduce our President and Chief Executive Officer, Victor Limongelli; and our Chief Financial Officer, Barry Plaga, who will present and discuss with you our business and financial performance. Before they begin, I’d like to go through some notes for the benefit of our audience.

Guidance Software reports its results on a generally accepted accounting principles or GAAP basis in conformity with SEC standards. These results may differ from results published by analysts or the media featuring pro forma financial results which may not be in conformity with regulatory standards. We encourage everyone to review our financial results presented on a GAAP basis which are detailed in our press release issued today at 4:01 pm Eastern time.

Some of the information discussed on this call, including projections regarding revenue and operating results, may contain forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements.

Additional information concerning these risks and uncertainties can be found in the company’s most recent periodic reports filed with the SEC. Guidance Software assumes no obligation to update any forward-looking statements.

Let me describe the format for today’s call. Victor will begin the call with a review of our fourth quarter achievements and provide his perspective regarding our industry. Barry will then follow Victor with a review of our financials for the quarter. Then we’ll open the call to accept your questions and provide answers before ending our call today.

Now, I’d like to turn the call over to the CEO of Guidance Software, Victor Limongelli.

Victor Limongelli

Thanks Bill, good afternoon everyone. I’m happy to report that Guidance Software had an exceptional fourth quarter especially given the economic environment. We had revenue of $25.2 million, our best quarter in the history of the company and after excluding share-based compensation on a pre-tax basis we earned $0.05 per share in the fourth quarter.

In addition deferred revenue grew to $33.3 million, an increase of $3.4 million from September 30. Our strategy has been centered around gaining more Enterprise customers as we view the eDiscovery and enterprise forensics’ markets as emerging areas that are ripe for development.

We have planned to do that by making our products easier to use, and easier to buy as well as more powerful. To that end we introduced version 3 of EnCase eDiscovery with an easier to use interface and better work flow in the third quarter of 2008 and our Pay-Per-Use pricing model in the fourth quarter of 2008.

I am happy to report that our strategy worked very well. In the fourth quarter we added 29 new EnCase eDiscovery customers including 15 under the Pay-Per-Use pricing model. This compares to 34 per for the entire first three quarters of 2008 combined so we were thrilled by this rapid customer adoption of our redesigned eDiscovery product and our new pricing model.

In addition we added 41 new EnCase Enterprise customers in the fourth quarter giving us a total of 117 new EnCase Enterprise customers in 2008 versus 71 in 2007. Adding new customers faster is important not just for current revenue but for future revenue. As we have reported previously we very often sell back into our existing customers. In the fourth quarter 51% of our EnCase Enterprise bookings were to new customers and 49% were to existing customers.

At this point when we measures our EnCase Enterprise customer base we have just shy of 50% of the Fortune 100 and almost 25% of the Fortune 500 as customers. As I mentioned we were thrilled by the pace of customer wins in the fourth quarter.

When we introduced the Pay-Per-Use pricing model we were uncertain of the extent to which it would cannibalize perpetual deals. I’m happy to report that we did not see that in the fourth quarter. With 15 Pay-Per-Use eDiscovery deals and 14 perpetual deals the Pay-Per-Use approach was largely additive enabling us to grow our customer base.

While our execution in selling EnCase Enterprise and related products established new records we’re equally pleased that EnCase forensic with well over 30,000 copies sold continues its legacy as the industry leader and de facto standard used by law enforcement for digital investigations, and by service providers for eDiscovery collections.

EnCase forensic continued to establish new records achieving a record fourth quarter with $3.2 million in recognized revenue or 8% growth year over year and a record year with $12.8 million in recognized revenue or 20% growth over 2007.

Moving from our products to our services businesses, I’m pleased to report that our training division had another good quarter. We taught over 6,000 students in 2008 which is over 25% higher then the number of students we taught in 2007. One of the drivers behind the large number of students we saw was a 33% year over year increase in the number of annual training passports sold.

That program enabled the student to take an unlimited number of classes within a given year. In addition we launched two more online training courses late in the fourth quarter. We believe that the online approach may prove appealing in 2009 as customers cut travel budgets. Our professional services division had a challenging quarter in a challenging economic environment. We saw a number of clients defer engagements in an apparent attempt to delay expenses.

Utilization rates have improved somewhat in 2009 but we are not expecting a sharp rebound in services in the immediate term. As I mentioned our strategy is to make our products easier to use and easier to buy to drive widespread adoption in the emerging areas of eDiscovery and enterprise forensics.

In our last call I talked a bit about the coming of our EnCase Legal Hold product, a new litigation hold and tracking solution that is tightly integrated with EnCase eDiscovery. We demonstrated this new product at the Legal Tech Industry Conference in New York three weeks ago and we expect it to be released in March or April.

EnCase Legal Hold is designed to be used by paralegals and attorneys rather then a highly trained IT user. EnCase Legal Hold has a browser based, easy to use interface that enables the paralegals and lawyers to send and track legal hold notices and also to view from their desktop the status of data collection and data processing for any case.

We believe that it will make our eDiscovery offering even more compelling to corporate customers. Before handing the call over to Barry, allow me to share some thoughts on the current economy and its implications for our business. Obviously we are pleased with the performance of the company in the fourth quarter. And in the first quarter so far, our sales activity, meetings, proposals, interest from customers, has been high.

And our products deliver to our customers a tangible return on investment which we believe is an absolute requirement in this environment. Indeed we believe that factor, the tangible ROI that our customers obtain from our products particularly EnCase eDiscovery was the primary contributor to our strong fourth quarter.

In addition the number of customers that we added in the fourth quarter may be a sign that more companies are starting to turn away from outsourcing. It may be that completely outsourcing electronic discovery is increasingly an unaffordable luxury. Despite the overall positive trends the current economic environment is uncertain. Customers are cautious. We don’t know if, how, or to what extent their cautiousness in their overall performance will impact our sales close cycle.

In addition given the extreme budget tightness there may be a pronounced trend towards Pay-Per-Use deals and although we welcome the business those deals won’t produce revenue until later. As you know the first quarter is typically the slowest time of the year for us. Given the current economic environment that seasonality may be especially pronounced this year.

Needless to say we are keeping a close eye on expenses. Now let me turn the call over to Barry for a detailed analysis of the numbers.

Barry Plaga

Thanks Victor, as the starting point and to be consistent with previous company practices, financial information provided on this call will be presented on a non-GAAP basis only. Any information we present on a GAAP basis will be noted as such.

Please see our fourth quarter press release for the reconciliation between GAAP and non-GAAP results. To summarize we exclude stock-based compensation and the tax provision to derive our non-GAAP results. Total revenue in the fourth quarter of 2008 was $25.2 million up $2.7 million for an increase of 12% as compared to the fourth quarter of 2007.

Product revenue rose to $14.2 million both a record fourth quarter and a record best quarter in the company’s history, up $1.9 million or 15% from the fourth quarter of 2007 product revenue of $12.3 million.

Sequentially from Q3 2008 product revenues increased 13.1%. Our EnCase Enterprise license revenues increased to $10.3 million in the fourth quarter up 14.4% year over year from $9 million in Q4 of 2007. We had nine Enterprise sales that were greater then $250,000 in license revenue and we also sold 39 EnCase Enterprise add on products in the fourth quarter of 2008.

Included in those 39 add on products were 29 EnCase eDiscovery which included 15 Pay-Per-Use sales, two EnCase Data Audit and Policy Enforcement and eight EnCase Information Assurance modules. In the fourth quarter of 2008 forensic product revenues grew 8% year over year to $3.2 million. Services and maintenance revenues rose to $11 million in the fourth quarter 2008 up $800,000 or 8% as compared to $10.2 million in the same period a year ago.

Services and maintenance revenue includes professional services, training, and maintenance revenue. Professional services revenue were $3 million for Q408 versus $4 million in Q4 of the prior year, a decrease of 27% year over year. This decrease is attributable to two causes, one, we had a significant eDiscovery project in Q4 of last year that we did not have this year. And second, we saw some customers deferring eDiscovery work into 2009.

Training revenues however increased year over year to $2.6 million in Q4 versus $2.2 million in the prior year period showing an increase of 15% year over year. Maintenance revenues increased 41% year over year to $5.5 million in Q408 as compared to $3.9 million in the prior year period. This increase is attributable to our Enterprise license bookings over the past year combined with strong maintenance renewal rates from our existing customer base.

Geographically US revenues comprised 75% of Q4 2008 revenues in line with the prior year while EMEA represented 16% and Asia and other 9%. For fiscal year 2008 US revenues comprised 79% of total revenue, while EMEA represented 14% and Asia and other 7%. On a non-GAAP basis overall gross margin for the fourth quarter of 2008 was 75.8% versus 73.9% in the prior year period. The increase in overall gross margin year over year was primarily driven by a higher mix of product revenue combined with a higher mix of maintenance revenue.

As we turn to operating expenses we saw a sequential increase of 6% from Q3 2008 to $17.9 million for the fourth quarter. This increase was driven by higher sales commissions tied to the increase in product sales, higher R&D costs due to increased headcount, and slightly higher G&A costs due to foreign currency exchange loss due to the rapid rise of the dollar and costs related to our ERP implementation which went live here in Q1 2009.

In terms of company headcount as of December 31 our full time headcount was 415 employees down from 419 as of September 30, 2008. As the company has previously reported this is just about our full projected headcount for 2009 and of course while unexpected turnover can occur we expect to remain around this level throughout the year.

For the fourth quarter 2008 share-based compensation was $2.3 million up approximately $800,000 year over year. For the year ended December 31, 2008 share-based compensation was $9 million up from $4.5 million in 2007. For 2009 we expect share-based compensation to be flat to slightly down from 2008 and in the range of $8.5 to $9 million. In the fourth quarter of 2008 we recorded a $567,000 for the provision for income taxes compared to $45,000 in the prior year period.

Excluding discrete or one time items the income tax provision is based on the company’s best estimate of its annual effective tax rate and taking into consideration the amount of current benefits it can realize if any. On a pre-tax non-GAAP basis and excluding share-based compensation we are reporting fourth quarter 2008 income of $1.2 million or $0.05 per share as compared to pre-tax non-GAAP income of $1.8 million or $0.08 per share in the fourth quarter of 2007.

On a GAAP basis we are reporting a net loss of $1.6 million or $0.07 loss per share as compared to a net income of $0.3 million or $0.01 per share in the fourth quarter of 2007. Turning to the balance sheet cash and investments increased $2 million from $34 million as of September 30 to $36 million as of December 31. Collections were very strong during Q4 and our DSOs decreased 12.3 days to 91.4 days as of December 31.

In Q4 2008 we grew our total deferred revenues to a record $33.3 million as of December 31. The current portion of our deferred revenues on the balance sheet was $30 million which will be recognized over the next 12 months. For the fourth quarter net cash generated by operating activities was $4.5 million which was primarily driven by the decrease in DSOs and the increase in deferred revenue.

Outstanding share count as of December 31, 2008 was 23.3 million shares, up approximately 48,000 from September 30. With that now let me turn the call back over to Victor to conclude.

Victor Limongelli

Thanks Barry, I want to take a moment to thank the Guidance Software employees for their hard work and execution during the fourth quarter. Our sales team executed very well, development did great work in launching the Pay-Per-Use model, as well as its work on EnCase Legal Hold, and our internally facing teams put forth a [inaudible] effort to get our new Oracle ERP and CRM system up and running earlier this month.

And I’d like to thank our customers both the 30,000 plus users of EnCase forensic and the 650 customers of the EnCase Enterprise platform who value our dedication and focus on eDiscovery and other digital investigations.

I mentioned earlier the uncertain economic environment. I don’t think that is a surprise to anyone on this call. Given that environment we are going to defer our annual revenue and EPS guidance until at least next quarter’s call when we expect things will be a bit clearer. As we have often discussed the first quarter is typically seasonally soft for us and the economic environment this year is certainly weaker then most Q1s.

On the whole however we believe we are well positioned for this year in that we have desirable products that deliver tangible ROI, we have a strong customer base, a nice mix of new and repeat business, and we have been performing well. Our plans are straightforward, to continue to improve our products, continue to win new customers, and watch expenses closely.

With that let me give the call back to Bill.

Bill Powell

Before we move into our question-and-answer period, I’d like to share two upcoming events of interest to our listeners. First we’ll be meeting with investors next week at the Morgan Stanley Technology Conference in San Francisco. We’ll be presenting at 1 pm Pacific Time on Wednesday, March 4 courtesy of Morgan Stanley and our covering analyst Adam Holt.

Next we’ll be meeting with investors the following week at the Raymond James 30th Annual Institutional Investors Conference in Orlando. We’ll be presenting at 1:40 pm Eastern Time on Tuesday, March 10 courtesy of Raymond James and our analyst there Brian Gesuale. Our presentation will be webcast and the link for the webcast will be available on the Guidance Software website. To arrange for meetings with us at these events please contact your Morgan Stanley and Raymond James representatives and please follow-up with me directly if you’re interested in meeting with us but are unable to confirm availability.

Contact information for me appears in the earnings press release issued today. Now we’d like to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Phil Rueppel - Wachovia Securities

Phil Rueppel - Wachovia Securities

It sounds like Pay-Per-Use is really off and running, can you give us any metrics for the deals so far, any cases perhaps that have been run through the system or revenue realization, and to the size of the installations, is that meeting your expectations.

Victor Limongelli

When we introduced Pay-Per-Use there were essentially three variables that concerned us. Number one how quickly could we sign up customers, number two how much cannibalization would there be of our traditional perpetual business and number three how long would it take to ramp up customer usage. So far we’re pleased with the sign up rate, and the cannibalization of perpetual deals really did not occur in Q3 or Q4. The third variable I think is still open.

Of the 20 Pay-Per-Use customers that we signed up last year the implementations really started to get under way in a meaningful way in January and February. We expect to get a small amount of revenue this quarter and for that to begin to increase next quarter. So we’ll see but overall we’ve been very pleased with the Pay-Per-Use strategy and we think it was the right strategy particularly given the economic environment in which we find ourselves.

Phil Rueppel - Wachovia Securities

And just backing up to the eDiscovery market in general as you head into 2009 are there any changes in regulations or competition. I know that both, Symantec and EMC for example are really pushing hard their archiving solutions and partnerships in that space, do you see any change in buyer behavior or the competitive environment in general.

Victor Limongelli

We’ve seen a lot of interest in bringing some aspect at least of eDiscovery in house. I think if you look at the results of the service providers a number of them have reported, the eDiscovery services business hasn’t been as strong as it had been traditionally and we even saw some of that with our professional service business although that’s obviously not the majority of our business.

But if you look at the number of customers we signed, we’ve definitely seen a high interest level for people in bringing some of it in house because everyone is looking to save money. When it comes to the content management companies our view is that we’re complimentary to them and I think we’ve seen that at customers. We now have connectors to EMC’s [document] product and open text live link product and in the near-term we expect to release connectors to Symantec’s enterprise vault product as well as Microsoft’s share point.

Those products are good in so far as what you put in them you can get to that data but they don’t solve the problem of distributed data on desktops and laptops and servers across the enterprise and we do solve that problem.

Phil Rueppel - Wachovia Securities

The commentary around I understand not giving full year guidance given the uncertain environment but the commentary around Q1 suggests that perhaps analysts have not been conservative enough, how should we look at Q1, do you look at it on a year over year growth rate or sequential growth rate from March to December and what kind of things from a product or services perspective might be a more impacted in this environment.

Victor Limongelli

We definitely look at Q1 more on a year over year basis then sequentially because historically for us the fourth quarter is by far the strongest quarter of the year for us and typically the first quarter is not nearly as strong as the fourth quarter so looking at Q4 to Q1 I don’t think is the right way to look at it.

Barry Plaga

We look at it year over year, we also look at what the environment looks like year over year in terms of what we’re selling into in terms of just customer spending habits and look at what we’re doing internally, we’re trying to cut costs and reduce CapEx and I’m sure every other company out there is trying to do the same thing especially at the front end of this year given the current economic situation. I think we’re just waiting to get a little more clarity, its an early start to the year so we’re just trying to be cautious on that front.

Victor Limongelli

And it actually ties into your earlier question about what we’re seeing, we’re definitely seeing a lot of interest from people in bringing electronic discovery in house as a means of cutting costs. We just don’t know how that shakes out in terms of what would be a typical close cycle in a typical year, are those going to be the same in 2009 or are they going to be a little bit more drawn out. So that’s the caution.

Operator

Your next question comes from the line of Mark Schappel - Benchmark Company

Mark Schappel - Benchmark Company

I was wondering if you were seeing any spending constraints on state and local budgets impacting your forensics business.

Victor Limongelli

Well there certainly have been constraints at the state level, the California budget was obviously a noose, the latest information that we’ve got now that the budget has passed is that some of that money will be available on the law enforcement side but we don’t know all the details on that yet. Typically the first quarter is not a strong quarter anyway for law enforcement spending so we’ll see how that shakes out. I think it wouldn’t be surprising to see state and local governments trying to cut back their spending. It seems to be it doesn’t matter where you go, what industry, or whether you’re talking about consumers or businesses or governments, mostly spending is being reined in.

Mark Schappel - Benchmark Company

One of the advantages of the Pay-Per-Use licensing model was it allowed you to sell to some of the legal services firms, have you made any progress doing so during the quarter or is it a bit too early to tell yet.

Victor Limongelli

Discussions are underway but we don’t have anything to announce yet. So we are actively pursuing that. Just bear in mind that the Pay-Per-Use technology was released in Q4 so we’re not that far down the road yet.

Mark Schappel - Benchmark Company

What was the foreign exchange impact to the top line.

Barry Plaga

Top line, not a meaningful amount, it was [$100,000] in the expense line item, G&A when those customers got collected during the quarter. EMEA where it would have been the biggest impact and we’re a little more front end loaded in the quarter rather then back end loaded before the dollar really strengthened so we got some of the benefit in the top line before it crashed out on the dollar but it wasn’t more then a few hundred thousand dollar exposure either way.

Operator

Your next question comes from the line of [Glen Coghill – Coghill Capital]

[Glen Coghill – Coghill Capital]

I just wanted to get a quick layout from your perspective of the competitive landscape, just your overview, and then a question on uses of cash and stock based compensation.

Victor Limongelli

On the competitive landscape particularly in the eDiscovery area there are of course service providers, the big four and some of the publically traded large service providers and that’s by far the most spend is with those companies if you think of the overall eDiscovery spend. On the technology side there are archiving companies that market their solutions as being useful for eDiscovery and we talked a little bit about those, content management for instance. And also some information access companies that are trying to broaden their reach and be able to collect from the desktop.

When we look at the competitive landscape we think we have some advantages, the scalability of our product in searching across the Enterprise, searching desktops and laptops, as well as our forensic heritage we do not change the metadata around a file and we preserve it in a file format, an evidence file, that has been upheld imbedded by the courts and we think those are a couple of good advantages for us as well as our existing customer base.

[Glen Coghill – Coghill Capital]

I think the question was probably a little more specific in that are you seeing any pricing pressure at all or do feel like pricing is holding up across the space and as compared to how you would have competed with customers in early 2008, is there any difference today.

Victor Limongelli

We had some good deals in the fourth quarter and for us the pricing pressure, its more a question of are they going to go with a Pay-Per-Use option which obviously is no upfront money and we think undercuts what they’re paying with service providers more so then a pure pricing pressure on traditional perpetual deals. It’s a little bit hard to compare because the situation for us is apples and oranges. In the beginning of the year we only offered perpetual deals so if you didn’t want to spend money, if you didn’t want to spend capital, we didn’t have anything to offer you.

Now we do so if you look at the number of customers we acquired as well as of course revenue I think things held up pretty well for us in Q4.

[Glen Coghill – Coghill Capital]

The service your deferred revenues, how much would that cost on sort of a run off basis and I know that that wouldn’t be an exercise you’d be thinking of, just trying to get an idea of the cost of servicing some of the contracts that you have.

Victor Limongelli

That really comes out of our maintenance line in terms of our support line, providing update, providing customer support when they have issues, and our maintenance margin is around is around 89% so its, the cost there is roughly 10% 11% as we roll forward.

[Glen Coghill – Coghill Capital]

On the uses of cash, I think at present you have $60 $70 million market value with $36 in cash now, and it looks like if we were to add the cash plus the accounts receivable it equates to a higher figure then the actual market value of the company, I just wanted to try to get your thoughts, [inaudible] equates to $60 million, which is roughly the market value of the company so I just wanted to get your thoughts on the uses of cash on a go forward basis because if you also have this, one of the big liabilities that you have is deferred revenue but really it’s the cost of servicing that is substantially below what is on your liability side.

Barry Plaga

Those are all good observations, in terms of future uses of cash as I’m just on board here for 90 to 120 days, getting my arms around just the feel for the business and the inflows and outflows and the seasonality here so as we entered this year I wanted to be a little more cautious on using cash for buyback etc. We do have a buyback in place. We’re going to look at that. We look at it on a weekly basis as the window is open. In terms of our CapEx spending for the next year, its going to be much lower then this year, it was about $5 million in 2008, we’re probably going to be like a lot of other companies reining that down quite a bit in the $1.5 to $2.5 million range.

So we’ll be looking at the stock price and buyback opportunities throughout the year. We’ll be looking at offsetting any dilution from our option plans etc. as options get exercised and trying to wipe that out but overall I think we’re just going to take it very slowly here at the beginning of the year and see how things develop with the pipeline and with opportunities.

[Glen Coghill – Coghill Capital]

I don’t have complete visibility into the option plan but if we look at it, it seems like a lot of the options have been issued at prices that are substantially higher then where the shares are today, but we don’t have visibility into the options granted to you, some of the medium level employees, do you have any data on what’s the average strike price for some of those options and the expiration periods.

Barry Plaga

I would say its right around $8, is probably about the average. So the majority of them are under water at this point and they’re pretty well spread out amongst the different working groups of the company.

[Glen Coghill – Coghill Capital]

On of the other things as you get your head around the business model, you have $8 or $9 million in stock based compensation flowing through on an annual basis, however it seems like that’s more of an accounting entry at least at this point in time, of course if the stock, when it was issued at $8 doubles then it might have actually seemed low but at this point in time it seems like its more of an accounting entry that’s clouding the underlying cash flow and income of the business.

Barry Plaga

That’s a noncash expenditure so our realized gains have been substantially less then that accounting entry for FAS 123.

Operator

Your next question comes from the line of Brian Gesuale - Raymond James

Brian Gesuale - Raymond James

What was the Enterprise product sales for the quarter.

Barry Plaga

It was 10.3.

Brian Gesuale - Raymond James

On the overall, the bookings were obviously strong and a lot of it was EnCase and a lot of it was perpetual, overall just in terms of customer mix is there was one that was particularly stronger and if I recall in the third quarter financial was pretty much close to not as much as so if that has changed at all or if any of the dynamics changed from what’s the normalized mix.

Victor Limongelli

In the fourth quarter there wasn’t any one vertical that dominated. We’ve talked about this before, we’re not dependent on any one vertical. We sell into biotech and pharma, and that vertical was pretty strong in Q4, technology, retail, energy, manufacturing, etc. Financial services did not magically turn around although we did have some nice wins in the insurance area. So I think that broad based appeal is something that helps us in this type of economic environment, something that definitely helped us in Q4 and we think its going to help us in 2009 particularly with respect to EnCase eDiscovery, customers are buying it because there’s a tangible ROI and that cuts across industries.

Brian Gesuale - Raymond James

If going back to the second quarter I remember there was a couple of deals that, the larger variety that kind of pushed a bit to the right and just seeing how the 250 plus deals kind of ticked up to about nine this quarter if any of those were kind of part of those delayed from the second quarter or is this is a lot of new wins, new conversations as a whole, just given the whole dynamic with the Pay-Per-Use and things of that nature.

Victor Limongelli

Definitely a lot of new conversations and new deals. One of the things we did notice with Pay-Per-Use is that we were able to close deals a lot more quickly then traditionally so we announced in that mid Q3 and were able to close some deals in Q3 and then close a bunch in Q4 so things went a little quicker there. In terms of the Q2 deals that slipped and I can think of at least one of them, that was a major major financial services institution and that we’re still talking with them but that didn’t, they didn’t have a good back half of 2008, let’s put it that way.

Brian Gesuale - Raymond James

I know there’s been, I think you announced last quarter more of the partnerships with the CACI, and [inaudible] and things of that nature, have you seen overall what the conversations are like in terms of expanding the adoption and just how those partnerships have gone so far.

Victor Limongelli

In terms of CACI, you probably saw they put out a press release about this partnership and they definitely are the right partner for us in the federal government space. They have the most of the spend by the Department of Justice when it comes to electronic discovery so we’re looking forward to expanding our relationship with them. With respect to [Pertivity] we’re training some of their folks on EnCase eDiscovery and also working with them on joint proposals to corporate customers where they have inroads. So that relationship is underway. And with respect to other service providers, we do have discussions ongoing with a number of them and I think the Pay-Per-Use model really provides a means for us to work with them so we’re looking forward to pursuing that but we don’t have anything to announce at this time.

Operator

Your next question comes from the line of Keith Weiss - Morgan Stanley

Keith Weiss - Morgan Stanley

I just wanted to talk a little bit about your outlook into 2009 and going off the, did I hear that right, that the headcount plans, when you’re talking about the 415 headcount level that’s pretty much your expectations for where your headcount is going to stay for the majority of 2009.

Barry Plaga

That’s our plan, we expect to be in that range through this year not to say there might not be variation up or down, 3 or 5% but we expect to be in that range, yes.

Keith Weiss - Morgan Stanley

Is there going to be shifts going on, do you expect to add sales staff and take away from some other areas or you’re pretty happy with where your capacity is today given the demand transitioning out there.

Victor Limongelli

Its fair to say that there might be shifts, depending on where the business is. If you have greater demand in one area and less in another and I think that’s normal and customary when it comes to looking at the business. Its not static by any means. Its not, today the number might be where it was six months ago in terms of the overall number but it doesn’t mean the mix has been exactly the same. So we’ll continue to try to fine tune that, save money where we can and apply resources where there’s opportunity.

Keith Weiss - Morgan Stanley

Just on the general tone, you had a very nice quarter, you actually saw an acceleration in your product revenue growth into the fourth quarter and your Enterprise business had the best growth that you’d seen all year, so [inaudible] to a quarter of such strength your [inaudible] is relatively muted and granted some of it is the economic environment but you’re dealing with a pretty tough economic environment in 4Q as well, was there anything in particular about 4Q like a strong budget flush or a very back end loaded quarter or anything in particular that you’ve seen since then that will help us foot sort of what seems to be a very strong quarter with a pretty muted outlook that you’re relaying to us on the conference call.

Victor Limongelli

No, let me just address the 2009 outlook. So far we’ve seen a strong interest level from customers continually from Q4 into Q1. We had a lot of interest, I think Pay-Per-Use worked exactly as we had planned. We had a lot of interest from customers and lots of conversations some of which closed and obviously we’re able to add a lot of customers. That has continued in Q1. We’ve had a very high activity level and a lot of interest. What you described as muted approach I think is largely because the macro environment just seems to be continuing and we’re not sure whether close cycles will be longer then they would be traditionally or maybe people will go for Pay-Per-Use even more then they would, then they did otherwise in Q4.

Its not lack of interest, its not lack of activity its just a difficult economic environment in total. Obviously like a lot of companies we’re dependent on the Fortune 2000 and the government ultimately spending money in one way or another so that is the backdrop for a little bit of caution.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Bill Powell

I’d like to thank everyone for joining us today. Again if you have interest in either the Morgan Stanley conference of the Raymond James conference please feel free to follow-up with those organizations. Thank you for calling, thank you for listening, we get to do this again next quarter.

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