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Executives

John S. Chen - Chairman, Chief Executive Officer and President

Jeff G. Ross - Senior Vice President and Chief Financial Officer

Analysts

Terry Tillman - Raymond James

Trip Chowdhry - Global Equities Research

Brent Williams - The Benchmark Company

Steven Koenig - KeyBanc Capital Markets

Peter Goldmacher - Cowen and Company

Curtis Shauger - Caris & Company

Horacio Zambrano - Jefferies & Company

Scott Zeller - Needham & Company, LLC

J. Derrick Wood - Wedbush Morgan Securities

Sybase, Inc. (SY) Q1 2009 Earnings Call April 22, 2009 10:30 AM ET

Operator

Good day everybody and welcome to the Sybase First Quarter 2009 Earnings Conference Call. This call is being recorded. Our speakers today are Chairman and Chief Executive Officer and President, John Chen and Senior Vice President and Chief Financial Officer, Jeff Ross.

I would like to turn the call over to Mr. John Chen. Please go ahead, sir.

John S. Chen

Thank you, Mike, thank you operator. Good morning everybody, and welcome to our call and I am going to pass this to Jeff first with the Safe Harbor language.

Jeff G. Ross

Thanks, John and good morning to everyone. Today certain statements we will make will be forward-looking statements which represent our current judgment on future events and are subject to risk and uncertainties that could cause actual results to differ materially. Forward-looking statements reflect our opinions only as of the date of this call and include statements about our future growth, future earnings, business prospects, and other statements regarding future events.

Actual results could differ materially from statements we make today for a variety of reasons which are described in our earnings release and our SEC filings, including in our Annual Report on Form 10-K for the year ended December 31, 2008. These documents are available in the Investor Relations Section of our website at www.sybase.com.

Back over to you John.

John S. Chen

Thank you. Let me start. As Sybase continue to execute well in a reasonably challenging environment, we deliver our sixth consecutive record quarter, which included historical first quarter high in revenue, operating margin, earnings, as well as cash flow.

Our strong performance was driven by growth across our key data management, analytics and mobility products. For the first quarter revenue came in as you could see 267.5 million; license revenue came in very strong at 89.3 million; services revenue was at 135 million and messaging revenue was 43.3 million. The growth in the license revenue more than off-set the decline in professional services as well as off-setting a stronger than anticipated impact of the foreign exchange rates.

In constant dollar, we grew total revenue by 9% and license revenue by 19% year-over-year. This represents obviously a solidly growth rate of 7% a year ago on total revenue and 6% a year ago in license revenue.

The non-GAAP operating margin reached 26% that's up over 600 basis point versus last year. The non-GAAP EPS grew 25% to $0.49. The GAAP operating margin reached 21% up over 700 basis point over last year, and GAAP EPS increased 39% to $0.33.

Now what we see in the IT spending environment most of you very interested in and we have chatted continuously. It's pretty much what we saw in Q4 of last year, customer are still spending, they're still spending dollars -- IT dollars but on a very highly cautious and selective basis. They do remain focused on cost reduction and quick return on investment.

Our license business exceeded our expectations as you can see; our maintenance business remained solid as we benefit from the strong license growth in prior years. In addition, this is one that you folks also always asked us. We have not experienced any deterioration in the renewal rate.

As anticipated, we have seen weaknesses in discretionary spending area that are more sensitive due to the economic downturn such as the consulting area and the education area, mobile advertising and content delivery. Secular growth trends however in messaging remains very good, marked by growing adoption by the enterprise, I'll spend a few minutes on that later.

Now I'd like to discuss some of the key products providing our growth. And starting let's start with the database. In the quarter, our enterprise database license revenue which include ASE IQ and RAP grew 31% year-over-year reflecting -- I have to say it's reflecting continuous market share gain. I don't think anybody is growing at 31%.

We are starting to see some key customer adopted the ASE share this Cluster. And we expect this technology to become a future revenue catalyst, and your customer who is now starting users really likes the product. Because of traction we're achieving in the analytics market IQ and RAP continue to generate very solid double-digit growth and now accounted for approximately 15 to 20% of the total IPG license revenue.

IQ offers a very attractive return on investment with very compelling price performance characteristics. In fact, this is -- the analytics is the part of the world that now you see a lot of people are going after, IBM most recently announced their major initiative from the global services group to into analytics world.

So, recently IQ on some hardware achieved yet another set of record price performance benchmark, for both the one terabyte and the three terabyte environment including large scale data warehouse and decision-support systems.

During the quarter, we also launched IQ 15 extending our leadership in a column-based architecture. This next generation release delivers significantly faster performance and enhanced scalability among many other benefits.

We also introduced a Complex Event Processing module, CEP as new add-on options for our Risk Analytics Platform. This combination between the CEP and the Risk Analytics Platform enables real-time intelligence on high-speed streaming data such as the stock acres and the newswire feeds and alikes. This will provide our RAP based customers, the Risk Analytics customers the real-time correlation of market risk and opportunities.

We will also be adding high-series capability to the RAP later in the year. I am pleased to state that the market response of RAP has been extremely positive. Since the launch of the RAP less than a year ago I think that was May 22nd, a year ago at New York Stock Exchange. We have signed up 22 new customers; they're all Tier-1 financial institutions.

I am also very pleased by the performance of our mobile software products, which delivered a license growth of 13% in constant currency, without a benefit of any big deals in the quarter that means the indicating that the base businesses is extremely solid. I am feeling very positive as usual on the direction of this business.

In the mobility business, we have talk about our focus in building-in direct channels and we have number of exciting partner initiative underway and I think I have said that at the beginning of the year, as well as through our last year. I've one good point, for example on March 11th of this year; we announced an important partnership with SAP, which will leverage the new Sybase Unwired Platform to extend the SAP business with functionality to all the major mobile device platform.

The two company collaboration, I am going to start with the iPhone first, as well as the Window mobile's platform and we plan to extend this functionality to RIM, to APAM, Symbian as well as the Google enjoy devices. There are currently 40 million licensed user of SAP enterprise systems. So, the market potential is huge.

This announcement has already regenerated a tremendous amount of interest and increase, especially from global system integrators. We release the Sybase Unwired Platform we call it SUP, one point to note at the beginning of the year and already have 40 pilots underway -- 40.

That next release of the SUP will be the features to support SAP; we'll call the SAP release, which is slated for by the end of the year. And then yet beyond that and another major release of SUP will bring messaging capabilities into platforms, into the platform, enabling more collaborative real-time present space communications. This is a very forward-looking industry concept and we're looking to share more with you hoping in a May Analyst Day here.

Today, we're recognized by Gartner and IDC as the leading development and deployment platform for mobile apps; with this momentum further accelerated by the road map I just outlined for SUP we expect it to extend our lead in the market and just a cyber, thing that we have a press release came out that we now became the number one mobile software provider in China according to that the Chinese I guess government analytics whatever, equipment of the IDC Gartner.

Messaging deliver a solid quarter and continue to expand its presence in the enterprise that has been our goal and our game plan. With almost two-third of messaging business coming from Europe, revenue was significantly impacted by the 10% foreign exchange headwind.

We expect Enterprise Adoption messaging to continue at a pretty rapid pace including our enterprise install base as well as our partner channel. This should result in a stronger messaging revenue growth and operating margin expansion in the second half of the year. I guess in layman term, we're going to resume growth for the 365 business in the second half despite of the FX challenges.

Our key strategy to drive revenue growth and margin expansion is to over higher value added services by leveraging our software over-the-wireless network. I am pleased to announce that Celcom Malaysia is launching a program called Air Cash (ph), a revolutionary mobile financial services for its 8.8 million subscriber. Air Cash enables mobile wallet capability such as person-to-person transfer through mobile devices and mobile airtime top-up.

In partnership with the global mobile operators like Vodafone and O2 in Germany MobileCom and One -- like the company One; in Austria Swisscom and Vodafone Egypt we have already proven this technology and are seeing meaningful transaction volume.

Our ability to enable application over virtually any type of mobile networks is transformative and also very exciting future opportunities. We are also very encouraged by our progress in growing and emerging market outside the United States. One such market is China, where Sybase is scoring numerous accolades.

In the most recent annual report by CCID this is the China official IT consultancy group, Sybase was ranked first in market share in China's enterprise mobility market; also we ranked first or second in the enterprise database market share in the key vertical such as financial, telecom and railroad. And also with IQ Sybase is running first in reputation among VI vendors and second in data warehousing market share.

Now I would like to turn the call to Jeff for a more detailed review of our financial performance. Jeff, take it away.

Jeff G. Ross

Thanks John. Let me spend a few minutes with our first quarter numbers. As John mentioned our total revenues increased 3% to 267.5 million, with license revenue leading the way on growth to 14% to 89.3 million. Service revenue came in at 135 million, including maintenance revenue of 109.8 million. Messaging revenue was 43.3 million.

Turning to geographies; North America represented 52% of our total revenue with EMEA and Intercontinental representing 33 and 15% of total revenue respectively.

Our non-GAAP operating income for the first quarter rose 31% to $68.9 million. This represented a 25.7% operating margin compared to an 18.8% operating margin in Q1 of last year. Non-GAAP net income grew 16% to $31.1 million and our non-GAAP EPS was $0.49 per share, a 25% increase year-over-year.

On a GAAP basis operating income increased 57% to $56.9 million. This represented an operating margin of 21.3% compared to a 13.9% operating margin a year ago. GAAP net income grew 29% to $28.1 million yielding a GAAP EPS of $0.33 compared to 24% -- $0.24 in the prior year.

Our fully diluted share count was 84.5 million for Q1 and we're modeling a share count between 84 million and 85 million for the balance of 2009. Our cash-flow from operations was $97.4 million for the quarter.

During the quarter, capital expenditures were 4.4 million and depreciation was 6.9 million. Capitalized software and amortization of capitalized software were 12.8 million and $8.7 million respectively. DSO for the quarter was 78 days on a consolidated basis.

Our deferred revenue was 246 million which is down 2% year-over-year as reported, but up 5% year-over-year on a constant currency basis reflecting strong maintenance renewals and our growth in licenses revenues.

Deals over $1 million represented 39% of Q1 license revenue compared with 27% in the first quarter of 2008 and 37% in the fourth quarter of 2008. Head count at end of the quarter was 3914 employees.

During the quarter, the company repurchased a total of $15 million of Sybase shares and 62.5 million remains authorized in our stock repurchase program. Our financial position remains strong with cash balance of $709 million at the quarter end.

Now I would like to turn the call back over to John.

John S. Chen

Thank you. Before I provide guidance, I would like to offer may be a few comments on our outlook as we all know the environment remains challenging, sales cycle is lengthened some weakness in discretionary area of IT spending. For the balance of the year we make some assumption, we assume that the economy is not going to recover. We also include no year budget flush assumptions.

Recently, growth forecast for global IT spending again ticked down, Gartner and Goldman Sachs both came on the reports and cut the 2009 forecast. Now, they are calling for anywhere down from 4 to 9%. For these reason we continues to model conservative growth rate.

Having said that, our stability is improving in a second half. We entered Q2 with a reasonably healthy pipeline and QP pipeline is gaining clarity. In constant currency, our license and maintenance revenue outlook as intact was slightly up. This should be sufficient to cover the incremental weakness in professional services. We will continue to invest and manage our expenses with discipline. Overall, we remain confident in our full year margin, earnings and cash flow outlook; despite the worsening effects of FX in the professional services business.

Now onto our guidance; for the 2009 second quarter, we anticipate total revenue in a range of 270 to 275 million. This represents a growth rate of 5 to 6% in constant currency with an estimated 9% headwind of foreign exchange. We anticipated a non-GAAP EPS in the range of $0.50 to $0.52 a share and GAAP EPS in range of $0.37 to $0.39.

For the full year, we're modeling a 5% revenue growth in constant currency ApEx headwind is now estimated 8% for the full year, up from the 5% previously stated. This result in estimated total revenue of approximately $1.1 billion with a favorable mix shift in revenue towards license and maintenance and good expense management or excellent expense management. We are raising EPS guidance, we now estimated a non-GAAP EPS range of $2.20 to $2.24 and the GAAP EPS in the range of $1.64 to a $1.68.

Based on a stronger than expected Q1 performance, we are also raising our expectation to full year operating margin and cash flow from operations. We now anticipate expanding operating margin by at least a 100 basis point. And we're expected to exceed 250 million in cash flow from operations.

In closing, I am very, very proud of our performance in the first quarter and the ability of the Sybase team to execute consistently in this environment. We're clearly gaining market share and customers do like us a lot.

Operator, I am ready for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question will go to a Terry Tillman with Raymond James.

John Chen

Hey Terry.

Jeff Ross

Good morning Terry.

Terry Tillman - Raymond James

Good morning guys. Nice job on the quarter.

Jeff Ross

Thank you, Terry.

John Chen

Thanks.

Terry Tillman - Raymond James

John, discuss the IQ product, one thing that kind of always worries me is that it's a strong product from what I can tell but not enough people know about it, I might be wrong on that but that's just kind of a thought. So could you may be help us and may be on this call you could even go and just make mention names. Why is it, when you see an opportunity with IQ is there common threat in terms of winning deals, is it some sort of percent and savings on hardware or less services required. Can you give us -- and again may be you don't have to give names of the companies but some things that are may be stood out from your travels when you went on IQ what really drives it?

John Chen

Okay. So, IQ is best to mange very large amount of data. It's -- the way that the architecture design as I said its column-based is to go through a large set of data and to able to pick out certain attributes. It's been very -- we see extremely well in anywhere from let's say analyzing a trend like IRS users those are lot in sipping through tax returns and to American Express users for fraud detections for cards, to healthcare HMOs like Blue Care card users for that same thing to building's analysis for telecoms.

So it's really you look at this massive amount of data and looking for certain trends and this design for that and is also designed to hook up many different types of datasets altogether. I know of one major insurance company uses it to analyze up scale capability of insurance policy.

So, each certain sort of person -- they think they would turn to agent that they've bolt in and they move to far order and chances are they are retiring and apply and so therefore they have certain type of needs maybe for certain type of products. So that's what IQ is good at.

Now recently, there is so much compliance reporting requirements by the government, that's also being the kind of the major driver of our IQ growth especially on Wall Street and banks. So, then a question is, okay so that's the kind of the functionality, what is it good at doing versus the other OIGP products out there.

So, then who else does it? There are some very small company that does it. I think Vertical and KX Systems and so forth. And there are one big ones which is Teradata and they provide that. I am about -- because our product runs on UNIX platform and it's a hardware agnostic. In many configuration on many where upon 20% of the price to 10% of price, I have one installation in a major bank in Asia that is basically running the same work load with 10% of the cost against the Teradata-Complex which they also have.

No I am not suggesting that's the that's true in every cases, but a significant amount of cost reduction and flexibility using the IQ product basically doing exactly the same thing. And over the smaller players, niche players then our reputations and out-surfaced and support capability and the completeness of our products win over. We have our own ETL Solutions on top and it does hook into the IBM data warehouse stack.

So those are all positive, I mean I could go on and on I don't to bore -- I mean I am over.

Terry Tillman - Raymond James

That's good. The 10% to 20% I mean that was those kind of what I was looking for, so thanks on that. I guess with China you have folks in different ways with different products like IPG and iAnywhere and then messaging. I guess could you talk about, that does -- is they still building out infrastructure in some cases from the first time. Obviously, their economy is growing at a slower rate, are you seeing more incremental weakness there or is that business been more resilient and your thought just a general view on how performing versus expectations and maybe anything about how big that business is now?

John Chen

In China.

Terry Tillman - Raymond James

Yeah.

John Chen

Okay. We don't breakout how big the business is that. I would just say this, in Asia Pacific and Japan I think they added up to be above 15% of the business, our total business. China is let's say -- Japan and China is on that neck-to-neck right about the size of business so, it's significant for us. China business has not slowdown not going to would, I mean we do know that the general economy is slowing but because we're infrastructure provider and because we're recently well known in the market. We have not seen any slowdown in fact last quarter was a very good quarter.

Terry Tillman - Raymond James

Okay. And then just Jeff, the way we are in terms of question and in terms of the first quarter of the operating margin was a lot higher than I expected; was there a lot of abridge there in terms of just expense management and can we actually see an system on the calculations that should we actually see operating margin continue to pick up in 2Q or could there be a bit of kind of pull back just considering how strong the first quarter was. Thanks.

Jeff Ross

Yeah Terry. We would expect Q2 not to be quite as high up as Q1. There is the Sybase dig out for classic in Q2 there is some other marketing programs and than there is we're going to hire some sales folks. So we will be investing a bit in the business; that said we do expect margin enhancement and as we had mentioned to a lot of you, we are actively managing our expense structure to make sure that we maintain flexibility in an uncertain market, so we continue to do that.

John Chen

Hey Terry, I thought we gave you the model, already I gave you a revenue, I gave you the EPS. You guys know this better than I do and you're be able to find out what's the and we'll give you that tax rate, and we gave you the what so I mean...

Terry Tillman - Raymond James

I am sorry for the trouble (ph).

John Chen

We're only going to answer the questions you were asking. But you add on to what Jeff said, Jeff is absolutely right. Our marketing program is going to kick-in in the second half. We actually are going to bring some of the equipments smaller Techwave to different country of the world. And we are hiring people, I mean we're hiring people selectively, but we're hiring people both in sales and our partnering organizations and increasing some head counts appropriately in some places like engineering. So, but we are hiring people at this point.

Terry Tillman - Raymond James

Okay. Thanks guys.

John Chen

Thank you.

Jeff Ross

Thanks Terry.

Operator

And our next question will go Trip Chowdhry with Global Equities Research.

Trip Chowdhry - Global Equities Research

Thank you. And again you have done pretty well in this extremely difficult and challenging situation that almost every tech company is facing.

John Chen

Yeah, thank you.

Jeff Ross

Thanks, Trip.

Trip Chowdhry - Global Equities Research

John, I was wondering since you have been very close to the various initiatives that U.S. federal government has been taking in the past. I was wondering what is your take about the tech stimulus package, healthcare reform, I think there is something called electronics record keeping or something like that ERMS.

And about two, three years back, healthcare was your very strong focus and you were doing extremely well. Do you think these, some of these initiatives and regulations will help you say year or two year down the road? And how do you plan on monetizing these stimulus packages that probably will be able to start flowing into the economy in six to eight months down the road?

John Chen

Okay. A good question, thank you, Trip. We did very well in HIPAA compliance, when the HIPAA compliance server was kind of co-and-co a requirement for most of the providers, healthcare providers and insurance company. Frankly speaking we didn't do as good a job and follow after that and in the healthcare sectors. I am extremely interested in what you just talked about, we've been watching that extremely closely.

And I would say that our current thinking is to recruit some very, very high-end partners to take our products into it. Because I view this whole government initiative, it'll take some time to be formed, somewhere between the federal spending their money or sending to the states for the state to spend their money is still reasonably unclear.

Now, we have a new CTO in the country. I think, all these are being in -- it's forming, I am not suggesting this, but it often takes longer time. So, instead of I put people on it following the bouncing ball and chasing every deal down the road I suggest may be the best thing to do is to recruit some very high-end bigger people who understand complex projects like we have a partnership with Harris Corporation and Accenture on the U.S. census deal projects.

I suggest that maybe these electronic data keeping initiative which are good initiative is going to take a bigger broader pictures approach to this. So and hence I don't know whether I answer your question, but my way to get at that A; I am interested very much so and B; the way I would get at it is to through some very big complex maybe system integrators or may be some of our partners like IBM.

Trip Chowdhry - Global Equities Research

Very good. And other question I had was the recent announcement of Oracle acquiring Sun, as matter of fact it has a very good IQ installations done on hard -- on the Sun hardware. I was wondering do you have any protection in place just in case Oracle acts like a bully and somehow forces the customer to move out of Sybase and go in to Oracle? I was just a little concerned because Oracle being a very aggressive and a very big company, they may squeeze out niche focused booty companies.

John Chen

Yeah.

Trip Chowdhry - Global Equities Research

And to have on that and to or are you approaching your customers to make sure that your service on Sun platforms will be totally frictionless as it has been in before? Thanks again and very good execution.

John Chen

Thank you, Trip. I -- first of all on that particular point, there's always a concern. Our team has reacted and had put in plans and I think you -- we doubt, I don't want to go in to detail, some of them are low to half baked, some of them are I don't want to kind of give away our precisions publicly and on how we are going do this.

Trip Chowdhry - Global Equities Research

I understand.

John Chen

But I am going to state the following things, A; I am not going to stick my head in the sand and think that this is not going to be a problem. But I don't think that there is going to be as bigger problem because software is usually a lot stickier than a hardware. And hardware are more changeable, IQ once and Sun obviously it runs there very well. It also run on Linux platform and it runs on Intel platform and it certainly runs extremely well on the P-Series on IBM, as well as the HP platform.

So I think there are choices out there. We're monitoring that very closely, we obviously are aware of what you said. Now having said that, I could tell you the reactions so far in the industry has been quite positive for Sybase. I think given that we are the only tier play they are actually profitable in the database business and with good technology there are lot of -- I have got a couple of calls from industry people since that end suggested we may want to sit down and chat about how do we go forward and if we collaborative together. So I think there are opportunities now open up as Oracle decided to get into the hardware business.

Trip Chowdhry - Global Equities Research

Okay, thank you.

John Chen

Thank you.

Operator

And our next question will go to John Difucci with JPMorgan.

John Chen

Hi, John. Hello, John. Yeah I think, he is on mute.

Operator

Mr. Difucci please check your mute button -- your mute function we cannot hear you. Okay our next question will go to Brent Williams with The Benchmark Company.

John Chen

Hey.

Brent Williams - The Benchmark Company

Hey guys, how are you doing? There's a couple of things, first off on the jump in large deal revenue versus the percentage that you saw in the year ago quarter. Can you give us some color on where the mega deals were trending may be in terms of product lines? Was this like one giant neutron bomb, was it a few things, was it something coming early from next quarter, just give me some character on that?

John Chen

Nothing comes early from next quarter, it came in -- it all delivered natural birth. It's not one neutron bomb it's a handful three or four. It was always expected 90 days ago when I told everybody that we have good visibility of the first half, obviously it is based on the fact that we have visibility of those transactions. And so nothing unnatural in timing and we're quite pleased that we're able to close it.

They are mostly in the database area and the IQ area and RAP, I mean database IQ RAP, that area. The INE were all very, very strong base business, upgrade, renewal as well as new feats requirement, and some new partners. Most of the big deals or bigger deals are Orion and IPG.

Brent Williams - The Benchmark Company

Okay. Within the INE work side do you see deals being deployments of stuff that people have been sort of doing in initial prototypes on? Is there been any shift down perhaps in the number of people that don't have any mobile applications, projects that are just entering this for the first time? Is there any shifts in the composition of that sort of mix?

John Chen

We are quite encouraged with kind of a newer usage of our product in iAnywhere. We got into a lot of different projects that we, these are preliminary buy, and so I would say it's a latter of what you just said which is still more driven by smaller byte in politicos economic times and, but it were usage.

Brent Williams - The Benchmark Company

Okay, great. Okay and last question, I have been hearing that one of the things that you have coming on later in the year in ASE and IQ is a shared memory cache between the two platforms which I think is a rather interesting idea, there is lot to like there.

And that just about the efficiency is that specifically about enabling RAP features or I am not sure I understand it just occurs to me I may be missing if I think about it in only those terms the possibility that there is something more gain changing on that approach and that I am thinking. Can you give me any help on that, I mean is there something far most sneaky than the first plans?

John Chen

Sneaky, now come on Brent, I mean what's and that was not sneaky I would -- let me first say that Brent I mean I know you are strong and understanding our database technology and always been a supporter of that. I am very proud of our engineering team and especially our database team. I think we in some what use of similar word or some of the customers told me that they're now seeing innovation coming out of Sybase.

And I would say this the memory cache -- share memory cache is originally designed for efficiency, use the word efficiency I use to work performance, but that scalability -- that basically the same thing we're talking about. We are looking very hard and so, it's on to scaling. We're looking at how customers could take advantage of cheap hardware to do a -- to do a grid like architecture. And how they would share data and applications, across but it's across the computer notes.

So, this particular share memory design and I would tell you, it will not be an our initial release but it will be something that we're very excited that we're working on very hard and staring at and in fact not just, just not long ago, I have a review on that.

So, I am pretty pleased with the least energy level that we're driving. We want to do something really interesting and I knew.

Brent Williams - The Benchmark Company

Great. Okay, thanks a lot.

John Chen

Thank you Brent.

Jeff Ross

Thanks.

Operator

And our next question will go to Steven Koenig with KeyBanc Capital Markets.

John Chen

Hey, Steve.

Jeff Ross

Hey, Steve.

Steven Koenig - KeyBanc Capital Markets

Hi Sybase, congratulations on a great quarter.

John Chen

Thanks much.

Steven Koenig - KeyBanc Capital Markets

A few questions on the segments and then a quick follow-up. In terms of your kind of what happened in your outlook, first of all on database, can you give us some color on did ASE did you see growth there this quarter? And then for the overall for the database business do you still expect kind of 8 to 10% constant currency license growth for the year or may be higher now that you've outperformed so well in Q1?

John Chen

We expected higher than that. On constant currency I think we -- our internal model is moving more like the mid-teens.

Steven Koenig - KeyBanc Capital Markets

Okay, great. And ASE did -- did ASE manage to grow this quarter even though Oracle did not any thoughts there?

John Chen

Yeah. ASE was actually in a very strong growth.

Steven Koenig - KeyBanc Capital Markets

Okay. Great. Okay and then on mobility that growth that -- you saw a little bit of growth this quarter can that and that was mostly from smaller business. Can that continue for the year or do you expect to may be even to accelerate, what's your outlook there?

John Chen

Yeah, I expect they'll continue and may be not so much as just a small deal. The base businesses are very strong in Q1 obviously they could positive surprise. There are some larger deals in the pipeline for the balance of the year. So, I think the INE where license deals are I think I am encouraged with what's going to happen.

Steven Koenig - KeyBanc Capital Markets

Okay. And then on messaging you spoke a little bit about it about growth resuming in the second half, is that mostly as the currency stops being so negative or there can you comment on the business organically, what's going on there, and any acceleration expected et cetera?

John Chen

Mostly because we sign-up some of the very large projects that we expect to see well as deployed volume goes up. So it really more on a on the expected business ramp not so much on the FX.

Steven Koenig - KeyBanc Capital Markets

And John is that those are AEM projects or they most specifically mobile banking or anything what kinds of projects are those?

John Chen

They are, there are one or two major mobile banking business. The payment systems that we talked about earlier, at Malaysia I think they are going on kicking gear in third and fourth quarter. And then some of the just a normal content business coming back.

Steven Koenig - KeyBanc Capital Markets

Okay, great. And then my last question is kind of a follow-up here. High class prompt to have but what you're going to do with all that cash that you're generating?

John Chen

Well, let me remind everybody on February 22nd of next year we have a convert due at $460 million. We're suppose to pay out in cash and Jeff is busy working on coming all of via all kinds of ideas and without -- with no lack of bankers help by the way. And so I want to be able to be in a position that when we look at the cost of this capital to either payback or if people put that to us.

We are at least have the option of paying with our own cash. And, so I think that's one usage of cash on kind of a stand by. That will serve the investor the best, our the shareholders the best because that way we don't have to do anything that we kind of force into doing for that matter. And then I don't what the economics condition or the capital market looks like or the fund raising market looks like down streams.

Secondly, there are some acquisitions that we're interested in. I know there has been some report that I am interested in meager acquisitions, I can tell you I have no intention to get into a hardware. I would tell also that we have not deviate from our the Seurat acquisition which is it'll be great to the in the $100 million price pack area that are very IP driven and that are strategic.

And that said, I want to reserve the right to do anything that are strategic and a deal that can be packed up. It was a little larger but that's not what we normally go on and seek.

Steven Koenig - KeyBanc Capital Markets

Okay, terrific. Thanks a lot for the color, I appreciate it.

John Chen

Sure, thanks.

Operator

And our next question will come from Peter Goldmacher of Cowen and Company.

John Chen

Hey, Peter you didn't chink us.

Peter Goldmacher - Cowen and Company

Hey John, how are you?

John Chen

Great.

Peter Goldmacher - Cowen and Company

Can you, just give a little bit more color around I tend to think of lot of database businesses the project oriented business and what we've seen from a lot of the CIO surveys and just spending have it some of the projects that it has been cut. And if that seems consistent with the trouble you're having in the services business which is certainly consistent across software but the database business remains pretty strong. So how do you correlate those similarly contradicting results?

John Chen

It's not contradicting. In a sense that we're really selling or since so well or doing well are the options for ASE are the new application they require on both the Risk Analytics as well and this is a really huge area, I mean I don't -- it's amazing that not more company are top line may be they did and they haven't said anything but it is a good, good area and a good discussion point with customers all around.

Compliance reporting remains to be a strong, it's in a strong demand. I don't really interesting not because of just mostly pluck in, they don't need to buy professional services on that. So the only weakness that we saw in the enterprise business is really the professionally services business going down.

Peter Goldmacher - Cowen and Company

And so what's change that they're used to on professional services now they don't? Are you intentionally deconstructing the business or how you're thinking about it?

John Chen

No, I -- we will only focus on making sure that we don't have too deeper bench. You expect a margin of business to be in the 10 and 12% range and its a business that we get in there not to lose money but to augment a mixture that we don't lose in the business but to augment the license sales. And so that's the kind of the general strategy of that. And when you sell add on plucked in to enterprise needs, lot of time they have their own staff that can take it between after to do the same thing.

Peter Goldmacher - Cowen and Company

Great. Thanks guys.

John Chen

Thank you.

Jeff Ross

Thank you.

Operator

And our next question will go to Curtis Shauger of Caris & Company.

John Chen

Hey Curtis.

Jeff Ross

Hey Curtis.

Curtis Shauger - Caris & Company

Good morning everyone. Congratulations on a great quarter.

John Chen

Thanks.

Curtis Shauger - Caris & Company

I wanted to circle back to the Oracle, Sun Microsystems deal, just to dig in a little bit, John you mentioned that you are in discussions with some other people I was just curious is there a chance that perhaps those could push some of the other hardware vendors in your direction?

John Chen

What does that mean?

Curtis Shauger - Caris & Company

I guess my point is that there is some commentary circulating that Microsoft's database business could be the primary beneficiary. So I am just wondering, is this -- could this be viewed as a potentially -- potential opportunity for you folks?

John Chen

Well yeah, I mean we, as I said yeah Microsoft obviously I could see that could be a that they could potentially have some benefit there. We see the same benefit, I think some of the hardware folks will like to work closer with us on providing the database on their -- on part of their stock. I am hoping that's the case, I don't have anything to report.

But, initially it seems that there are a lot of positive discussion. People are interested in understanding our views and our positions and so I do think that I am encouraged this has been net positive so far.

Curtis Shauger - Caris & Company

Excellent. And on the margins obviously, a lot there then I think what myself and others were thinking, license coming and I think it helps that. And it doesn't yet seem that you folks are fully I think in to what you're hoping to lever third party channel partners. Is that -- I mean is this still more room to go once you get to that stage where you can take more advantage of some direct sales with some of the bars that you're talking to especially on the wireless platform?

John Chen

Absolutely. As I said I don't know how long will it take us to get there, I think it's entirely reasonable for us to get to 30% operating profit margin.

Curtis Shauger - Caris & Company

I guess the big question is to when is that a $0.20 is that...

John Chen

I don't know. I am working hard at it. Once there was a time that I really don't, I seriously I don't -- not telling you but I really don't know. We're obviously trying to get there as soon as we possibly can but the more important thing is when we get there we want to make sure that we could stay there.

Curtis Shauger - Caris & Company

Got it.

John Chen

So that's a very important thing. In the mean time we wanted to stay there you need to spend money on innovation, you need to spend money on a better partner strategy, partner organization. So there are few things one have to do. One, it's not hard to get there I mean you could see that if you look at Q4 of last year, we believe we've had that and never looked back.

But you don't -- you can't really gauge it there. I want to make sure that we have on a year basis except the 30% and we could stay there and continue to improve from that point. So, we still got rooms. If you ask me is there any potential on margin -- more margin uptake improvements, the management is very focused in getting it done. Yes.

Curtis Shauger - Caris & Company

Excellent. And the I get the sense that the wireless division was still I think a work in progress, six to 12 months ago, but with the SAP announcement it seems like you've taken a big step forward in terms of translating that into actual products and actual business. Is that kind of what you're feeling in your mind?

John Chen

Yes. It's a big proof point. And some of the pilots that we're working on with some name brands, I hope we could be successful, can't promise that. And if they are successful that would even further strengthen to what you just said.

Curtis Shauger - Caris & Company

Excellent. And just real quick, this is a housekeeping item. I missed here any commentary add-on tax rates going forward, could you just repeat that for me please?

Jeff Ross

Yeah. What we say 36, sorry 33 for the year, 36 for Q2 typically we get a little bit help in Q3 and Q4 when some reserves come off of the books. So, 33 is down slightly from what we said before.

Curtis Shauger - Caris & Company

Excellent. Thank you gentlemen, congratulations.

John Chen

Yeah. Thank you.

Operator

And our next question will go to Horacio Zambrano of Jefferies & Company.

John Chen

Hey Horacio.

Horacio Zambrano - Jefferies & Company

Hey, thanks guys and congratulations.

John Chen

Thank you.

Jeff Ross

Thank you.

Horacio Zambrano - Jefferies & Company

I am still struck by the database license growth of 31% and I just wanted to go back to that. I guess could you remind us what percent of your ASE base is on version 15 now? And I guess in the top modules, what's the penetration of those modules into those bases?

John Chen

Okay. I -- the last I check which is about less than a month ago. We are roughly about 60-70% of our base at ASE 15. And our penetration is about 30% or so, of that base -- of course of that installation.

Horacio Zambrano - Jefferies & Company

For most of the top modules is that what you say?

John Chen

Yeah for most, yeah on average on most of the top modules, I mean the encryption and the call insurgence and

Jeff Ross

I'm not sure it is Cluster,

John Chen

Not sure it is. A share this is going to -- our expectation to share this is more like a 15% penetration so the pace because now everybody want to use them. But its not being reflected in the current numbers because now as they started to come online as we try to scale more of those. It will be some level of growth we'll expect from share this customer going forward.

Horacio Zambrano - Jefferies & Company

How many customers did sign and shared this Cluster in the quarter and I guess similarly is it over 20 now or...

John Chen

Oh yeah, it is over -- I don't know how many we signed over the quarter, obviously it is our share with this customers is not on 20.

Horacio Zambrano - Jefferies & Company

Okay. And then just jumping over to the messaging side of the business, you've given us some metrics before and how the growth between SMS and MMS is going? Can you kind of -- if it's still have 3X to 1 type of ratio and I guess is there any way to quantify the FX impact, did you guys give us a constant currency growth rate in the messaging business?

John Chen

Lets see.

Jeff Ross

About 10% or so.

John Chen

Yeah, it was higher for that business, we told you 10% was the FX hit in that business.

Horacio Zambrano - Jefferies & Company

Okay. And then just in that....

John Chen

On SMS, MMS I actually haven't gotten the update on this quarter. I should, so if you're interested we'll get Jeff to find that out or Charlie will let you know or something.

Horacio Zambrano - Jefferies & Company

Okay, perfect. Thanks a lot guys.

John Chen

Sure.

Jeff Ross

Thank you.

Operator

And our next question will go to Scott Zeller of Needham & Company.

John Chen

Hey, Scott.

Jeff Ross

Hi Scott.

Scott Zeller - Needham & Company, LLC

Hi. Thanks. I know there were a couple of questions earlier on Sun. Could you just tell us or frame out in broad terms what you think your install base is on that platform, percentage wise? Is it 5% maybe?

Jeff Ross

No, no. We have probably 30% of installations.

Scott Zeller - Needham & Company, LLC

30%. Okay.

John Chen

But that said, of course the first thing we do you expect us to do us call our fund based customers, all I mean the top-line, okay. I would tell you what the customer says, the software that they use for mission critical environments they're used to and have a lot of application written on top of that its hard, much harder to move to anybody else than they move to hardware.

So and you'll expect that I know there are firms that have written tremendous amount of applications on install procedures and triggers on Sybase that is as long as I will provide another alternative platform that are qualified and I will put Intel and Linux and Dell and HP and IBM as qualify they are just lying with that option. So, there is no negative zone that comes back from the top ten customers for example, when we've called every single one of them as soon as that news hit the stand.

Scott Zeller - Needham & Company, LLC

And if I understand correctly that's ASE plus IQ, right?

John Chen

ASE plus IQ, yes that's right.

Scott Zeller - Needham & Company, LLC

And I remember previous -- I think I remember previously your commentary I think last quarter from professional services. You are saying that you're going to be off-loading that to partner's overtime. Do you think now, what you saw the weakness in the 1Q, is the rate of decline in services going to be greater than what you expect it? Or does this macro trend just sort of take the burden since you're off-loading it?

John Chen

No, I wouldn't say that. I wouldn't say that. I would say it this way, our models I'm really just go to the model okay, our model expect now that the license business specially database license is going to be growing at roughly as we top pointed out roughly mid-teens percentage on constant currency.

And on the constant currency basis we're actually expect it the professional services down by 25% and but the professional services such as small parts as compared to the license, I think its mathematically is easily understandable and at least over come-able and so I wouldn't -- and the margins of that shift is much more positive.

Scott Zeller - Needham & Company, LLC

Right.

John Chen

Given that, as long as the professional services bench does not cost us more money to keep, it is important to keep a good pilot and a task team to be able to go help customers and especially when the economic times return back to normal. I doubt very much there is something in all our game plan to completely off load our business. We do need to keep some capability of that. We're going to make sure that those are not something that drag on our margin.

Scott Zeller - Needham & Company, LLC

Okay. Thank you.

John Chen

Thank you.

Operator

And our next question will go to Derek Wood of Wedbush Morgan Securities.

J. Wood - Wedbush Morgan Securities

Good morning gentlemen, nice job on the quarter.

John Chen

Yeah.

Jeff Ross

Hi, Derrick.

J. Wood - Wedbush Morgan Securities

Jeff, I guess have a question around Q2 guidance. And it certainly seems like there is a lot less seasonality in your assumptions for Q2. Obviously professional services is going have some negative impact there, but can you walk us through what other assumptions you have that are different than you're historically more seasonally up Q2?

Jeff Ross

Yeah. So one thing just to level that I mean we had blow out Q2 last year. So there is a rather tough comp. I think we are viewing Q2 obviously that's just marginally up from Q1. Some of the macroeconomics are going to change dramatically, FX is going to get a little bit worse than it was in Q1. And then solid execution on database side, a little bit stronger growth on mobility and a little bit stronger growth on messaging so to get to guidance.

J. Wood - Wedbush Morgan Securities

Okay. And on the mobility side you guys gave license numbers from both the IPG group and the INA work group. It looks like those growth numbers are vastly different, is there how do we read into that? Is that a difference of product, is that a difference of just channel execution and where the deal for us is coming from, if you could give us some color on why those numbers are different?

And then may be some color on what products within that iAnywhere space are doing better and...

Jeff Ross

Okay. So, partly because of channel. Our iAnywhere business license business are predominantly 90% going through value at the resellers in some cases distributor but mostly on the ware side. And the fact that we don't have a huge amount of big deals or any deal that are big in the iAnywhere licensed this last quarter and was able to grow -- still grow pretty well on 13% constant currency. It's a good sign that we're now seeking the market. So, we're pleased with that the thing that the product that does some best are in better database as well as a fairer device management, encryption device management tools.

So those are two areas that have done better than that's predominantly drive the growth for the iAnywhere. The database side is a little easier in the growth rate partly because we have some used early words, but we've a couple of smaller neutron bombs that kind of went off in the same quarter, but it was as expected.

So, but the database business frankly speaking on the base business on ASE is and IQ for that matter is stronger than we expected in Q1. So therefore the license dollars are better. So we actually have done better than our own model sets and both the bigger deals comes in as well as the smaller deal also come in.

J. Wood - Wedbush Morgan Securities

Great. That's a good color. And then on the messaging side I think last quarter you guys have given some expectations for 09 around 15 to 20% constant currency growth, has that changed at all at this point?

John Chen

No.

J. Wood - Wedbush Morgan Securities

But more of a back half loaded acceleration in growth due to I guess adoption of usage on some of the contracts that you have signed?

John Chen

Yes. And the project has currently been launched yes.

J. Wood - Wedbush Morgan Securities

Yeah.

John Chen

And Marty told me I asked Marty that questions. Marty told me that he is there so the constant currency 15 to 20% grow year-over-year is there.

J. Wood - Wedbush Morgan Securities

Okay. And then just last question around that space. Mobile banking is obviously one of your bigger initiatives there.

John Chen

Yeah.

J. Wood - Wedbush Morgan Securities

And you've signed up a lot of banks, what are banks telling you in terms of what their own adoption rates are by their own customers on using some of those mobile banking services?

John Chen

They actually told me it's pretty good. I don't have any data to share with you, but when I go talk some of these early stage road out they are very encouraged. They like the fact that the customers, their customers that is, are responding well to it, I hope may be this is -- are you going to the Analyst Meeting in New York in May?

J. Wood - Wedbush Morgan Securities

I will be there.

John Chen

Okay. Make sure that Marty or Charlie will make sure that Marty will able to give you some data point.

J. Wood - Wedbush Morgan Securities

Perfect.

John Chen

Okay.

J. Wood - Wedbush Morgan Securities

That's it from me. Thanks guys.

John Chen

Thanks very much Derrick.

Operator

And next question will go to Brad Sills (ph) of Barclays Capital.

John Chen

Hi Brad.

Unidentified Analyst

Hey guys, thanks for taking the question. Just a question on geographies did you see any difference there in performance in the different geos and I need some color on execution versus demand drivers in those geos would be helpful?

John Chen

Okay. Let's see the U.S. have done reasonably well, as we expected because of a 50-53 -- 52% it's a little bit up in scale revenue. They've done reasonably well, as I said we've a good financial services quarter, we also have a good government quarter in Q1.

And a reasonable base business in the commercial. Although, I would say the performances in that order, I just told you. We have a reasonable Europe, but I could see the Europe is a little sluggish in terms of close rate than in the past and probably because European situation.

We have a very good quarter in China. We have a very, very good quarter in Japan and then the rest is kind a little slow in Asia, what you say? Korea is focused on the currency situation where we have a pretty high volume of business but we outperformed and translated U.S. dollars a lot less. But the business is still there, so I would say China and Japan, pretty reasonable execution in the United States. Europe did well in numbers, but it feels a little kinky on that perspective. Latin America is probably weaker than last year.

Jeff Ross

Latin America was the only region that was down.

John Chen

Yeah.

J. Wood - Wedbush Morgan Securities

Okay. Got it, thanks, that's helpful. And then very good database growth obviously, would you attribute that, when we talk about share gains more to new customers by in to say IQ or is it existing customers just expanding the footprint?

John Chen

Actually both. I think we have signed about 200 new customers in combine in the quarter.

J. Wood - Wedbush Morgan Securities

Okay. Got it, that's helpful, thanks.

John Chen

Good, thanks.

Jeff Ross

Thanks Derrick.

Operator

And we'll take a follow up question from Brent Williams with The Benchmark Company.

Brent Williams - The Benchmark Company

Okay hi. And actually that was my follow up question was the number of new ASE customers on the quarter? And the other thing was on the auction rate securities stuff is -- you took an impairment are there any write offs or is there just impairment on standard mechanism that we've been seeing?

John Chen

It's just impairment on standard mechanism that you've been seeing.

Brent Williams - The Benchmark Company

Great, thank you.

John Chen

Thanks.

Operator

And this concludes today' question and answer session. At this time I would like to turn the conference back over to John Chen for any additional comments.

John Chen

Thank you, Mike. So we all -- thank you for joining us this morning we're looking forward to seeing you all at the Analyst Day on May 14th at the New York Stock Exchange and we'll chat more about the business and we're -- you obviously hopefully you could tell that we're cautious but we're encouraged by our own business and the business volume. I think every operating unit expect some level of growth and so we will share more that with you on mid-May.

Thank you all very much. Have a great day.

Operator

This concludes today's Sybase conference call. Thank you for joining us. And have a wonderful day.

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