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Deltek Inc. (NASDAQ:PROJ)

Q1 2009 Earnings Call

April 30, 2009; 5:00 pm ET

Executives

Kevin Parker - President & Chief Executive Officer

Mark Wabschall - Executive Vice President & Chief Financial Officer

Dave Spille - Vice President, Investor Relations

Analysts

Bryan McGrath - Credit Suisse

David Bayer - Cantor Fitzgerald

Brad Silla - Barclays Capital

Mitesh Dhruv - Banc of America

Greg Speicher - Moss Creek

David Bayer - Cantor Fitzgerald

Operator

Good afternoon. My name is Allie and I will be your conference operator today. At this time, I would like to welcome everyone to the Deltek first quarter 2009 earnings conference call. (Operator instructions)

At this time I’d like to turn the call over to Dave Spille, Head of Investor Relations. Sir, you may begin your conference.

Dave Spille

Thank you. Good afternoon, everyone. Joining me here today are Deltek CEO, Kevin Parker; and Mark Wabschall, our CFO. I want to welcome you to today’s conference call announcing Deltek’s financial results for our first quarter ended March 31, 2009. The press release we issued this afternoon containing our financial results for the quarter is available on our website at www.deltek.com.

This call is being recorded and will be available for replay on Deltek’s website or by dialing the following numbers 1-800-642-1687 or 1-706-645-9291. The access code for replay is 95013771 and the conference call replay is available through May 7, 2009.

During the course of this conference call, we may make forward-looking statements that involve substantial risks and uncertainties. You can identify forward-looking statements by words such as anticipate, believe, estimate, expect or similar words. Actual outcomes and results may differ materially from what is expressed in these forward-looking statements for many reasons.

Any forward-looking statement in this conference call speaks only of the date on which it is made. We undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

Please refer to our earnings press release for further information on forward-looking statements and for explanations on the use of non-GAAP financial information. You can also obtain more information about Deltek, including review in our SEC filings and press releases by visiting www.deltek.com.

With that, I’ll turn today’s call over to Kevin.

Kevin Parker

Thanks, Dave. As we look at our results for Q1, a very tough economic condition continue to be the largest single factor impacting software spending across the globe and we certainly aren’t an exception to that trend. Our Q1 license revenues were below our expectations as a result of the challenging economy and its continuing impact on near term predictability about individual deal cycles.

As we enter the quarter, our overall pipeline was good. We combine that pipeline with the substantially more conservative close rates than we’ve experienced historically, but as the quarter came to a close we saw significant variability in buying behavior as many customers delay decisions, reversed decisions they have previously committed to, confronted changing internal approval requirements within their organizations or in some cases put off decisions by even a few days to push a commitment into the next quarter for their own financial statements.

Not surprisingly that impact was most acutely felt in the A&E sector. Our GovCon results were essentially at 2008 levels. EPM also performed comparatively well. We look to the details of the quarter and while we would have clearly preferred better overall results we also know that the number of deals we lost the competition remains exceptionally low. In fact the number of deals of any consequence that we lost to our top competitors in Q1 is probably less than five.

We also know that our overall pipeline remained at healthy levels during the quarter and we saw strong increase in our GovCon pipeline during the past three months as a result of our focused sales and marketing effects. As we have discussed in recent quarters, the A&E market has been hit hard by the recession and our license revenue in this market has suffered significantly as a direct result. While we continue to be engaged with many of our A&E customers and prospects, the near-term visibility on when these deals will close is comparatively low and closure rates are very difficult to predict in today’s environment.

As I said, we essentially achieved the same level of license revenue from our core Government contracting customers as we did last year. Overall, the GovCon market remains a fairly stable market for our products, especially when compared to other verticals. In Q1, we did see a small number of GovCon customers temporarily delay their buying decisions proactively they had officially received a signed contract or purchase order from the federal government. This is particularly true with a few smaller firms since they have fewer resources to invest ahead of future growth.

In addition, we saw few deals impacted by the potential of changing spending activities associated with the transition to a new administration. Those issues aside, the overall GovCon market continues to be healthy, our pipelines continue to grow and the trends toward greater transparency and accountability for government contractors are factors that we believe will continue accentuate our unique strengths and capabilities in the future.

In Q1, our EPM license revenue was relative flat from Q4 but as expected down from the prior year as a result of a $2.7 million deal we closed in Q1 of 2008. Excluding the impact of this large win, our EPM revenues would have been on par with last year’s results.

On the international front, we continue to make inroads in the EMEA market. In Q1, we won a significant transition, one of the world’s leading environments on an engineering energy consulting firms. This global firm needed a new financial CRM and business management solution that could keep pace with their rapid growth and they chose Deltek for the scale and capabilities of our solutions. This win was significant to us for a couple of reasons. In evaluating solutions they’ve considered a broad range of applications from almost all our major competitors. During the evaluation process, Deltek Vision clearly rose above the competition.

This customer will ultimately end up being one of our largest global implementations on the Vision platform and will provide us with future revenue opportunities for us to up sell additional products and it helps us as we continue to build the brand awareness for the EMEA market. In fact this customer is already recommending our products to other prospects.

The other area fell short of our goals for the quarter was our consulting business. Mark will walk you through the details in a few minutes, but to summarize the shortfall, we were caught up in the BearingPoint bankruptcy, which cost us a significant chunk of Q1 revenue and we saw our training revenue decline below normal levels. Training declined as a number of customers avoided travel in Q1, and as a result we saw training revenues declined significantly from Q4 in the prior year.

Our revenue for maintenance subscriptions continue to be very strong. We saw a continuation of our historically high renewal rates and our customer retention remain consistently strong. We’ve seen a slight up tick in maintenance downgrade request, but those are almost exclusively at a very low end of the A&E market and are very small, in fact immaterial impact on our results and we expect it to remain that way in the coming quarters.

Despite the overall revenue shortfall, we’re pleased that we achieved operating income and EPS result that were inline with the goals we set out at the start of the quarter. We achieved these strong bottom line results through a combination of aggressive cost savings and operational improvements, including reduced facilities, travel and telecommunication costs as well as headcount reductions.

Going forward, we’ll continue to manage our costs aggressively to ensure that we continue to generate strong profitability and cash flow. As it is evident from the profit and cash flow, we believe the underlying fundamentals of our business remains strong. We have a pipeline that continues to grow, our products are extremely competitive and our customer loyalty is very strong. We have a maintenance revenue stream that is very health and numerous add on products to sell to more than 12,000 customers.

We also believe that both our government contract and A&E businesses will prosper in the future as customers benefit from the government’s economic stimulus plan. As a result of these factors we believe we’re well positioned for future success.

While our near-term revenue results were largely being influenced by the economic climate, we have been working hard on a number of product related activities and have a number of new products that we will continue to introduce and maintain our strong brand presence for the foreseeable future. Later this quarter, we will be releasing a number of new products, including Vision 6 and Vision Performance Management. These exciting new products for the project based professional services markets will further improve their visibility, collaborative performance across their entire business organization.

Importantly, Vision 6, the latest release of our industry-leading Vision platform is the first release of our Vision applications we to be built and to be translated into other languages. By the release of Vision, our international efforts have been limited to the English speaking world. This redesign of Vision was a process we started more than 18 months ago and we’re very excited about the new architecture and the flexibility it brings to both us and our customers. We’re also releasing several new GovCon products in Q2 to further enhance our leadership position in this market.

At inside our user conference we will be launching the latest version of our earned value platform Cobra 5. Cobra 5 is a significant technological upgrade to our flagship EVM application. At a time when project governance and controls are of ever-increasing importance, Cobra 5 will deliver best-in-class technology and capabilities to our EVM customers.

Also included in our launch plans is the latest version of GovWin, our industry focus CRM solution built specifically to meet the business development, collaboration and capture needs of government contractors. In an environment where more and more companies are trying to win business with the U.S. Government, the potential market for GovWin is increasing.

With that I’ll turn it over to Mark so he can give you a very detailed review of our financial results and outlook for Q2.

Mark Wabschall

Thank you, Kevin. Before I review the financial results of the quarter, I wanted to elaborate on Kevin’s earlier comments on management’s commitment to protect our bottom line in this difficult economic climate. Our ability to deliver operating income and profits inline with our guidance, despite a $5 million shortfall in total revenue, is due to a number of operational improvements and cost savings initiatives which enabled us to reduce our cost of revenues and operating expenses excluding restructuring charges by $4 million from Q1 of 2008.

We achieved these results through a combination of headcount reductions, delayed hiring, lower professional fees and temporary labor costs, reduced travel and internal communication cost and lower variable expenses including royalties, commissions and bonuses. In Q1, 2009, we implemented a reduction in force of approximately 50 employees, 4% of our staff. As a result of this headcount reduction, we expect to realize annual cost savings of approximately $5 million.

We also continue to leverage the lower cost structure of our Philippines operations as we now have more than 12% of our workforce in this offshore location. Starting at the top of the income statement, Q1 license revenue was $11.2 million, which represents a 34% decrease from last year. This decline was primarily driven by lower Vision and EPM license sales while our core government contracting products of Costpoint and GCS were on par with prior year’s results.

As Kevin mentioned, the decline in our Vision license sales to our A&E and other professional services firms is due to these customers delaying purchasing decision as a result of a significant downturn in our industry. As a result of this decline sales for our Vision product now represent less than 25% of our total license revenue.

The decline in our EPM sales was primarily due to the fact that we closed a $2.7 million license transaction in Q1 2008, which we did not replicate this quarter. We added approximately 65 new customers to our installed base in Q1 and these new customers account for approximately 15% of our Q1 license revenue. In total, we had approximately 700 license transactions in Q1 none of which was over $1 million.

During Q1, sales from our reseller partners were 8% of our license revenue consistent with last year and license revenue from our international operations was 5% of license sales, which also was its consistent with last year’s results. Q1 consulting revenue of $20.1 million decreased 17% from last year and 8% from Q4 due to lower implementation and training services and reimbursable expenses as well as the BearingPoint bankruptcy which has lowered consulting revenues by approximately $750,000 in Q1. Our consulting margin for the quarter was 14% excluding the impact of the BearingPoint bankruptcy on our consulting revenues our consulting margin would have been approximately 17% which is equal to the level we obtained in Q1 of ‘08.

Q1 maintenance revenue increased 9% to $30.6 million due to the increase in our total customer account and our ability to maintain a retention rate in excess of 90%. Our Q1 maintenance revenue increased 2% sequentially and was in line with our expectations. Our Q1 maintenance margin was 81.2% consistent with historical results and our objectives. Our Q1 R&D expenses of $10.9 million decreased 5% from last year and 2% sequentially, primarily as a result of lower labor and labor related charges.

Our Q1 sales and marketing costs were $11.5 million which is down 6% from last year’s quarter and 20% from Q4. These decreases were primarily driven by lower commission costs and reduced labor and labor related expenses. Our G&A expenses in Q1 were $7.9 million which is approximately 5%, which is up approximately 5% during the prior year’s quarter as a result of higher labor cost, insurance and bad debt expense.

G&A expenses were down 9% from Q4 levels, primarily due to lower professional fees and a decrease in stocks complaints cost. As a result to remediating all previously reported material weakness and partially off set by higher bad debt expense. As I indicated earlier, despite a revenue short fall we were able to achieve our operating income and EPS guidance ranges as a result of our continued focus on operational improvements and cost saving initiatives. Our Q1 non-GAAP operating income and margin of $10.6 million and 17% were in-line with our guidance ranges of $11 million to $12 million and 17% to 18%.

In Q1 our interest expense decreased by $2 million year-over-year and $1 million sequentially as a result of lower rate interest cost. Through tax plan initiatives we implemented in 2008 we’re able to lower our effective tax rate and 44.5% in Q1 2008 to 38.2% in Q1 of 2009. Q1 non-GAAP net income of $5.6 million or $0.13 per share was in line with our guidance of $0.13 to $0.14. On a GAAP basis our Q1 net income was $2.7 million or $0.06 per share, which is in line with our guidance range of $0.06 to $0.07 per share. Had we not experienced the $0.01 earnings per share impact on the BearingPoint bankruptcy, both our non-GAAP and GAAP EPS will meet the high end of our initial Q1 guidance ranges.

Our Q1 cash flow from operations were $17.4 million which was $8.6 million generated from net income and non-cash expenses plus $8.7 million in working capital changes. We continue to focus on improving our collection efforts in cash management to maximize and accelerate cash flow. DSOs for Q1 improved to 58 days compared to 61 a year ago and 60 in Q4 2008. We continue to expect that our future DSOs to be within our benchmark range of 55 to 65 days.

The impact of our strong cash flow can clearly be seen on the balance sheet as we increased our cash balance in Q1 by $7.2 million to $43 million even after paying down debt by $10.2 million in March of 2009. As noted in our press release, we filed earlier today an amendment to our registration statement with the SEC for a proposed $60 million rights offering, which allows shareholders of record as of April 14th 2009 to purchase up to 20 million shares of our common stock at a price of $3 per share.

Since we’re in the legally mandated quite period for the offering, I’m sure you’ll understand that we can provide no further information about the offering on this call. At the end of Q1, we had $183 million of debt outstanding under our term loan as a result of $10.2 million principal payment we’ve made. Our next principal repayment of approximately $500,000 is scheduled to occur in June of 2010.

Given our healthy balance sheet, long history of profitability, strong cash flow from operations, and the fact that we are well in compliance with all of our financial covenants, we are confident that we will be in a good position to refinance any remaining debt balances when our term loan matures in approximately two years. We ended Q1 with a short term deferred revenue balance of $24.8 million, which is up $3.5 million from Q4 primarily as a result of the increase in prepaid fees for Insight customer conference which will occur in mid-May in Orlando.

Deferred license revenue remained relatively flat and continues to represent less than 5% of total deferred license revenue. Looking back over our Q1 results, while we were disappointed with our license and service revenue performance, we are pleased with the progress we made in many areas of our business.

We experienced strong maintenance revenue growth of 9% and retention rates in excess of 90%, we continue to show strong expense discipline and implemented various cost saving initiatives which allowed us to report operating income and EPS results in line with our guidance. We achieved $17 million in cash flow from operations and we strengthened our balance sheet by increasing our cash and lowering our debt.

Turning to our guidance; although we remain actively engaged with our customers and our sales pipeline continues to grow, the challenging economy continues to impact our customers purchasing decisions. Therefore we will continue to improve operational efficiency and reduce our cost structure to maximize profitability and cash flows during these difficult economic times.

For Q2, we expect license revenue to be in the range of $11 million to $12 million. Total revenues expected to be between $65 million and $67 million and include approximately $3 million a piece from our annual Insight customer conference. We expect non-GAAP operating income to be in the range of $10 million to $11.5 million, which results in an operating margin of approximately 16% to 17%. Our non-GAAP operating income excludes the impact of approximately $2.5 million of stock-based compensation expenses and approximately $1.2 million of intangible amortization expenses.

Our Q2 GAAP earnings per share is expected to be in the range of $0.07 to $0.09 per share. On a non-GAAP basis we expect our earnings per share to be in the range of $0.12 to $0.14 per share. Our Q2 GAAP and non-GAAP EPS targets assume an effective tax rate of approximately 38% and an average share count of approximately 44.5 million shares. This weighted average share count does not take into consideration our 20 million share rights offering.

Now I’ll turn it over to the operator for the Q-and-A portion of the call. Operator.

Question-And-Answer Session

Operator

(Operator instructions) Your first question comes from Bryan McGrath – Credit Suisse.

Bryan McGrath – Credit Suisse

I just want to dig in a little bit to the consulting line. With Insight happening in this quarter, would you expect a rebound in training fees kind of would go in conjunction with that?

Kevin Parker

Bryan, it’s Kevin. We do expect that, I think you can tell from the overall guidance that Mark gave. We’re pretty cautious these days and looking for an effectively flat Q1 to Q2 but the training business we think will come back, I think the early indications are that customers are back and we also do training at Insight, the people have signed up for, so there is a natural up tick in terms of revenue, because people take training when they are there or immediately prior to going there. So there is some upward pressure on that.

Bryan McGrath – Credit Suisse

And one more follow-up on the BearingPoint bankruptcy; it’s impacted roughly 700 K in this quarter. Was there anything that would have been in your future plans that is now taken out of the model or there is no more impact kind of in the future quarters because of BearingPoint?

Kevin Parker

There probably is very limited impact. I think the tragedy of BearingPoint was not days but maybe weeks away from going live with their new implementation of Costpoint. They were quite enthusiastic about it, so it was going to be a defining moment for them. The resources are very highly utilized in that part of our business, so those resources have been goggled upon other things and the benches are staying very low on utilization and business stays very high. So there is no real impact on us.

Bryan McGrath – Credit Suisse

And then just from modeling perspective, you’ve done obviously a really good job of lowering the cost base; should we going forward model kind of flat operating expenses or do you still think there is still areas where you can improve and slightly decrease that going forward?

Kevin Parker

Well, we’re not done exploring and that’s sort of a never ending exercise as we continue to optimize around that. I think the guidance that Mark gave; and Mark you can fill in the details, but almost implicitly assumed flat expenses to a large degree, so we’re not making a prediction about when those additional optimizations will bear fruit, but we’ve not done exploring and Mark why don’t you fill in some of the details from your view.

Mark Wabschall

Yes, certainly. We implemented the headcount reduction in Q1 and so we’ll get a full quarter’s benefit of that during Q2, but obviously given our revenue outlook, management’s committed to continue to look at ways of reducing our cost structure and we’ll continue to do that.

Kevin Parker

That especially is most often Bryan inside the company as we tend to manage it from the bottom line up, and so we’re committed to maintaining a pretty high level of profitability and very strong cash flow, given the economic circumstances and the variability around that in the short term; that means focusing on expenses and process improvement.

Operator

(Operator Instruction)Your next question comes from Bryan McGrath – Credit Suisse.

Bryan McGrath – Credit Suisse

Yes, I’ll jump back into the queue. Just kind of conceptually thinking about the deals that are frozen in the pipeline from the A&E customer base, do you get the sense that if you lower pricing or if you played around pricing you could get some of them to free up or are we at a state where until their business turns around, they are going to be paralyzed from making any kind of long term future investments.

Mark Wabschall

Again, it is almost pricing sensitive. The one thing that we have done that has gotten some deals to move forward is working with the third party financing company to offer people extended payment terms, and people are on the bubble; that’s one of the things that have push them in to signing a deal, if they can spread the payments out, and remember these are primarily partnerships and relatively modest size businesses that are very cash flow sensitive. They are price insensitive in the sense there is no price elasticity, it’s just they need confidence about their business.

I think on the margins they’re all in the A&E sector, not all but certain of the larger ones are building plans and I’m trying to figure out where overall these stimulus dollars are going, so they can go hunt them down and get their fair share, but right now it’s hard to see in their minds when that first dollar crossed the threshold of their business and that’s probably what they’re waiting for.

Bryan McGrath – Credit Suisse

You guys are in Washington DC, much closer to the auction than we are; do you get a sense of when those stimulus dollars are actually going to make their way into the economy. I know a lot of people are trying to handicap that. I think Accenture is not expecting anything until 2010, but may be you have a better insight into that?

Mark Wabschall

In some areas the term of Accenture is most often shovel-ready and it’s also a global phenomena too, because there’s stimulus dollars being spend around the world these days. Geographically we’re close, I don’t know that that gives us that much more insight when the dollars really start to flow. Our customers are going to let us know when that is and when they win the first contract, and it’ll probably be on the federal side of the business before we see it on the engineering side, but it’ll be followed hopefully shortly thereafter by the engineering side of the business.

Kevin Parker

Yes, Bryan one thing that we saw, maybe I don’t know if the trend is, but we certainly saw some anecdotal evidence for this, where even some of our government contracting customers that were lined up to buy our software had won contracts, but they were being protested by the competitors that have loss and the government contracting customer of ours delayed purchasing our software until the protest was adjudicated.

In the past we really had not seen that trend, so really there is just hesitancy of before they buy the software they want to make sure they have their contract with the government, and as the stimulus dollars start flowing out, we just start to seeing the customer to start opening up their purchasing decisions.

Operator

Your next question comes from David Bayer - Cantor Fitzgerald.

David Bayer - Cantor Fitzgerald

You mentioned you had one large customer that might have some pull through; can you give us a little bit more color on that and how that works?

Kevin Parker

Well, we are talking about the large engineering customer that we won, the consulting environment, they are headquartered in the UK and we actually won without giving too much of the details. We won a very large deal for their South African enterprise, so their South African enterprise is going to go on Deltek Vision or engaged in deal cycles for them for other parts of their global business and it’s a very decentralized business, but with a lot of project oriented activities and we now see internal referrals into other parts of the business.

So we think there is a revenue stream there that goes on as we continue to win new segments of that business, that can go on for let’s say a year to 18 months as we expand our presence within that and we have a very deliberate land and expand strategy that we are working on with that customer. We’ve got a very strong sponsor in some executive offices there.

The other part of it too is because we bring new products to market. Vision performance management for example and dashboards division to up-sell into that customer represents an opportunity for us. So this is a very deliberate strategy that we’ve got within that company; we’ve won two or three of the largest divisions, but we’re going to continue to see that expansion across the board and that’s a common phenomena for us on either the GovCon or the A&E of the business, and this happens to be an engineering firm.

Bryan McGrath – Credit Suisse

Okay, and then one other question is, now normally in the second quarter you get I see an up tick in revenues from the conference and last year the conference was about I’d say $4.5 million of additional revenues give or take. I’m assuming that we should think that’ll be a lower number this year just given what’s going on in the economy and I wonder if you can give us a little bit color on that.

Then related to that, there’s an implication and if we back out the contribution from the conference, that seasonally this is going to be a much weaker than normal quarter, which obviously reflects what’s going on in the economy and I’m just sort of wondering how much slippage we should be thinking about for the back half of the year?

Kevin Parker

Well, we’re not going to give any guidance for the full year, but I’d probably take the questions in the order they were given. In terms of the conference I think it’s a fair statement that last year’s attendance will not be replicated this year and people are still signing up the conferences, it’s still several thousand strong at this point in terms of attendees, but I think just our overall Demeter these days is much more conservative than we’ve sort of looked at that in terms of our overall anticipation of what the conference might be.

We are not seeing any impact from the sort of the crisis to zero/here with the swine flu and things like that, but I’m not trying to handicap what’s going to happen there either. So we’ve just taken an altogether more conservative posture with regards. Then I think that reflects the environment that we’re in. We still believe the conference will be an unqualified success in almost every dimension that we can think of.

In thinking about the seasonality of the business, I think as Mark and I were talking about and thinking about our forecast for the quarter, etc, etc, I think the performance this quarter has us sort of being very, very thoughtful about what the next quarter might be and if we certainly don’t see the situation getting any worse in terms of the economy and there is undoubtedly some impact in Q1, but we’ve tried to be more conservative in our outlook and we’re expecting that it’s essentially flat on a quarter-on-quarter basis, a sequential basis and that’s effectively what the guidance that Mark gave here a bit ago.

In terms of the normal seasonal up tick, I’m optimistic that it maybe there, we are seeing deal flow today, deals are closing, we’re actively engaged in customers, we expect that the deal flow is there, it’s not frozen, but at the end of the April I think it’s a little early for us to feel so confident that we’re ready to put that in front of the world in terms of guidance. Mark, you probably want to add to that a little bit?

Mark Wabschall

Yes, you also asked the question about the impact it has on margins, our user conference. If you look historically at best it’s neutral for us, that the revenues cover the direct operating costs of the conference, so there really is not margin that comes out of that and that the revenues, you’re right, last year over $4 million we put in a conservative estimate for $3 million, because the conference is a couple weeks away.

Operator

(Operator Instructions) Your next question comes from Brad Silla – Barclays Capital

Brad Silla – Barclays Capital

Just a question on international, the mix this quarter, I think you were saying 5% of revenue came out of the international geographies. I think it’s down from last quarter; if you could just comment on just color on what you saw in the UK and then some of the other international geographies this quarter please?

Mark Wabschall

Sure. The revenues declined sequentially and we had I think in retrospect very good Q4 in the international business and I think we were very proud of the results. I think the year is off to a strong start, we are very happy with closing the deal that we did and made a few other ones over there.

Literally I was on the phone with our international team this morning and from a consulting business were actually resource constraint at the moment, so we’re hiring over there. I think we’re expecting that the rest of the year will continue to do well. I know the teams were enthusiastic there. We have seen over the course of the last six month or so, we’ve put some very focused programs in place around pipeline building and we’ve seen the pipeline grow very significantly over the course of the last six months or so as a result of those efforts.

So it’s a very good environment for us. We’re in a position I think to continue to win business; we’re working on some big deals with some very influential customers in the EMEA market. We’re very existed about the new release of Vision and the ability to do translations, and as I mentioned in the prepared remarks, Vision is up at this point in English only a product, so the ability to translate in the foreign languages at a relatively modest cost in a very finite period of time gives us great capability.

In our world, that is even necessarily winning new business at a market, but we have got customers that have deployed Vision in their U.S. operations that are looking to deploy it in a more expanded view in some of their global operations. They are ready to take the product; we just need to have it in a translated form. So there is a lot of good stuff going on from that perspective.

Having said that though, they are influenced by the same things that the U.S. economy is influenced by. They are maybe only slightly less cautious these days. We’re doing a lot of good attractive marketing and some special programs for international customers as well to make sure that they can make good decisions and move forward and I think we’re very optimistic about the rest of the year from that perspective.

Brad Silla – Barclays Capital

Thanks, and then a question just on the resource base you have in the Philippines; you mentioned 12%, are you happy with the level of resources there in terms of staffing or is it something that you’re planning on kind of gradually shipping more over to Philippines in the effort of cost savings?

Kevin Parker

Well, it’s going to continue to expand and we’ve done that and we’re going to continue to growth that operation. If I recall correctly Mark, we’ve got about 150 people there today. By this time next year, I think it will be undoubtedly be closer to 200. It’s a great number of team mates we’ve got there; it’s our operation there, it’s not an outsourced capability. These are Deltek employees and we’ve got a number of very, very talented people there.

We originally started out as exclusively a sort of development centre, but we now have support there, we now have remote data conversion capabilities there, we’ve moved more and expanded our developing capabilities there as well. So it’s a great operation for us and certainly the cost competitive is good for us as well. That’s not the primary motivation for moving there. We just have very good team mates there and we’re going to continue to see that expand.

Mark Wabschall

It’s a mature operation, I believe Kevin. We’ve been there for about 10 years.

Kevin Parker

We’ve been there for 10 years, so it’s not a startup for us. We’ve just taking more and more advantage of it and we’re hiring over there and expanding our capabilities over there. And it certainly gives us some more follow of this on capabilities from a support perspective.

Operator

Your next question comes from Mitesh Dhruv - Banc of America.

Mitesh Dhruv - Banc of America

Two questions, first thing is, when I look at the risk you’ve done in about $5 million cost saving annual run rate, that alone gives you about two points in margin expansion or two points of margin. So if I roll forward the model, let’s say over the next years or so looking at the calendar 2009, how do I think about my margin?

Kevin Parker

Well, I think that as we’ve said, we tend to run the company from the bottom line upward and we’re very, very focused on improving the profitability of the business and maintaining it very high. We’re looking at ways to reduce costs, there will be areas that we need to invest of course as we go forward whether it’s in international or expanding into new markets, new geographies and new products as well. So we think over a long term basis I think we said that we expect our EBITDA margins to be in the 20% range or slightly above that and so we’re going to maintain that commitment. Mark, do you want explain on that a little bit?

Mark Wabschall

Yes, our non-GAAP operating income, our target has been 20%. We’ve been consistent with that and we’ve slightly below that here for Q1 and our guidance coming in around 16% to 17%, but obviously our mid-term and long-term goal will be to keep that over 20%.

Mitesh Dhruv - Banc of America

But for 2009, do I still think that if I look at the first half of the year, your margin is about 17%, a little lower than that in fact. So, do I expect a snap back or a rebound in the second half because of this $5 million run rate kicking in or how should I think about not super long term but at least for 2009 in terms of margins?

Kevin Parker

Well, certainly we haven’t given guidance for the full year as the visibility that we’re facing right now, but certainly when you add in any license revenue increase that’s about 90% margin business that would certainly impact it, but we’re managing the bottom line and we’re looking for ways to cut cost. As I said before, Q2 will have the full benefit of the reductions we did in Q1 and then any other cost saving initiatives we do for the remainder of the year.

Mitesh Dhruv - Banc of America

And the second question I had is, when you did give out the flat guidance for license revenues, what kind of closed rates are you assuming relative to when you give out your guidance for Q1?

Kevin Parker

We’re assuming and personally that it doesn’t get any better. So this is, I think thoughtfully conservative from that perspective; we’re assuming that it is a challenging quarter in the same way Q1 was a challenging quarter, and I think that’s probably the best way to describe it. Having said that as I said earlier though, deals are closing, we are seeing customers move forward and I think that gives us some confidence with regard to the quarter, but there is so many variables out there that are completely outside of our control at this point, that we have an abundance of caution and we are looking at flat license revenues.

Mitesh Dhruv - Banc of America

Just one quick clarification; the $5 million saving is an annual saving, right, but you mentioned that the full benefit will kick-in in Q2, but that’s just a part of $5 million just to be sure?

Kevin Parker

That’s correct, and the $5 million is salaries, bonus, fringe and benefits. That’s the total cost of not having an employee.

Operator

Your next question comes from Greg Speicher - Moss Creek.

Greg Speicher - Moss Creek

Hey guys. This may be a stretch, but as you look at business so far in April, just within the U.S., are you seeing any sort of a geographical recovery within the U.S.?

Mark Wabschall

Having looked at it, it’s a finite degree of details. Just in terms of the geography here in the GovCon contracting sort of centre of gravity here that our sales people are busy and I think one of them stopping in the hall on the way outside “I’m certainly a lot busier than I was in Q1 at this point.” So that’s anecdotal, I don’t know if the data point of one and I certainly wouldn’t draw a trend line through it, but we do know that there is some stuff going on here in our area of the world.

Greg Speicher - Moss Creek

Okay. That’s good, and I know you have some competition that maybe is lower priced, but you have to do a lot more of the work yourself; is there a chance that some people are just saying, “look we need to do something, but we are just going to try to get a lower price point and do it ourselves” or is there any trend like that going on?

Mark Wabschall

We’ve seen a few people out there at the very low-end of the market in the A&E space and I don’t think we’ve seen it in the GovCon space in any trend; and what’s forcing them to come to that decision is remember, they’re probably on a legacy Deltek product that support is expiring at some point. So we’ve got people who are saying “look I got a choose between Vision, and the state of my business tells me the better choice might be QuickBooks at this point.”

So we’re not competing it, we’re competing and it’s QuickBooks; we’re not going to be priced in a way that can allow us to win that; that’s just a completely different market and a completely different set of issues that customer is facing. In moving up to the market a little bit, there’s a couple of very low end competitors that we’re doing our best to make sure they don’t get a foothold and we’ve not lost many deals to them, but they’re very small deals and we’re very aggressive about competing with those folks on price.

Operator

Your next question comes from David Bayer - Cantor Fitzgerald

David Bayer - Cantor Fitzgerald

These are couple of, I hope you’d remind, blocking and tackling kinds of question. I’m assuming that there is no additional recapitalization or restructuring charges contemplated for the remainder of the year at this point and then related to the sort of blocking and tackling the question I would think is, when should we expect to start putting into our models the additional shares from the new program?

Mark Wabschall

Okay. Let me go ahead and address that. The guidance I gave today for Q2 did not include any restructuring costs, but I think that’s kind of a bold statement to sit there and extrapolate that out for the year. Basically as I communicate it is, management will continue to look at out cost structure and take the appropriate measures, but right now the guidance I gave today does not have a restructuring expense to it; and then the second part of the question?

Kevin Parker

I think the second part of the question is really in terms of the share count, from that perspective and I think we’ve been advised thoughtfully by counsel that anything that’s related to the rights offering, to remind everyone that we’re in a filing period and we can’t comment on it.

Mark Wabschall

Yes, and that’s why I went ahead and iterated that it’s assuming the 44.5 million shares due in that calculation.

Operator

There are no more questions today. Mr. Spille, do you have any closing remarks?

Kevin Parker

Guys, this is Kevin, I’ll substitute for Dave in that regard. We appreciate everybody’s time here this afternoon and we look forward to talking to you at the end of Q2.

Operator

Thank you. This does conclude today’s conference call. You may now disconnect.

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Source: Deltek Inc. Q1 2009 Earnings Call Transcript
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