Epicor Software Corporation Q1 2009 Earnings Call Transcript

Epicor Software Corporation (EPIC)

Q1 2009 Earnings Call

May 4, 2009 5:00 pm ET

Executives

Damon Wright – Director of Investor Relations

L. George Klaus – Chairman, President and Chief Executive Officer

Michael Pietrini – Executive Vice President Finance and Administration, Chief Financial Officer

Russell C. Clark – Senior Vice President Finance and Principal Accounting Officer

John Hiraoka – Senior Vice President and Chief Marketing Officer

Analysts

Steven Koenig - Keybanc Capital Markets

Peter Goldmacher - Cowen & Co.

Brian Schwartz - Piper Jaffray

Abhey Lambda - UBS

Richard Baldry - Canaccord Adams

Ross Macmillan - Jefferies & Co.

[Unidentified Analyst] - The Benchmark Company

[Brad Sills] – Barclays Capital

Presentation

Operator

Please stand by. We’re about to begin. Good day everyone and welcome to the Epicor quarterly conference call. Today’s call is being recorded. At this time I’d like to turn the conference over to Mr. Damon Wright, head of Investor Relations for Epicor. Please go ahead sir.

Damon Wright

Thank you, [Jamie], and thank you all for joining us this afternoon to discuss Epicor’s 2009 first quarter financial results. Our press release issued this afternoon detailing these results may be accessed on our website at www.epicor.com under the Investors section.

Joining us on today’s call to comment on Epicor’s first quarter are George Klaus, Epicor’s Chairman, President and CEO and Mike Pietrini, Executive Vice President Finance and Administration and CFO. Russ Clark, our Senior VP Finance and Principal Accounting Officer and John Hiraoka, our Senior Vice President and Chief Marketing Officer are also on the call to participate in the Q&A session. George will begin the call with a few comments followed by Mike who will discuss certain financial results and trends in our business in more detail.

Before we begin, I would appreciate your patience as I review our Safe Harbor statement. The discussions on today’s call will include forward-looking statements. These forward-looking statements include statements regarding the company’s expected revenue, earnings and other financial results, as well as new product releases and other statements that are not historical facts. The actual results may differ materially from those expressed or implied in the forward-looking statements. For a discussion of such risks and uncertainties which could cause actual results to differ from those contained in our forward-looking statements, please see our annual report on Form 10-K for the period ended December 31, 2008.

Today’s comments will also include a discussion of certain non-GAAP financial measures such as adjusted EBITDA, free cash flow and non-GAAP revenue and non-GAAP earnings which exclude amortization of prior intangible assets, stock-based compensation expense, restructuring and other charges. The most directly comparable GAAP financial measures and information reconciling the company’s non-GAAP and GAAP results are included in our earnings release and in the Form 8-K to be filed with the SEC.

With that I would now like to turn the call over to George. George?

L. George Klaus

Thank you, Damon, and thank you to everyone on the call and webcast for joining us today. Having retaken the Epicor leadership reins at the end of January, I am pleased with our Q1 results as we clearly demonstrated that we are [audio impairment] to the market conditions. We are managing those things that we can control to insure our cost structure is aligned with our anticipated revenues.

As expected, the first quarter proved challenging as economic conditions continued to impact purchasing decisions and implementation timelines. January and February were especially difficult as conditions seemed to deteriorate even further. However, March was a relative bright spot and our business was considerably stronger than the first two months of the quarter. Executive decision making around buying application software reemerged from the early quarters freeze and we closed a significant number of deals, adding a total of 84 new name customers in Q1 even in the difficult conditions.

We benefited from closely managing our expenses throughout the quarter and from our proactive cost reduction measures which led to our Q1 non-GAAP earnings coming in at the high end of our guidance range despite revenues slightly below expectations. FX had approximately a 7% negative effect on our revenue due to the strengthening of the U.S. dollar relative to other major currencies versus a year ago.

Demand for Epicor 9 is strong and we have received more than 350 requests and orders for our latest ERP offering. As most of you know, in December of 2008 we released Epicor 9 which is built on a second generation service oriented architecture and leverages Web 2.0 technologies along with all new global financial suite. This new release we now provide a single ERP product that can be deployed across all major markets and geographies for our target industries, and we now are doing business in 160 countries around the world.

Being at the front end of a new product cycle provides us with several significant advantages over our competition. This is especially true in challenging economic times. Some of the most obvious advantages which help drive strong retention rates and solid new name customer wins this last quarter were first, existing customers have a well defined upgrade and/or migration path offering them many new benefits when they are ready to move to our latest product. This is meaningful to the majority of our install base of more than 20,000 customers as Epicor 9 is a final step for our customers in our protect, extend and converge product strategy. This means Epicor 9 provides the migration path for all of our legacy ERP products including manufacturing, distribution and services.

Second, new customers can see a clearly articulated product strategy that has been executed on. This enhances their confidence in selecting Epicor as they go forward in their business decisions. And three, all customers know that this is the front end of a product cycle that Epicor is committed to continuing to invest in.

Additionally, on the international front Epicor 9 is already beginning to deliver on its promise to open new markets through deepening and broadening our international presence. During Q1 we had our first Epicor 9 customer wins in Fiji, South Africa, Saudi Arabia, Colombia and China. We are also seeing good activity in our international pipelines, especially in many of the eastern European countries where Epicor 9 provides us with more capabilities.

On the retail front we have seen some indications that our retail markets could be improving. While we continue to take a conservative approach in the retail market, our market share leading position and fully integrated end to end retail offerings positions us well to be able to capitalize on any pick up in this retail market space.

All of these data points help support our belief that [audio impairment] will continue to execute on its business model during this downturn and that we will emerge extremely well positioned for growth when the economy begins to rebound.

I’m now going to ask Mike Pietrini, our recently appointed Chief Financial Officer, to cover some of the financials from the first quarter and discuss some trends in our business, after which I will make some closing remarks. Mike?

Michael Pietrini

Thank you, George. I’m pleased to address all of you on the call for the first time as Epicor’s CFO and I look forward to interacting with all of you on these calls and hopefully in person in the near future. As you know, our press release and tables provided significant amount of financial information regarding our quarter and I do not plan to simply repeat everything listed there in this call. Rather I would like to provide some additional color around some of the trends we are seeing in our markets and throughout our business. I will also highlight some of our key financial metrics. For additional information, please refer to our press release.

First quarter non-GAAP revenue was $99.1 million, which is approximately $400,000 higher than GAAP revenue due to the impact of NSB purchase accounting deferred revenue adjustments. February marked the anniversary of the NSB acquisition, so this is the final NSB non-GAAP deferred revenue adjustments we will report.

Like most companies with significant international business, Epicor faced FX headwinds that impacted our revenue growth as the U.S. dollar strengthened meaningfully over the past year against most foreign currencies. All revenue lines were impacted with total revenue impacted by approximately 7%. In reviewing this by line item, license revenues were negatively impacted by approximately 10%, consulting revenue by approximately 8% and maintenance revenue by approximately 6%. On a constant currency basis, first quarter total non-GAAP revenue would have been $106 million with license revenue of $14.6 million, consulting revenue of $34.1 million and maintenance revenue of $50.1 million. Hardware revenue was not impacted by FX movements.

Before turning to some of our margin detail, I’d like to spend a little time on some of the trends we are seeing in the market and the corresponding impact of our various revenue lines. While it is no surprise that license revenues are down year-over-year, there are some positive data points for Epicor that we believe bode well for the future. Our primary Q1 weakness came in existing customer base sales and retail software sales. Neither of these data points in and of themselves is unusual in this environment. The majority of our existing customers are not currently growing their business and thus they are not adding [seeds] or additional features. Most plans for expansions or upgrades have been delayed primarily due to customers waiting for their own as well as their customers businesses to rebound.

A delay in acquiring a new module for additional users may not meaningfully impact their business during such a slowdown. Similarly, the majority of retailers are not expanding right now, although we do still see demand for point solutions providing near term ROI as well as some demand from retailers that service the value shopper.

On a positive note, our new name ERP customer software sales were relatively strong in the first quarter, contributing a greater percentage of our overall software revenue versus last year, despite the significantly worse economic conditions. New name revenue is very important revenue for a software company as it results in future consulting and maintenance revenues and becomes a source for additional software sales. Although our sales cycles generally take at least six to nine months and Epicor 9 was only released in mid-December of 2008, nearly half of the new name customers we added in the first quarter purchased Epicor 9. This supports our belief that being at the front end of this major product cycle with industry leading technology is setting Epicor apart from its competitors.

On the consulting side, in addition to currency headwinds, we also experienced the impact of customers not wanting to spend in this economic environment. This resulted in several projects and implementations being delayed on both the ERP and retail side of our business. While still a small but growing part of our consulting business, we are seeing good demand for managed service offerings. Because of our single point of accountability, Epicor is in a unique position to provide our customers with additional services that leverage Epicor specific knowledge to enhance the value of their IT investments while reducing the overall costs associated with managing their internal processes.

Now turning to maintenance, maintenance continues to be an excellent cash generator for Epicor, contributing 47% of our first quarter revenue with gross margins greater than 76%. While Epicor is able to boast some of the best customer retention rates in the industry, 93% in the first quarter, growing this business becomes more difficult in periods of economic downturn. In addition to maintenance growth being impacted by currency fluctuations, we are also experiencing the impact of slow paying customers. Although it’s not prevalent throughout our customer base, we are getting more requests for maintenance discounts as customers are trying to match their costs to their expected revenues. We are generally able to turn this to our advantage by offering smaller, near term discounts in exchange for longer maintenance contracts.

Winbacks. Winbacks continue to be strong as we brought back 160 customers onto maintenance contracts in the first quarter. While we are not collecting as much back maintenance from these winbacks as we did during better economic times, the significance of these first quarter winbacks is that they represent $3.1 million in annual maintenance.

Looking at our gross margin detail, maintenance gross margins were 76.6%, up year-over-year by nearly 2 percentage points. Maintenance margin benefited from improving retail maintenance margins as well as from the expense reductions taken at the end of last year.

First quarter consulting margins were up significantly year-over-year to 16%. As expected, 2009 first quarter utilization rates were impacted by seasonal training for all of our consultants which was more extensive than usual due to the release of Epicor 9 at the end of 2008. The consulting organization is doing an excellent job of matching its workforce to its book of business, and we expect to see utilization improve markedly in our second quarter resulting in margins at or approaching 20%.

Hardware margins were 11.4% which were in line with our expectations. We expect to continue to see some variability in our hardware revenues and margins due to the timing of customer orders and product mix.

License gross margins were 81.6%, increasing year-over-year by nearly 1 percentage point, due primarily to a lower mix of third party products. Total gross margins excluding amortization were 53.2%.

Now moving on to operating expenses, excluding restructuring charges operating expenses benefited from our focus on managing our variable costs as well as the strengthening of the dollar versus foreign currencies. However, the full impact of the cost initiatives we have taken is not completely apparent just by viewing this year-over-year operating expense line.

Sales and marketing expense declined meaningfully year-over-year and R&D was relatively flat as we continued to invest in Epicor 9. G&A, however, was up significantly from the first quarter of 2008 due to a few key factors which accounted for close to $3 million in additional G&A expense in the 2009 first quarter compared to a year ago. Given the current economy and some slower paying customers, we took additional provisions for bad debt expense in the first quarter of 2009 which increased G&A expense. 2009 first quarter G&A expense also had additional legal expense and more costs associated with NSB as we had a full first quarter of operations in 2009 compared to only six weeks of NSB in the first quarter of 2008.

Now looking at some balance sheet metrics, we had solid collections of $112.9 million for the first quarter even in the face of the weak economic environment. Once again we collected more than we sold during the quarter. Our cash and equivalents balance as of March 31 stood at $83.2 million and we started 2009 with solid free cash flow of $7.2 million. Historically the first quarter is the lowest cash generating quarter of the year.

We continued to use excess cash to pay down our credit facility with payments totaling $8.5 million during the first quarter. Based on the $6 million discretionary payment we made in the first quarter, our credit facility interest rate will drop by 25 basis points to LIBOR plus 2% when we file our 10-Q later this month. Our debt balance consists primarily of our $230 million obligation to holders of Epicor senior convertible notes, and $86.5 million of borrowings under our credit facility. As a reminder, the first time our outstanding convertible notes could be subject to a forced redemption is not until May of 2014. These notes are a relatively inexpensive cost of capital as they carry a very favorable cash interest rate of 7.375%. As just mentioned, our credit facility is also attractively priced. We remain comfortable with our liquidity position and we will continue to pay close attention to our credit facility covenants throughout the year.

Lastly, I want to reemphasize that we will continue to closely manage our variable expenses to insure our cost structure is in line with our revenue expectations. At the same time, we will continue to invest in our products while insuring we are providing our customers with the very high level of service and support they’ve come to know and expect.

I’d now like to turn the call back to George.

L. George Klaus

Thanks Mike. While we don’t control the economy, we are doing a good job with the things that are under Epicor’s control. In addition to keeping a close eye on expenses during the first quarter, we have also eliminated several distractions while making the company stronger.

Most recently we filled the CFO position. Mike is a well known and respected executive within Epicor and brings excellent operating and leadership skills to oversee a very strong financial organization. We also solidified our executive management team with Jim Bork taking the role of Head of Worldwide Sales and Russ Clark assuming the position of Principal Accounting Officer. Every executive management position that I believe Epicor needs right now is full. I have worked very closely with this team in the past and I am confident that this is the group to lead Epicor in successfully and profitably weathering current economic conditions. Everyone is using the same playbook and Epicor will emerge an even stronger company, well positioned for growth across all lines of our business when the economy turns around.

In addition to rounding out the management team, we reached an agreement with one of our largest shareholders, insuring that the team is not distracted from running our business. We added two strong new members of our board, both of whom have already proven to be excellent assets for the company in recent board deliberations.

We believe the company specific distractions of last year are behind us and that Epicor is operating from a solid foundation. Epicor has weathered economic downturns over the years and this is the team that in the past helped the company emerge from those downturns as an even stronger company. The current situation is obviously unique, but I am confident we are taking the right steps for Epicor to emerge even better positioned.

We will continue to invest in our latest technology offerings while closely managing our expenses to our expected revenues. We will take opportunities to continue to prune where prudent, while making sure that we do not impede our ability to compete. We continue to focus on making every revenue dollar more profitable than it was last year while insuring we are prepared to capitalize on the significant opportunities we believe a rebounding economy will bring. That said, in the near term execution to our stated objectives is our top priority. As seen in our Q2 financial guidance provided in our press release, we plan to continue to take a prudently cautious approach to our revenue and earnings projections as we await signs that the economy has bottomed.

With that I’d like to turn the call over to our operator and we will field questions. Jamie?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Your first question comes from Steven Koenig - Keybanc Capital Markets.

Steven Koenig - Keybanc Capital Markets

I’m wondering if you could comment a little bit on maybe two things. One is what you saw happening towards the end of the quarter, you know, with respect to improvements relative to January and February, what kinds of deals? Any sort of metrics on large deals would be interesting as well. And secondly, just to clear the table here, I’d also be very interested in finding out about Epicor 9 as you started to see some traction with that. What kinds of verticals were you filling into? Where are you seeing the initial traction both from a vertical and geographical perspective?

L. George Klaus

Okay, Steve, so first of all, you know, I think, you know, we installed a new President in the U.S. in January and I think a lot of wait and see attitude was taking place during the January, February timeframe and there started, while there’s still not total clarity, there started to become a little more clarity as to what, you know, his economic policy was going to be. And with that I think our customers started to feel a little more comfortable in spending.

But it’s not unusual to see business back end loaded in the first quarter anyway as, you know, we have our sales teams in many kickoff meetings during the beginning of the year, we have our consulting organization in many kickoff meetings, and especially this case where we were doing a lot of training for all the people on our new Epicor 9 product. So that might have accounted for some of the March strength. It’s really hard for me to put my finger on the fact that it was a turnaround in the economy.

As far as Epicor 9, we are continuing to sell it into our existing strengths, certainly manufacturing. Epicor 9 product brings a lot stronger distribution product capabilities and we did see some additional wins in the distribution side of our business that we would probably not have seen with our older product. So that in addition to the new countries we were able to open up. I think I mentioned six of those in my chat, and that’s because we now have global financials on the Epicor 9 products. So with the ability to have global financials around the world on the Epicor 9 product and with the added distribution capability, and then with the improved manufacturing product I think is where you saw most of the Epicor 9 sales coming from.

Steven Koenig - Keybanc Capital Markets

If I may follow up with a quick question, what are you seeing in Europe with respect year-on-year comparisons, license sales, or generally color on the environment there?

L. George Klaus

Well, I just came back from eight days in Europe quick frankly and it’s, while they’re suffering the same economic constraints that we are here in the U.S., it’s a very positive group. And I met in one of my stops in Stockholm I met with 40 of our largest strategic customers over there, and we went through a whole five hour presentation on Epicor 9 and the product, and of course Epicor in general and our markets, and very well received I might add. And I actually feel a little bullish about our pipelines in Europe and think that we’re going to see, you know, by going to the global financials on Epicor 9 we’ve opened up a number of countries that we couldn’t sell our Vantage 8 product into for example. And so I think we’re going to see stronger sales come out of Europe than we have in the past.

Operator

Your next question comes from Peter Goldmacher - Cowen & Co.

Peter Goldmacher - Cowen & Co.

Can you talk a little bit about your sales headcount, where you were a year ago, where you were six months ago, where you are now? And then some more detail on the competitive environment, for the deal you’re winning, who are you winning them from? And then for the deals that are getting delayed or going away, what’s happening on the deals you’re not winning?

L. George Klaus

Peter, I don’t know that I know where we were a year ago. As you know, I wasn’t here. But we have 160 quota carrying sales reps right now, I know that for a fact. And, you know, Damon will have to get back to you where we were a year ago and six months ago, unless we know that. Do we know that, guys? Oh, we were around 200 a year ago and we’re around 160 now. They just slipped me a note. Okay. So we’re about 160 and what was the second part? I already forgot, Peter.

Peter Goldmacher - Cowen & Co.

The competitive environment when you’re winning, who are you winning from?

L. George Klaus

Yes, we don’t see a big difference there. I mean our three primary competitors are SAP, Oracle and Microsoft. And those are the guys that we see them pretty much and certainly in all the deals we’re in. The larger ones of course are SAP and Oracle more and then the medium and smaller ones we see a lot of Microsoft. But those are our three major competitors as has been for some time now.

And Epicor 9 will allow us to move up market more, so we’ll be seeing more of I’m sure the SAPs and Oracle in all of the deals we’re in.

Operator

Your next question comes from Brian Schwartz - Piper Jaffray.

Brian Schwartz - Piper Jaffray

George, I just wanted to ask you a question on the retail performance. Actually two questions. One is I want to know how the retail business performed according to your expectations here in Q1. And then second I’d just like to follow up on your introductory comments about the retail segment. You seemed to indicate that you are potentially seeing some positive indicators here in April in that segment and just wondering if you could share some more details around that?

L. George Klaus

So one of the things that allows us to be a little more, if you saw [Coach’s] announcement recently that they were pretty positive about some return to more normal times in the retail environment. So, you know, we see a little more strength in terms of spending going on out there. And I think in the retail space, the retailers will know before a lot of the rest of us as they start to see people start to come back into their stores as to whether the economy is turning around in that space.

Now with regard to our retail business in Q1, you know, it was pretty good, it wasn’t bad. The area we were disappointed in of course was our software license sales and that was down over our plan, but you know we didn’t have a huge number in the plan for retail software license sales in Q1. And we have taken the prudent cost cutting measures on the retail side of our business such that the retail side of our business is actually producing a lot of EBITDA to our bottom line there. So we have definitely got the cost balance with the effect of retail sales that we see.

And our consulting and maintenance business continues to be relatively stable. So it’s really just a matter of some of the license sales and we have a pretty good pipeline in Q2 and would expect to see that bounce back a little bit in Q2.

Mark Murphy - Piper Jaffray

Just taking a step back, I know we’re talking about retail here in April but is it possible to comment on what you’re seeing as the business as a whole here, now that we’ve finished the month of April, if it’s possible to compare that to what you saw in March? If you had any month over month improvement last month.

L. George Klaus

Well, I would compare April to January and April was a much stronger first month of the quarter for us than January was. Now that’s not unusual because the first quarter of the year is usually the toughest one. But, you know, our pipelines are strengthening and I think, you know, based on the environment we’re in our sales team and our consulting team is scrubbing our pipelines even more aggressively than we have in the past, and we’ve always been pretty aggressive. So the people that we have in our pipeline right now are, you know, justified and bona fide candidates for purchase into the environment. So we are taking a conservative approach as I mentioned in my chat with our guidance for Q2. We’re going to do it on a quarter by quarter basis now.

And as soon as we start to see this economy rebound, I can’t think of anybody who is better positioned than as I mentioned I just spent eight days in Europe moving around four different cities and, you know, because we’re the very beginning of a product life cycle and have made the investment over the last six years in getting us to the point where in December of last year we released Epicor 9, I think, you know, should the economy and when the economy starts to turn around we’re going to be well positioned to take advantage of it. But until we see that we’re going to take a conservative approach to managing our business and forecasting our results.

Operator

Your next question comes from Abhey Lambda – UBS.

Abhey Lambda – UBS

George, just following up on the comments about April versus you compared it to January, so would it be fair to assume that in March you saw the typical kind of slowdown in the first month of the quarter type of thing? And what type of environment are you assuming for second quarter in your guidance as you compare it to what you saw in March? Are you expecting sequential improvement from March in second quarter?

L. George Klaus

I don’t know if we’ll see sequential improvement from March. I think we’ll see June be better than March. I would feel that, but I think second quarter will be better than first quarter, even though we are guiding pretty conservatively for the second quarter. So, you know, it’s still hard. The only thing I can relate to there is our pipelines lead us to believe that we will have a successful second quarter.

Abhey Lambda – UBS

In terms of costs do you think you have more room to cut costs here? Or do you think you have the right cost structure in place for the rest of the year?

L. George Klaus

No, I think we will continue to cut costs. You know one of the things that difficult economic times do is make you take a really hard look at just everybody you need in the company, and we continue to do that and while nobody wants to furlough people or lay people off, we are taking a very, very tight look at all of the resources we have in the company and making sure they’re needed.

Abhey Lambda – UBS

Lastly, with Epicor 9 the leads are you seeing any kind of customer power, any kind of falls in customer decisions right now? Or do you think all the decisions are being made just with macro in mind [inaudible] not a consideration?

L. George Klaus

No, I think there’s still a lot of caution in the decision making process by the customer base. And you know we don’t lose to the competition hardly at all, but we lose the no decision if you will or deferred decision. And we’re still seeing some of that, and that will be, you know, I think continuing until we see this economy start to get some legs under it.

Operator

Your next question comes from Richard Baldry - Canaccord Adams.

Richard Baldry - Canaccord Adams

So despite the sequential uptick you think you’ll see now on the revenue side, should we be expecting the G&A line to actually decline? Because it looks like there are some one time items in Q1. And then if you could speak to deal sizes, at times you’ve told us numbers for deals over $1 million, over $0.5 million. And then just kind of a detailed question, unsure if you would give the headcount exiting the quarter.

L. George Klaus

So on the G&A side I’m going to ask Russ Clark to chat with that. Russ?

Russell C. Clark

Yes. Hey, Rich, I’d expect G&A to be fairly consistent in Q2 with Q1. We did have some one time items but, you know, when we look at DSOs and collections and so forth, we’re kind of monitoring that closely and conservatively. So I wouldn’t expect a big decrease in G&A in Q2. I’d expect more consistent.

L. George Klaus

And I remember the third part, Rich. We’re just under 2,800 employees right now but I forget the second part of your question.

Richard Baldry - Canaccord Adams

The deal sizes?

L. George Klaus

Oh, the deal sizes. I think our average deal size for our top ten as we usually announce it was a little over $350,000.

Operator

Your next question comes from Ross Macmillan - Jefferies & Co.

Ross Macmillan - Jefferies & Co.

I just had a couple of financial questions. Just on the interest expense, it looked like that picked up both sequentially and year-over-year yet you’re I guess paying down your debt and interest rates are lower. Can you just talk to that for a second?

Russell C. Clark

Yes, Ross, it’s Russ here. The biggest impact on that you’ll see is the implementation of the new accounting for the convertible debt which is adding $2 million of interest expense to the quarter.

Ross Macmillan - Jefferies & Co.

And the amortization?

Russell C. Clark

Yes, it’s the amortization. It’s a little bit less than $2 million a quarter and that’ll grow over time. It’s essentially a $61 million discount back at the issuance date and it accretes up over time. So it’s adding about $2 million in additional interest expense now and that’ll creep up quarter by quarter through 2014 which is the first put date of the note.

Ross Macmillan - Jefferies & Co.

And then just on, you know, what you do have to provide against customers that may be late in paying maintenance. Do you, just so I’m clear, does your maintenance revenue, do you net out those if you will at risk maintenance payers? Or do you gross, do you have that revenue in there gross and then basically net out of the G&A line as a provision? I’m just trying to understand the math of that.

Russell C. Clark

Sure. If it’s an issue with the maintenance renewal on a collection, you’ll generally see that coming out of the revenue side. On the G&A side, you know, when we’re down to a situation with a customer that it’s a little bit later cycled but on the early stage with the renewals you’re going to see that hitting the revenue line.

Ross Macmillan - Jefferies & Co.

George, you mentioned a 350 number in terms of Epicor 9 requests or orders. Do you have a reference point from last quarter or is there any kind of context you can put around that?

L. George Klaus

Yes, we were around 200 last quarter.

Ross Macmillan - Jefferies & Co.

And when you say request, what’s the difference between request and order? How should I think about that?

L. George Klaus

Well, we think of orders coming from a new account and we think of requests coming from existing customers that want to upgrade from their existing product.

Operator

Your next question comes from [Unidentified Analyst] - The Benchmark Company.

[Unidentified Analyst] - The Benchmark Company

Just two quick questions. The first one is do existing customers get Epicor 9 for no charge if they’re paying maintenance or do existing customers have to pay extra for the product release?

L. George Klaus

Existing customers get like for like technology for free. Anything additional they choose to add and most of them do, they get charged for.

[Unidentified Analyst] - The Benchmark Company

And the second question is can you break out the business in Q1 in terms of percentage of revenue from retail and percentage of retail from manufacturing?

L. George Klaus

No, we don’t do that.

Operator

Your next question comes from [Brad Sills] – Barclays Capital.

[Brad Sills] – Barclays Capital

Just a question on consulting. Could you comment on, you know, trends you might have seen there this quarter?

L. George Klaus

Well, margins are stronger. Of course as you know end of last year we had a reduction in force which also impacted our consulting organization along with others. As we mentioned in the script, our managed services seems to be becoming a little bit of a popular thing and we would expect to see that grow. We spent a lot of time in Q1, a lot of time training all of our consultants for implementation of Epicor 9, so that took them out of the field a little longer than normal which would impact our revenue and margins in Q1.

[Brad Sills] – Barclays Capital

Are there any verticals or sub-verticals within, you know, manufacturing distribution for example where you’re seeing, you know, more traction for Epicor 9 just in terms of pipeline build? Are you seeing, I guess, certain functionalities that’s resonating well? Obviously international is the big incremental, but are there any others, you know, just within vertical functionality that you’re noticing are getting traction?

L. George Klaus

Well, I think if you’re looking for something a little different new it would be distribution. The Epicor 9 product has a lot more distribution capability than our Vantage 8 product did. And of course it has a lot more manufacturing capability, but Vantage 8 was also very strong in that market. So we will see increased pipeline in the distribution area and in the international area.

Operator

Your next question comes from Steven Koenig - Keybanc Capital Markets.

Steven Koenig - Keybanc Capital Markets

I’m wondering if you all happen to have available the number of deals over $500k and over $1 million and would be particularly interested in how many of those were Epicor 9 if you have it.

L. George Klaus

None were Epicor 9 and there’s one of each.

Operator

And that does conclude our question-and-answer session. At this time I’d like to turn everything back to you, Mr. Klaus, for any additional closing remarks.

L. George Klaus

Well thank you. So briefly in closing as always I’d like to take this opportunity to thank our employees for all of their hard work during the quarter and I know it’s a difficult environment that we’re working in, but their dedication and their support and their loyalty to the company is always much appreciated. Of course thank you to our customers for their confidence in Epicor and as always we continue to have an extraordinary franchise with over 20,000 customers and a great maintenance base and consulting base of revenue to work form, and Epicor 9 should bring as the environment turns the added license revenue that we would like to see come back. So thank you all for joining the call. It’s been a pleasure.

Operator

That does conclude today’s conference. Thank you for your participation.

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