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Executives

Victor Limongelli - President & Chief Executive Officer

Barry Plaga - Chief Financial Officer

Bill Powell - Director of Investor Relations

Analysts

Jonathan Ruykhaver - ThinkEquity

Priya Parasuraman - Wachovia

Keith Weiss - Morgan Stanley

Mark Schappel - Benchmark

Matt Bugarin - Raymond James

Guidance Software Inc. (GUID) Q1 2009 Earnings Call May 5, 2009 5:00 PM ET

Operator

Good day everyone and welcome to the Guidance Software first quarter 2009 earnings results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to the Director of Investor Relations, Mr. Bill Powell; please go ahead sir.

Bill Powell

Thank you, Shevan. Good afternoon everyone. This is Bill Powell, Director of Investor Relations and we thank you for joining Guidance Software’s first quarter 2009 earnings conference call. In a moment I will introduce our President and Chief Executive Officer, Victor Limongelli; and our Chief Financial Officer, Barry Plaga, who will present and discuss with you our business and financial performance. Before they begin, I’d like to go through some notes for the benefit of our audience.

Guidance Software reports its results on a generally accepted accounting principles or GAAP basis, in conformity with SEC standards. These results may differ from results published by analysts or the media featuring pro forma financial results which may not be in conformity with regulatory standards.

We encourage everyone to review our financial results presented on a GAAP basis, which are detailed in our press release issued today at 4:01 pm Eastern time. Unless otherwise noted, we will refer to non-GAAP results during this call. Non-GAAP results exclude share base compensation expense and in the case of EPS, share base compensation expense and the provision for income taxes.

Some of the information discussed on this call, including projections regarding revenue and operating results, may contain forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements. Additional information concerning these risks and uncertainties can be found in the company’s most recent periodic reports filed with the SEC. Guidance Software assumes no obligation to update any forward-looking statements.

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

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

Victor Limongelli

Thanks Bill. Good afternoon everyone. Our revenue in the first quarter of 2009 was disappointing. Financial markets were weak and businesses and consumers cut spending drastically compared to Q1, 2008, not just in the US, but around the world. Although the company had managed to pose successive record quarters in the third and fourth quarters 2008, in the first quarter of 2009 revenue came in well below expectations and indeed for below mid quarter sales forecast.

Typically, the first quarter has been our seasonally weakest quarter and as we noted on our conference call in February, given the macroeconomic environment, we expected that seasonality to be even more pronounced this year. That turned out to be the case. The good news however is that we see conditions improving for us in the second quarter and later in the year and therefore, we believe the first quarter will mark the low point for us.

Total revenue for the quarter was $18.7 million and our net loss excluding share based compensation and taxes was $0.14 per share. Despite the overall disappointing revenue performance, there were positive aspects to Q1 2009. First, the company signed 26 new EnCase eDiscovery customers in the quarter, of which 21 were Pay-Per-Use deals and five were perpetual deals.

The total of 26 for Q1 was nearly three times, the nine new customers added in Q1, 2008 and just below the record of 29 achieved in Q4, 2008. We view this as an excellent indicator that demands for our solutions remained strong. In addition, the 21 Pay-Per-Use deals signed in Q1 included minimum usage commitments from customers of an aggregate of $1.2 million; that is contractual agreements to incur at least $1.2 million in Pay-Per-Use charges over a specified time period. That $1.2 million of course was not reflected in our Q1 recognized revenue.

Second, EnCase Forensic had a good, although not great quarter, particularly given the economic conditions and in particular the state budget difficulties in places like California. Overall revenue for EnCase Forensic was $3.4 million, which was up year-over-year by 23%.

Third, maintenance renewals in Q1 were strong and renewal rates were higher year-over-year, which is a strong indicator of continued customer loyalty. Furthermore, our quarterly customer satisfaction survey likewise reflected the highest levels of customer satisfaction since we started this survey, with nearly 90% of customers’ surveyed indicating that they were likely or very likely to recommend EnCase to a colleague or friend.

Fourth, within our training business, the number of individuals achieving certification under our EnCase Certified Examiner program was strong, with 129 people certified in the first quarter of 2009, as compared to 71 in the first quarter of 2008. The total number of people who have achieved the certification is approaching 2000.

This highlights the strength of our user community and of our brand. We believe that widespread layoffs and/or anticipated layoffs have caused many people to try to burnish their professional credentials by becoming EnCase certify. Finally, we saw some benefits for our cost cutting initiatives as total expenses of $21.9 million came in lower in Q1 2009 than in any quarter in 2008.

Turning to the components of revenue, the public sector that is our federal segment, was relatively strong, but our commercial enterprise revenue was weak in all geographic regions; the various regions in the United States, as well as EMEA, Asia and South America.

Clearly, the worldwide economic recession impacted our commercial enterprise business. In addition, with respect to EnCase eDiscovery, as detailed previously, we had a larger number of commercial customers choose our Pay-Per-Use option rather than signing perpetual licenses. In fact, the close rate in our pipeline for perpetual deals was the lowest we have experienced, with evidence of slow and even strong customer decision making in every region.

Our services businesses, training and professional services likewise had a disappointing quarter. Training produced revenue of $1.7 million and was severely impacted by customers cutting both travel and training budgets. Our online, OnDemand training however, has gained momentum in 2009 with 172 individuals registering for our OnDemand courses, of which we currently offer three.

On the product development front, in January we released Version 3.3 of EnCase eDiscovery, which had a number of improvements, particularly to the processing capabilities of the product and in late March we released a new product called EnCase Legal Hold. It is integrating with EnCase eDiscovery and provides unprecedented insight into not only compliance with litigation holds, but also the status and progress of collection and processing.

It marks our first product with a browser interface rather than a fit client and is designed to be used by in-house attorneys and paralegals. Also, work has progressed on additional brand new or great enhanced products that are planned for later this year. We expect to announce some of these new products at our annual CIC conference to be held in Orlando, Florida in a few weeks.

We are in the process of taking a number of actions to drive better performance in Q2 and position the company better for future growth. To be clear however, although recent results and economic conditions warrant changes in certain areas, in other aspects we believe the best approach is to maintain course.

In short, we have undertaken or planning the following. We will continue to invest in research and development, to develop high value products. The new and improved products planned for 2009 are designed to further enhance our competitive position as we head into 2010.

We believe demand for our solutions remain strong as highlighted by the number of new eDiscovery customers in Q1, with of course many of them choosing the Pay-Per-Use option. We planned to cut expenses. Although, our expenses in Q1, 2009 were lower than in any quarter in 2008, we believe we can make further progress in this area.

During the current quarter, we initiated cost cutting measures that reduce our headcount going forward and bring down our expense levels. We reduced our workforce approximately 7.5% resulting in annual savings of approximately $3 million going forward.

We planned to make EnCase Enterprise, which is the platform for our high value eDiscovery and related products, more channel friendly by setting an attractive price for a fixed configuration and using a quick through license agreement as we currently deal with our EnCase Forensic product, which is sold extensively through the channel and we plan to begin to develop our service provider Pay-Per-Use business.

I mentioned earlier that we are optimistic that Q1 marks the low point for us during this recession. There are a number of reasons for that. First, there is continued demand for our offerings, as shown by the number of EnCase eDiscovery customers in Q1 in the solid EnCase Forensic business and we expect that demand to translate into more business, both in terms of revenue and in the number of new customers.

Second, our Pay-Per-Use revenue, not bookings, but revenue which just got started in the first quarter is moving in the right direction; from low five figures in Q1 to we expect, low to mid six figures in Q2.

Third, we expect continued solid performance in the Federal sector, where are cyber security offering provide critical capabilities for government agencies. Fourth, we’ve seen a slight pick up in our services business, since January and February and we believe that business in fact bottomed out in the beginning of the year.

Fifth, we controlled expenses well in Q1 and we have taken further steps to cut expenses materially; which will provide the business with better leverage going forward and finally and anecdotally the macro environment seems to have stabilized a bit this January and February. Its not that we think the macro environment will rebound strongly, but that thing seemed to have stopped getting worse in that and in now itself is a positive.

Now, let me turn the call over to Barry. Barry.

Barry Plaga

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

Please see our first quarter press release for the reconciliation between GAAP and non-GAAP results. To summarize, we exclude stock based compensation and the tax provision to derive our non-GAAP results. Total revenue in the first quarter of ’09 was $18.7 million down $3 million or a decrease of 14% as compared to the first quarter of ’08.

Product revenue was $8.4 million, a decrease of $2.5 million or 24% from the prior year period. Our EnCase Enterprise license revenues were $4.4 million in the first quarter down 42% year-over-year from $7.6 million in Q1 of ‘08. We have three perpetual deals that were greater than $250,000 in license revenue during Q1 ’09 versus seven in Q1 ’08 and versus nine in Q4 of ’08.

We also sold 31 EnCase Enterprise add-on products in the first quarter of ’09. Included in those 31 add-on products were 26 EnCase eDiscovery, which included 21 Pay-Per-Use sales, one EnCase Data Audit & Policy Enforcement and four EnCase Information Assurance modules.

To-date we have sold 41 EnCase eDiscovery Pay-Per-Use deals and in Q1 ’09, we gained more traction with our minimum commitment bundles and booked $1.2 million in Pay-Per-Use minimum commitments, which will be recognized over the next one to two years or sooner as usage occurs.

In the first quarter of ’09, Forensic product sales grew 23% year-over-year to $3.4 million. Services and maintenance revenues decreased slightly or a 4% year-over-year to $10.3 million in the first quarter of ’09 that’s compared to $10.8 million in the same period a year ago.

Services and maintenance revenues includes professional services, training and maintenance revenue. Professional services revenues were $2.8 million for Q1 ’09 versus $4.1 million in Q1 of the prior year, a decrease of 32% year-over-year. This decrease was consistent with what we saw in Q4, where customers pushed project to later start date.

In the prior year period, we had one significant services engagement that drove services revenue higher in that period. January and February, were impacted by the economy and deferred spending, but we did see a small pickup in March in our service business.

Training revenues were impacted in the similar fashion as our customers travel on training budgets were cut in Q1; year-over-year, training revenues were down 32% in Q1 to $1.7 million.

Maintenance revenues increased 38% year-over-year to $5.8 million in Q1 ’09, as compared to $4.2 million in the prior year period. This increase is attributable to our enterprise license bookings over the past year combined with strong maintenance renewal rates from our existing customer base. Geographically, U.S. revenues comprised 79% of Q1 ’09 revenues, while EMEA represented 17% and Asia another 4%.

On a non-GAAP basis, overall gross margin for the first quarter of ’09 was 73.5% versus 74.6% in the prior year period. The decrease in overall gross margin year-over-year was driven by a lower mix of product revenue in Q1 ’09. Overall total expenses, including cost of sales were $21.9 million in Q1 ’09, versus $22.5 million in the same period last year.

As we turn to operating expenses, we saw a slight increase year-over-year in total OpEx to $16.8 million in Q1 ’09 from $16.5 million in Q1 2008. Year-over-year selling and marketing expenses decreased approximately $200,000 to $8.8 million, while R&D expenses increased $500,000 to $3.2 million in Q1 ’09 and G&A expenses decreased approximately $100,000 to $3.6 million in Q1 ’09. The increase in R&D year-over-year is due to higher R&D headcount, due to an increase in the number of products currently in development.

In terms of company headcount as of March 31, ’09, our full-time headcount is 412 employees, down from 415 as of December 31, ’08. As Victor mentioned, during the current quarter, we initiated a number of cost cutting measures including a headcount reduction to bring down our expense levels.

In all, the 7.5% reduction will result in annual savings of approximately $3 million going forward. As a result of these cost cutting efforts, we will incur one-time charges of approximately $350,000 during Q2.

For the first quarter of ’09, share based compensation was $2.1 million, which was flat year-over-year. In the first quarter of ’09, we recorded $74,000 to the provision for income taxes, as compared to $28,000 in the prior year period. Excluding discrete or one-time items, the income tax provision is based on the company’s best estimate of its annual effective tax rate and taking into consideration the amount of the current benefit it can realize if any.

On a pre-tax non-GAAP basis and excluding share based compensation, we are reporting a first quarter 2009 loss of $3.2 million or $0.14 per share, as compared to a pretax non-GAAP loss of $531,000 or $0.02 per share in the first quarter of 2008. On a GAAP basis, we are reporting a net loss of $5.4 million or $0.23 per share as compared to a net loss of $2.7 million or $0.12 per share in the first quarter of ’08.

Turning to the balance sheet, cash and cash equivalents increased $1 million from $36 million at December 31 to $37 million as of March 31. Collections were very strong during Q1 and our DSOs decreased 8 days to 83 days as of March 31. In Q1 ’09, total deferred revenues decreased by $2.2 million to $31.1 million as of March 31.

The decreased in total deferred revenues was a result of the decreased in new maintenance contract booking, attached to new license deals sign during the quarter. The current portion of our deferred revenues on the balance sheet was $26.9 million, which will be recognized over the next 12 months.

For the first quarter net cash generated by operating activities was $2.2 million which was primarily driven by the decrease in DSOs. Outstanding share count as of March 31 was 23.3 million shares, up approximately 28,000 shares from December 31.

I would now like to shift our attention to forward-looking guidance. As Victor and I have pointed our earlier on the call, we are in the midst of a difficult economic environment, which for us in particular hit us during our seasonally soft part of the calendar year. We feel that our products offer our customers and our prospectus a very rapid ROI that can be achieved either through our perpetual license offering or through our Pay-Per-Use offering.

Although, we are very disappointed with our Q1 revenue, we have seen growth in customer activity and in our sales pipelines at the beginning of the year and while we are concerned about the state of customer purchasing behavior, we are optimistic that Q2 and the remainder of the year will be better than Q1. Accordingly and in a nut, we would like to offer the following data points in terms of forward-looking guidance for 2009.

We expect total revenues to be in the range of $85 million to $90 million. We expect total expenses excluding share based compensation to be in the rage of $87 million to $88 million. This expected range of total expenses assumes the workforce reduction we spoke of earlier and will vary based on the level of product revenue bookings and associated sales commission expense.

We expect share based compensation expense in the range of $8.5 million to $9 million. We expect weighted-average share account to be approximately $23.5 million for basic EPS and $24.2 million for diluted EPS for calculation purposes.

Excluding both share based compensation expense and the provision for income taxes, we expect non-GAAP earnings per share to be in the range of an $0.08 loss per share to a positive $0.09 income per share. In terms of a quarterly breakdown, we expect Q2 to be better than Q1 and the second half of the year to be stronger than the first.

With that let me turn the call back over to Victor.

Victor Limongelli

Thanks Barry. As we have mentioned many times, our strategy is to make our products easier to use and easier to buy, to drive life spread adoption in the emerging areas of eDiscovery and Enterprise Forensics; we are achieving that lighter adoption.

As highlighted by the 26 new EnCase eDiscovery customers in Q1 and also by the fact and on the Enterprise Forensics side, we achieved in Q1 a milestone, passing the 50% threshold in terms of the adoption by the Fortune 100 and we believe that we can achieve record numbers of new EnCase eDiscovery customers in 2009.

Looking forward, we will be announcing new products of CIC, with new capabilities and tremendous ease-of-use. We expect those to help drive the business in the back half of the year, despite the economic environment.

With that, let me give the call back to Bill. Bill.

Bill Powell

Thank you, Victor. Now we’d like to take your questions. Shervan, would you please tell our listeners how to register their questions and then tell us who our first questioner is please?

Question-and-Answer Session

Operator

(Operator Instructions) We’ll have our first question from Jonathan Ruykhaver with ThinkEquity.

Jonathan Ruykhaver - ThinkEquity

Hi guys, good afternoon.

Victor Limongelli

Hi, Jonathan.

Jonathan Ruykhaver - ThinkEquity

Victor, I didn’t hear, I think you mentioned it, but did you actually recognize some revenue from Pay-Per-Use in the quarter?

Victor Limongelli

We did, we just started to get a trickle of that in Q1. It was in the low five figure range; it’s been picking up in Q2 and we expect that to be in the lower to mid six figure range in Q2.

Jonathan Ruykhaver - ThinkEquity

Okay, but it sounds like you’ve seen pretty good activity. I think the number was 15 new customers in the December quarter and I think you said 21 in March. Are you going to any history as it relates to when you actually announced those customers and then when you actually start to see the usage and hence you get paid?

Victor Limongelli

Yes, we are starting to get a little bit. It takes a little while just to get them implement, right. Somebody closes a deal on March 31, the implementation might not occur until May or June, depending on their schedule of getting equipment, etc. So it can take a little while for that to occur and then it depends on the customer.

Some of them keep going right away and start bringing revenue in and others are a slower restart. We’re starting to build a little bit of history on that. We also Jonathan, with respect to Pay-Per-Use deals in Q1 started to do a lot of deals with minimum commitments and we like those a lot better, because the customer has agreed upfront to certain level of usage. So, we think that will make greater predictability going forward.

Jonathan Ruykhaver - ThinkEquity

Right, so most contracts, when we try distraction of those minimum usage commitments going forward I guess depends on the customer often times?

Victor Limongelli

It will depend on the customer, but that is now our standard approach to these in Q2 and going forward.

Jonathan Ruykhaver - ThinkEquity

Okay and also you mentioned briefly just the opportunity in the service provider market, especially for your Pay-Per-Use model and obviously, I think the service provider market is where a lot of the evergreen kind of growth opportunity is. Can you just talk a little bit more about, who you might be targeting and when we could see these partnerships potentially?

Victor Limongelli

Sure, we hired a VP of Partners and Alliances in March and he’s targeting everything from the largest service providers, just more mid level ones. I would say discussions are pretty far along and we’d hope to have something to announce this quarter, with our gains and the specifics of the names of who they are until we are ready to announce them.

Jonathan Ruykhaver - ThinkEquity

Okay and a question just on the sales side. Where are you in terms of sales seems and when you look at the restructuring, did the restructuring include the sales organization?

Victor Limongelli

It did not. So there were two areas of the company. We mentioned 7.5%; that was really excluding R&D and excluding sales. So in other words the cuts were much deeper, but first of all on R&D side, we wanted to make sure that we are able to continue to develop products as we go through this year, so that we’re ready for next year and then on the sales side, of course we want to continue to build pipeline going forward. So, we excluded those two areas from the…

Jonathan Ruykhaver - ThinkEquity

So, you feel that you don’t want to make any changes to the sales organization, even despite it looks like productivity really kind of took a hit in the March quarter, but I guess you’re suggesting that should show some improvement going into the June quarter than in second half and then I guess also pointing to the weaker productivity, it’s just this move towards the Pay-Per-Usage model, which obviously hurts productivity in near term?

Victor Limongelli

Yes, it certainly does and the thing, we made a change at the top of the sales origination last Q2 and one of the things that occurred was some new sales people came on board in the back half of the year and so it takes a little while for those people to build that pipeline.

I mean we closed a lot of deals in Q1. I think the big difference between Q1 and Q3 and Q4 is instead of a 50/50 split, achieving perpetual and Pay-Per-Use deals it was 80% Pay-Per-Use and that obviously doesn’t bring in current revenue.

Jonathan Ruykhaver - ThinkEquity

Right, and did do you have an actual number for sales team or I’m not sure if you disclose that anymore?

Barry Plaga

Jonathan just to clarify, so the 7.5% reduction was based on the overall headcount, but as Victor talked about, we kind of kept sales and product development out of those cuts, because the cuts were deeper in other areas of the organization and in terms of sales rep headcount we’re just a little over 70 right now. So that’s where we were kind of at the beginning of the quarter.

Victor Limongelli

Jonathan, just to give you a little bit more color on that, the new reps that came on the back half of the year, I mean obviously it takes them a while to build a pipeline, but we’re seeing the impact of that and we’ve seen strong growth in the pipeline over the past 90 days, which obviously we think is a good indicator for future result.

Jonathan Ruykhaver - ThinkEquity

Alright, okay good. Thanks a lot.

Operator

And we’ll have our next question from Philip Rueppel with Wachovia.

Priya Parasuraman – Wachovia

Thank you, this is actually Priya Parasuraman for Philip. I was wondering if you could talk a little bit more about the end markets and what level of confidence you have for the rest of the year and assumptions on close rates.

Victor Limongelli

Sure, by end markets, do you mean industry verticals?

Priya Parasuraman – Wachovia

Yes, just in general, especially on the perpetual side; I mean considering that you saw a big decline in this quarter.

Victor Limongelli

Yes, with respect to verticals, we saw last Q3 and Q4, they were tough in the financial services vertical, but there was strength in a lot of other areas; but in Q1 now, there wasn’t any one vertical that shared a lot of strength other than the federal government. We did have deals in the financial sector ironically and technology as well, but we tend to be pretty spread out when it comes to verticals. We are not depended on any one vertical and we expect that to help us going forward.

I think what we saw in Q1 was a new budget year for people, constrained IT budgets, constrained spending budgets and we saw people defer or delay purchase decisions out of the first quarter, compared to previous years when a higher percentage would have caused and we also saw people go with the Pay-Per-Use option, versus a perpetual deal.

Priya Parasuraman - Wachovia

So you are seeing cannibalization then to the Pay-Per-Use model?

Victor Limongelli

Well, I mean just the numbers themselves show that 80% of the eDiscovery deals were Pay-Per-Use in Q1, and obviously if you go back to the prior Q1, we didn’t have Pay-Per-Use, so we didn’t have that situation.

Now, whether those deals would have closed in the absence of the Pay-Per-Use model, it’s hard to say. Certainly the customers had budgetary concerns and were attracted to the idea of Pay-Per-Use where they could bring the technology in-house, address some of their eDiscovery costs without a large upfront investment.

Priya Parasuraman - Wachovia

For the Pay-Per-Use, what kind of commitments are they signing; is it one year or more longer term than that?

Victor Limongelli

Typically they’re one year; some of the deals are two years. The majority of them are one year deals right.

Priya Parasuraman - Wachovia

Okay, also could you talk about competition?

Victor Limongelli

Sure. In general we haven’t. As I mentioned, we saw deals deferred generally rather than straight out losing deals to competition. I mean from January 1 until today, I think there only two deals that were in our internal forecast, that we ended up losing to a competitor, but obviously it’s a competitive world and there’s lots of competition out there and that’s why we’re continuing to invest in R&D, to be able to meet and exceed the capabilities for the competition.

Priya Parasuraman - Wachovia

Thank you.

Operator

(Operator Instructions) We’ll go next to Keith Weiss with Morgan Stanley.

Keith Weiss - Morgan Stanley

Thank you, guys. I was just hoping to delve into your forecast, as it relates to Pay-Per-Use for perpetual. Last quarter you guys had the initial Pay-Per-Use and you characterized it as what you thought as additive to the perpetual model. This quarter it sounds like Pay-Per-Use might have been a little bit more cannibalistic to the perpetual model.

When you guys put together that revenue forecast of $85 million to $90 million, how are you thinking about that mix between perpetual and Pay-Per-use? How are you balancing that in your forecast to come up with $85 million to $90 million?

Victor Limongelli

Yes, Keith it’s a good question. What we saw last year as you know was a pretty much of a 50/50 mix between Pay-Per-Use deals and perpetual deals. The reason we commented last call that it was additive is because we have for many quarters been in the range of nine to 16 perpetual deals per quarter and so if you look at Q4 for instance, we still had 15 perpetual deal, but we were getting; I think they were 14 or 15 Pay-Per-Use deal, so it really seemed additive.

This quarter, obviously it tilted much more towards Pay-Per-Use deals, so it was arguably cannibalistic and going forward we think that the Q1 experience was sort of the extreme. I don’t know it will be 50/50, we’re more likely to be closer to that then we will be at the 80% to 90% of the deals coming in on a Pay-Per-Use basis.

We’re modeling some revenue uptake as we already talked about Q2 for Pay-Per-Use revenue and we expect that to improve as we had into the back half of the year and I think that addresses your question.

Keith Weiss - Morgan Stanley

So, is the bottom line that you guys expected to trend more towards that 50/50 mix?

Barry Plaga

Yes, we think Q1 was an extreme, given the economic environment and the budgetary constraints that people have this year and they have the option of going Pay-Per-Use. We think that was as far along the Pay-Per-Use tilt as we’ll get if that make sense.

Keith Weiss - Morgan Stanley

Got it and if I could sneak in one last one, when you guys came into 2009, I’m assuming that you changed the sales plans a little bit. Can you talk a little bit about how you incorporate sort of the conversation for Pay-Per-Use versus the perpetual? Are you happy with having some meaningful indications? Do think it’s powerfully insulting people towards or is it neutral towards models or if you can explain how that comes during the conference?

Barry Plaga

Sure Keith, we were aiming for a neutral model. What we do is we pay the rep upfront for the minimum commitment. So that $1.2 million of minimum commitments that we talked about, the reps would have done, that commission expense would get paid upfront. If it’s per month above the minimum commitment, they’re paid as the revenue comes in, as it’s earned.

Obviously, in a perpetual deal they get paid upfront for that revenue. So, if they can get a commitment from a customer for 100 carriers, they can sign a deal for a 100 carrier, it’s neutral for them as far as the short term revenue goes. Obviously, in the long run they have their opportunity to perhaps make more money on the Pay-Per-Use option.

Victor Limongelli

We try to build a very balanced approach to what the sales person will be motivated to close in terms of perpetual versus a Pay-Per-Use deal. So, there’s a lot of triggers and that basically paid a rep to deliver both types of deals to the company, because we want to get solid mix of both business here going forward. So, I think we came up with a pretty balanced plan and over the next couple of quarters we’ll reevaluate that to make sure it’s delivering what we anticipated and so far it seems in the right direction.

Keith Weiss - Morgan Stanley

Excellent. Thank you, guys.

Operator

(Operator Instructions) We’ll go next to Mark Schappel with Benchmark.

Mark Schappel - Benchmark

Hi, good evening. Victor or Barry, with respect to the almost $27 million in deferred revenue in the balance sheet, how much of that was due to Forensics product?

Barry Plaga

Good question. I think it was probably $6 million to $7 million.

Mark Schappel - Benchmark

With respect to the Forensics product, I believe you touched on a little bit how the government did in the quarter and I know this seasonally a weak quarter for your government business, but maybe you could just add a little color there?

Victor Limongelli

Sure, the Forensic product is not just a federal product. As you know it sold to state and local governments, as well as overseas. So there were some states in particular that had really difficult, and still have difficult budgetary situations. California, you may remember was in a kind of default situation with the huge budget deficit and that held up some purchases especially in January and February, things were very slow, but they picked up nicely in March and we ended up having a decent quarter for forensic.

Mark Schappel - Benchmark

Okay thanks and then finally Victor, could you just clarify your comments earlier on your staff cuts in your prepared remarks, I didn’t catch those.

Victor Limongelli

Sure, we reduced headcount by 7.5% in aggregate. We commented in response to one of questions that we did not cut in the R&D areas or in the sales areas, they were in other areas the company G&A, etc. and the annual savings is approximately $3 million on an annualized basis.

Mark Schappel - Benchmark

Thank you.

Operator

(Operator Instructions) We’ll go next to Matt Bugarin with Raymond James.

Matt Bugarin - Raymond James

Hi, guys. Just a quick question; you mentioned I think Cyber Security as a potential opportunity for the company and maybe in the federal realm, as that kicks and I guess goes forward throughout the year. Can you just talk about a little bit more in detail about that kind of opportunity and maybe how you evolve with being in that kind of situation?

Victor Limongelli

Sure. Thanks Matt. I mean I think the Obama Administration definitely has more of a focus, more of an emphasis on Cyber Security, including the creation of a Cyber Security plan has been in the news and most of our federal enterprise business is focused on the area of Cyber Security, so we think it’s a good opportunity for us.

When I say our federal business has been strong, that was the case in Q1 and it was also the case in the back half of the last year and that really is focused on the Cyber Security area. So we expect that to be an area of development for us and we’ll have some things to announce in that area. We’ll be in your negative words for CIC in Orlando, Florida in a couple of weeks. So, we think it’s a good growth area for us.

Matt Bugarin - Raymond James

Okay. Thank you.

Operator

We have no further questions in the queue at this time. I’ll turn the conference back over to Mr. Powell for any additional or closing remarks.

Bill Powell

We thank you everyone for tuning in today and we appreciate your interest in Guidance Software. Have a good day.

Operator

That concludes today’s conference. Thank you for your participation.

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Source: Guidance Software Inc. Q1 2009 Earnings Call Transcript
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