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Executives

John Chen - Chairman, Chief Executive Officer & President

Jeff Ross - Senior Vice President & Chief Financial Officer

Analysts

Terry Tilman - Raymond James

Brent Williams - Benchmark Company

Peter Goldmacher - Cowen and Company.

Trip Chowdhry - Global Equities Research

Ross MacMillan - Jeffries

Derrick Wood - Wedbush Morgan Securities

Chad Bennett - Northland Securities

Brian Denyeau - Oppenheimer & Company

Scott Zeller - Needham & Company

Brad Sills - Barclays Capital

Ross MacMillan - Jefferies

Sybase Inc. (SY) Q2 2009 Earnings Call July 21, 2009 10:30 AM ET

Operator

Good day everyone, welcome to the Sybase second quarter 2009 earnings conference call. Today’s conference is being recorded. Our speakers today are Chairman, Chief Executive Officer and President, John Chen; and Senior Vice President and Chief Financial Officer, Jeff Ross.

I would now like to turn the conference over to Mr. John Chen. Please go ahead.

John Chen

Good morning everybody and welcome to our call. I’ll pass it on to Jeff first for the Safe Harbor language.

Jeff Ross

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

Actual results could differ materially from statements we make today for a variety of reasons, which are described on our earnings press release and in our SEC filings, including in our Annual Report on Form 10-K for the year ended December 31, 2008 and our quarterly report on Form 10-Q for the three month period ended March 31, 2009. These documents are available in the Investor Relations section of our website at www.sybase.com.

John Chen

Thank you. Before I start, I noticed on our screen here, a little logistic issue that there are more people that are calling in then we have lines reserved. I guess this is one of those expense control method, but I apologize if somebody couldn’t call in, but this is on the webcast and people could listen to it.

So, starting with the quarter; team executed extremely well to deliver yet another record performance in these challenging economic times. Our performance was marked by second quarter all time highs in the operating margins, earnings and cash flow, which of course we are very power. We also delivered double digit growth in the database license revenue, operating income and EPS.

For the second quarter total revenue was $278 million, on license revenue of $94.1 million. Service revenue came in at $139.6 million, messaging revenue at $44.2 million. Year-over-year the foreign exchange rate movement have restarted a 7% headwind to our revenue growth.

So in constant dollar, we grew total revenue by 5% and license revenue by 11%. All of our businesses saw a solid margin expansion. Ibt reaching a non-GAAP operating margin of 29%, [Inaudible] will beat them by 30%, and Sybase 365 came in as expected 11%. As a result, consolidated non-GAAP operating margin reach 28%, up 560 basis points versus last year. Non-GAAP EPS grew 16%, to $0.56. GAAP operating margin reached 23%, up 470 basis points and GAAP EPS therefore increased 28% to $0.43.

The IT spending environment really has not changed meaningfully over the past several quarters. Although it remains somewhat challenging, it also appears to be stabilizing. As it related to us, at Sybase we continue to feel that the largest impact is in the discretionary area, such as consulting and education.

Foreign currency affects has been a persistent headwind as we outlined earlier. However, our overall performance has been consistently solid, our pipeline is growing and we are executing very well against this pipeline. The team really did a wonderful job and we did experience our fair share of few moving around, but they have backup deals, so we were able to come in better than we expected.

On the geographic front, the license revenue in North America region reported the highest growth, the Asia Pacific grew modestly and Europe was down slightly year-over-year. That’s pretty much, what we have modeled 90 days ago.

Now, I’d like to discuss the key business drivers starting with database. I’ll give you a general overall view and now comment to the free business unit here. Everyone grew pretty well in the area we expected them to do, database that grew analytics and that seems to be done extremely well. Graph is certainly something of its high strong interest from the market.

Fro the mobility side, the mobile middleware is really firming up very nicely. I’ll talk a little bit about that and in that actually we found a new language for the cloud computing environment. Finally, on the messaging side we made a lot of progress moving our business from the content delivery side of the equation to the enterprise side of the equation. As you know, that’s not only the equation for future growth, but that’s also an equation for the margin. So, those are the three kind of the major highlights.

I’m going to go into giving you specific examples of that as we go through. In second quarter, let’s start with the database. In the base license which includes ASE, our flagship database IQ and RAP, they grew 23% year-over-year in the reported dollars, reflecting obviously what we expected in ongoing market share gains. So I think we have done better than everybody else in the market.

Enterprise Database wins, we give you some example of that include General Electric, The Bank of China in Hong Kong, MFS Investment Management, Agricultural Bank in China, The Hana Bank in Korea, our Mexico Federal Social Security Agency, the LG group in South, Blue Cross and Blue Shield of Michigan, the Sichuan Electric Power, so these are just as represented wins, but you could see its pretty across industry and geography.

Wins indicate attraction across our traditional strong vertical, like financial services, technology government as well as healthcare, they also demonstrate database for momentum in China and Asia. In the analytics market IQ and RaQ continued to experience a strong traction and good growth. Since the launch of the IQ 15 last quarter the phase of growth have actually have gone better.

Together IQ and RaQ added 64 new customers in the quarter. License grew, reached well into double digit in the quarter. Also in Q2, we added the time series capability to our RaQ solution. Because of the strong growth we are seeing in IQ, I thought it would be useful to highlight a few uses. A number of you have asked me from time-to-time what people use like you for in and a few of you are very well informed, but that is for the benefit everybody.

Let me just provide a view, why people buy IQ today? That’s just on the Agricultural Bank of China, who has been a traditionally a big ASE users for many, many years is now using IQ and system that analyze credit card activities to improve customer services and to minimize the credit risk issues.

Another example at Hana Bank of Korea, Hana Bank is one of the major retail bank in Korea, uses IQ for financial data warehousing. They also use us to integrate data across business sectors and providing the platform for historical and cost functional analysis, sorry it’s a multiple, but if you don’t understand that, what they do ask Jeff.

We want the pretty big foreign government deals, I’m sorry I can’t give you the name, we haven’t gotten approval to provide the name, but we want I think foreign government deal involves consolidation and centralization of all the tax payer information.

Other uses of IQ including and analyzing customer buying pattern, trading automation and of course risk management. As we see success in all part of our database business, Sybase is increasingly recognized for our market and technology leadership. So, in the quarter, better recently for us to upgrade Sybase to a leadership category for the enterprise database market, forester actually full ASP and IQ reliability robustness and broad set of the features.

We’re also voted the best enterprise data management vendor for the second year in a row by Voters magazine for those of you in financial world you’d know what those magazines are, they are financial IT publication are very well respected one. We’ve also broadened our market advantage in China, this I guess in early in May of Q2, we announced that SQL anyway became the first database to receive the security certification from the Chinese government.

SQL can now be deployed therefore in environment with special security needs such as the government agency in china enterprise that exchange data with the government, like the customer authority and so forth. So, that’s kind of my recap database, love to talk about more, if you have any questions.

Let me move to the mobile software. Obviously, we are very encouraged to the progress achieved on the growth initiatives by this business. In Q2, mobile software license revenue grew 11% in constant currency. With essentially leveraging the heterogeneous position across the growing number device, device platform users in the enterprise including RIM, iPhone, Enjoy, Window Mobiles and Symbian and that’s kind of where we’re focusing on.

I’ll give you some highlights for the quarter, the progress and we are very encouraged with that. First of all, let’s talk about RIM a little bit. Two major things happened to RIM. We have gotten a secured RIM to work with us, to help the blackberry customers mobilize the SAP enterprise application to the blackberry smartphones.

We also have created alliance with RIM, that we’re targeting the under served small-to-medium sized enterprise market integrating our leading mobile middleware platform, the SUP, to customize the mobilize application onto the blackberry devices. So those are two major ones that happened with RIM in the quarter.

A notable iPhone, win was with [Total], Total is a French international oil and gas giant. Total chose the Sybase Mobile Office as the platform of deploying 1,000 iPhones across their organization, starting with the C-Level Executive.

In addition, we also extended the Mobile Office support to the latest iPhone with free PGS. So, the version of that Mobile Office would be available by the month July, that’s a lie, I know its available now because I got that notification. We also [Inaudible] new release of our iAnywhere Bluetooth software.

In addition, and finally all the latest version of our mobile products are certified on both Symbian devices and the Window Mobiles devices. As I’ve clearly stated our future growth in enterprise stability will benefit from expanding our partner ecosystem that would be Sybase and wire platform key to that effort.

So far we are pleased for the strong momentum we’re seeing, with from new partnership of broadening existing relationship with the lights of the SAP and Samsung which I’m going to give you an update. In the partnership with SAP the first module using SUP which is Sybase and wire platform to extend the SAP application to mobile devices are on target for delivery in Q4 and that’s by the way to CRM platform and then go well forward to ERP and IPM so far.

In Q2 Samsung SDS Enterprise mobile services have choose our unwired platform SD platform for the Cloud Computing environment. It’s actually pretty interesting we work close to with Samsung in the quarter recently completed architecture for this environment Samsung while use SUP to extend various ERP CRM and supply chain management enterprise application to the BlackJack handset. So they are creating a portal on the cloud that is designed for the BlackJack to get connected to for enterprise use.

So, we believe that these relationships represented a very important validation on leadership position; it’s becoming clear that the Sybase to our partners and ultimately the end user there is a natural fit, between mobilization and Cloud Computing on, more to develop as we go forward. We expect this momentum to continue in Q3 that we are on target to sign partnership agreement at least two very high profit name involving using SUP. This development will further reinforce our position as the leading mobile middleware platform. So, stay tune please.

So, moving on to the mobile messaging, strong enterprise demand we saw in sequential revenue growth in Q1 and 7% year-over-year growth in constant currency. Our strategy to accelerate revenue and margin growing this is involved expanding our participation in two major areas. We are always talk about one enterprise adoption of messaging and two, and mCommerce, we have made significant progress in the quarter, I will give you some examples here.

Number one, the enterprise now accounts for 37% of the total messaging revenue up from 29% from a year ago. Revenue from classic enterprise customer increased over 20% in constant currency offsetting the decline in business from content providers. The content provider business is actually really tough in this environment. Both on the FX side, the equation was economic side of equations, but we were able to offset that would be enterprise using messaging.

One major enterprise win in the quarter involving delivering mobile messaging for marketing and customer loyalty progress was Proctor & Gamble, and Proctor & Gamble uses this SMS and MMS technology for the royalty programs marketing programs and some of the brand on a worldwide basis. Another enterprise business was MIS science, which has Sybase deliver the alerts for transportation agency, airport, University, counties and as well as 911 services.

So I will give you some example of their customers are like Washington metro, a metropolitan area trends up to transport authority, the port of authority of New York and New Jersey, the University of Arkansas, the county of Riverside, GFK international airport and just and we could actually go to website and you see a lot their big name is there.

Let us move to the mCommerce world, we now have 36 live customers providing revenue stream from mCommerce or mBanking deployment, this is up from eight a year ago. So year ago we have eight customer paying us revenue now is 36 of them, and we are obviously well positioned for growth here. Give you an update on Celcom; I made an discussion I think a quarter ago about Celcom using our mobility water technology.

I will give you an update on rollout. Celcom Malaysia went live with their project call AirCash, a mobile service for powered by mCommerce technology for payment, cross border money transfer and mobile top up. On a Q1 earnings call we announced the participation in AirCash and I’m pleased to announce now it’s live and available to 9 million subscribers. Last but not least in the quarter Western Union has elected Sybase as part of their mCommerce initiative. So, these developments are extremely encouraging, set the stage for us to growth and going forward not only in the second half but in the future years.

I’d like to turn the call to Jeff now, with some details of our financials and we’ll get back to the Q-and-A

Jeff Ross

Thanks John. I’ll spend a few minutes providing a bit more information on our second quarter numbers. Our total revenue came in at $278 million led by licensed revenue which grew at 4% to $41.1 million. Services revenues were $139.6 million and maintenance which accounts for 82% of services grew 5% on a constant currency basis, messaging revenue was $44.2 million.

Turning to geographies, North America accounted for 53% of our total revenue and EMEA and Intercontinental represented 32% and 15% of our total revenue respectively. We experienced strong growth in all of our income indicators, non-GAAP operating income for the second quarter rose 23% to $78.3 million this represented a 28.2% operating margin compared to 22.5% in Q2 of last year.

Non-GAAP net income grew 14% to $49.4 million and our non-GAAP EPS was $0.56 which was a 16% increase on a year-over-year basis. For GAAP purposes operating income increased 24% to $63.3 million. This represented an operating margin of 22.8% versus 18.1% to year ago. GAAP net income grew 26% to $37.6 million, which yielded GAAP EPS of $0.43 compared to $0.33 in the prior year.

Our fully diluted share account was $87.6 million for Q2 and we are modeling the share account around $87 million or $88 million for the balance of 2009. Cash flow from operations came in at $68.3 million for the quarter, which was a 9% year-over-year increase and our financial position remains strong at quarter close with the cash balance of $816.8 million including restricted cash of $18 million.

During the quarter, capital expenditures were $5.5 million, depreciation was $6.9 million and capitalized software and the amortization of capitalized software were $9.5 million and $10.1 million, respectively. DSO for the quarter was 76 days on a consolidated basis. Deferred revenue was $231 million, which was flat year-over-year as reported, but grew 5% on a constant currency basis, which reflects our strong maintenance renewals and our growth in license revenues.

Deals over $1 million represented 35% of Q2 license revenue, compared to 39% in Q1 of 2009 and headcount at end of the quarter was at 3,880 employees. Finally there remains 62.5 million authorized in our stock repurchase program.

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

John Chen

Okay. Let me provide some guidance and few comments on the outlook and then we could start our Q-and-A discussion. The environment isn’t really changing quiet a lot means, IT spending remains challenging, sales cycles is usually longer, however as I pointed out earlier environment does seems to be little stabilized in some ways. Consistent with our outlook in the first half, we assume no economic recovery for the balance of year, we don’t assume any year end budget for us and we continue to model our conservative close rate.

That’s the second half visibility continues to improved, we ended Q3 with the reasonably robust business pipeline we are gaining somewhat clarity on Q4. Due to our stronger than expected performance in the first half of the year, we are now raising our full year guidance 2009 earnings and cash flow guidance for the second time this year.

Now on to your guidance, the actual numbers 2009 third quarter, we expect the total revenue in a range of $275 million to $280 million. This represents a growth rate of 4% to 6% in constant currency we are modeling the FX headwind of 7%. We anticipated a non-GAAP EPS in the range of $0.55 to $0.57 of share, the GAAP EPS in range of $0.41 to $0.43.

For the full year, we are rising total revenue guidance to a range of $1.11 billion to $1.12 billion from our prior expectation of possibly $1.10 billion. This is 5% to 6% revenue growth in constant currency and assuming a 7% headwind. We are now modeling the operating margin expansion year-over-year for at least 300 basis points for the full year. This is obviously up from our prior expectation of at least 100 basis points and this is all future the stronger than expected performance in the first half of the year.

As a result we now estimate non-GAAP EPS in the range of $2.23 to $2.27 versus the period guidance of 220 to 224. We have now estimated a GAAP EPS in the range of $1.67 to a $1.71, which compared with the previous guidance of $1.64 to $1.68. We are also raising our expectation for full year cash flow from operation to approximately $275 million which compares with our earlier estimate of at least $250 million.

In closing, I’m extremely proud of the performance for the second quarter, people said the word proud is too strong and I’m very pleased with the performance in the second quarter and first half of the year. The team has been focused and very discipline and consist in execution so operator we are now ready for the Q-and-A.

Question-and-Answer Session

Operator

Thank you. The question-and-answer will be conducted electronically. (Operator Instructions) The first question will come from Terry Tilman with Raymond James

Terry Tilman – Raymond James

Hi, guys. I guess I’ll start will with my regulatory comment, nice job on the quarter. I had just a couple of questions for each of you. First John in terms of you talked about IQ and I guess RAP combined you’re kind of core. You just said they’re going double digit. I don’t know if that’s like 11% or 50%, but its double digit away, that’s good, but what about ASE? How did that grow in the quarter and could you segment ASE just core database is opposed to database options?

John Chen

No, I don’t know how to separate core database versus database option, we don’t even have that. I guess we run an analysis for it with our IQ engine. We don’t normally look at that, the database comes in at ASE and so I can tell you on that one. First of all, the IQ is better than the 50%, it’s not 11% so that’s number one. The core database ASE grew year-over-year. Ross, what you say?

Jeff Ross

Yes, it grew a bit about market rates. Since, what we are saying. Yes 8% to 10% or so.

Terry Tilman - Raymond James

Okay, well that’s great there and then John you mentioned something earlier in your script about deals moving around. Was there anything this quarter that was different and like the first quarter or the couple of prior quarters in terms of deals moving around? Was there more business that was kind of less predictable? And then secondly, on that comment, how is pipeline or are you having good coverage, so that’s been able to provide an offset? Thanks.

John Chen

Well, I thought you really tell me, because I saw you write on that quarter. Now, it’s a matter of people are taking longer to get things done and it’s really kind of you have the needs and finish the discussion and the negotiation and just kind of looking for money type think. So, that’s what I meant was moving around.

The business wasn’t really gone, it was just moved around basically. Yes, the answer to your question, our pipeline is very strong and we also developed kind of backups alongside with deals. So, we’re okay with that and we did well in Q2 and we expect to have the same discipline carrying through in Q3 and Q4.

Terry Tilman - Raymond James

Okay and Jeff in terms of the sales and marketing, I’m amazed by how much it was down year-over-year. Is there a fair amount that I’m just maybe missing that is FX related, because you’re actually benefiting on that front as opposed to revenue side and then what should we think about sales and marketing in the back half? Should have pickup quite a bit?

Jeff Ross

Yes. So, let me start with the second part of question. Yes, our expectation is that we will invest more in the second half of the year in sales and marketing, and as far as year-over-year and year-to-date comparison there is a few reasons, part of the reason is this is FX, Terry, it’s at least 7% on those expense numbers.

In addition to that last year and some of the comparisons we had some severance numbers that don’t appear this year, we found some channel synergies and our new go-to-market reduce some of our cost structure associated with sales and marketing too. So, we definitely do expect the spending numbers to increase in the second half, but we do think that even with that there is some year-over-year cost savings.

Terry Tilman - Raymond James

Okay, that’s all my questions. Thanks guys.

John Chen

Thanks.

Operator

Your next question will come from Brent Williams with Benchmark Company.

John Chen

Hey, Brent. Good morning, Brent

Brent Williams - Benchmark Company

Hi guys. Thanks for taking my questions. First thing, Jeff when you answered one of Terry’s previous questions, you said that ASE grew a bit above market rates and if I put down perhaps ahead in cheek. Are you defining market rates to be perhaps the most recent quarterly numbers from our database company across the bay, where they were down 20% year-on-year in the quarter or we are using IDC type number?

Jeff Ross

I think, I’m using an IDC. The point is the core database is not growing at double digit growth rate from a market perspective.

Brent Williams - Benchmark Company

Right, okay and I just wanted to be utterly certain on that. Second thing was when you talked about going from eight to 36 mCommerce customers over in that in 365 areas? What kind of, I mean are those like the biggest customers typically in that? What is the percentage of that crowd of the total enterprise number in 365?

John Chen

I don’t know what the exact number, but my recollection is correct somewhere around little bit less than 10%.

Brent Williams - Benchmark Company

Okay, so that really just point to just very, very broad strategic customer base that you’re targeting, it’s not just a revenue opportunity?

John Chen

Absolutely, we noted that all these -- we entered into the contract as pay as you go. Many years ago, I have told everybody that’s the kind of business that we were like to see. So, yes, this is every quarter we hope they use small and it looks like they were using more and reasonably steady growth, and so the volume goes up by these accounts and the numbers of accounts should expand also on a worldwide basis.

Brent Williams - Benchmark Company

Then last thing, as you had commented on, why things are going well in China. Are there any particular catalyst right because the economy seems to be a little bit dicey over there. I mean the only catalyst I’ve seen recently is all the tourists supposed to be flooding in for the Eclipse tomorrow. Including several plans…

John Chen

No actually, so there are two component of this, number one we’ve won some long term contracts. Like I made one statement about ASE IQ, we know it’s the trend. Obviously it’s the trend and unfortunately it has the region news of the big earthquake, but I talked about that power, electric and a while back this tied to one the safeway project that we won and they’re rolling out provinces by provinces and this last quarter happened to be the trend.

So we have some long term contract we are delivering; we are winning some new contracts and China, I don’t know what dicey means. The GDP was about 8% growth and in the United States we love that diciness. A lot of their number of moneys are put into infrastructure building that in some cases, not in all cases, but in some cases speaks well for us because of the database needs.

Operator

Our next question will come from Peter Goldmacher with Cowen and Company.

Peter Goldmacher - Cowen and Company

Hi guys.

John Chen

Good morning Peter.

Peter Goldmacher - Cowen and Company

Good morning. Just talk to me a little bit more about the database and IQ. When you guys are competing on the database side, are your win rates going up at all and if so why, and then as you’re selling IQ, who you’re seeing in competitive situations most frequently?

John Chen

Okay, we won roughly about 250 or so new customers in the quarter in AFC, correct? So this is pacing; we normally won about 800 to 900 new customers a year in AFC in the last couple of two, three years. So we are doing a little better on that front.

In terms of IQ competitiveness, we are seeing probably let me see what to think about, [Inaudible] net teasers, mostly a highly oriented. Occasionally we see Vertical KX Systems, but they are a lot smaller and we are not overly concerned about that. So mostly I think is we are talking [Inaudible]

Peter Goldmacher - Cowen and Company.

John when you talk to customers, are they looking at the Oracle Sun deal. What’s their opinion relative to their opportunity to do more or less business with Sybase?

John Chen

That’s a broad question. It goes from pretty much across the Board, but nobody told me that, “Oh look, this is the problem for you and therefore…” All expected us to say, “Hey make sure you have the robust platform with Linux; make sure you have your relationships with some of these key Intel base platform provider and including HP and so forth.” So we’re pretty fortunate in that score and we are doing pretty good, with both HP and IBM and as well as all the Linux platforms. That’s most of all the customers’ recommendations.

Peter Goldmacher - Cowen and Company

Okay, and are any of the hardware guys trying to get a little closer to you, any of Oracle’s former friends?

John Chen

Well you would have to assume that we are always talking to a lot of people and yes we have some more market activities going on with some of the hardware providers like Del and HP. HP in particular.

Peter Goldmacher - Cowen and Company.

Great. Thanks John.

Operator

Our next question will come from Trip Chowdhry with Global Equities Research.

Trip Chowdhry - Global Equities Research

Thank you and congratulations on very good execution.

John Chen

Thank you, Trip.

Trip Chowdhry - Global Equities Research

John I was wondering, like of course this year in the federal government, IT, there’s hardly any new initiative that we can see, but there’s a lot of talk about some new initiatives coming in calendar year 2010. I was wondering, do you have any insight that you can share with us of about what new initiatives maybe coming in the federal government next year and how do you think Sybase is positioned for that? Thanks again.

John Chen

Okay, thanks Trip. I think everybody expected a lot of potential dollars in healthcare IT, and I think that’s continuing to be talked about. To be honest, I really haven’t seen a very major change in the IT spending habits of any of the government agency.

Now, having said that you need to understand the footprint of Sybase and federal; and the footprint of Sybase and Federal are mostly in the armed services and the intelligence community and so we don’t normally see too much of a upper or down, with the exception of maybe there’s some new project with the Air Force and so forth.

We have a pretty good pipeline and business volume going out for the next couple of two, three, four quarters, because the projects that we are engaged in are usually pretty long term, but I have not see, we’re not really as strong in the civilian side as we should be, therefore I don’t really have as much insight as other people may have on that point.

Now, what we have seen is a lot of messaging requirements in the state governments and the county governments, where there is an alert system or just citizen information systems and we have Massachusetts, we have New York, and so we’re pretty broadening on messaging that we know that represent good opportunity.

Trip Chowdhry - Global Equities Research

Do you think the federal IT budget may increase next year versus this year, it would remain flat?

John Chen

I personally doubt it Trip, but that’s a political statement more than anything else, not that I know. I met with the government CTO, and we met with a lot of the key people in those agencies. Their idea is to try to get more synergy across system and software purchases, so that strikes me as a way to control the budget and expand the budget. So, that’s my view, but again, I don’t have any, I couldn’t point you to a specific incidence of any sort.

Again, I don’t see it. I know the healthcare IT, a lot of my colleagues and partners and the industry are very excited about it. When we first talked about some three, six months ago; now this area you know a lot more than I do. I believe I’m yet to see anyone that would beat the drums and say [Inaudible] because of that. I don’t see the money coming in. Money is tight in Washington as far as budget is concerned. So chances are we’re not going to see a major increase of budget next year.

Trip Chowdhry - Global Equities Research

Thank you and again, good execution.

John Chen

Thank you.

Operator

Our next question will come from Ross MacMillan with Jeffries.

Ross MacMillan - Jeffries

Hey good morning. Just a high level one I guess. When I look at your first half growth rate currency adjusted, I think it was about 7% and obviously you’ve kept your five to six for the year, but that does imply, I guess the constant currency deceleration in the second half.

So with that as the context, I guess I was particularly interested in the messaging business, which I thought would probably start to see the back of the drag from content to enterprise. So I’m just trying to kind of get a framework around that notion of modest deceleration in the back half, because I would have thought, if anything messaging was going to accelerate?

John Chen

Yes, I would say it is our plan to increase our messaging growth rate in the second half. We have signaled that and made that statement, we’re not backing-off on that statement. We should see a higher revenue in Q3 than Q2 and a sequentially higher Q4 than Q3. So, I don’t have any issue with that. I think that we are also modeling that ourselves.

As to the point of your saying that deceleration, now we’re splitting 1% many different ways. I don’t think that we are signaling to you on deceleration of revenue in the Q2 half. We do have very tough comps to deal with in Q3 and Q4. So we’re just being slightly conservative on the side.

So far it’s surfaced well and we’re not really kick backing-off from our 5% or 6% growth for the year and we happen to have a higher growth in the first half. If we could continue, we will. There’s no signal here that we’re seeing business slowing down.

Ross MacMillan - Jeffries

Great, that’s very helpful.

John Chen

Don’t bring the number up, it’ll do both of us a lot of favor.

Ross MacMillan - Jeffries

Fair enough. Understood and then just on FX, I thought I heard you say 7% headwind for the year, was that correct in your assumption?

John Chen

Yes.

Ross MacMillan - Jeffries

Okay, and then just another high level one I guess; obviously if I take IQ and RaQ growing the database and the database in total growing at 30% constant currency, which places very high growth rates for IQ and RaQ constant currency. Then I look at iAnywhere, which I think you said 11% constant currency?

John Chen

Yes.

Ross MacMillan - Jeffries

So I guess, the question is if these businesses are going like that, which area of the business from a license perspective is maybe not growing so fast. Is there anything at all that is not going so faster than the overall mix; is it any of the development tools or any elements that are maybe still active to drag.

Is there a point where those just becomes so small, but you can get a benefit to grow, just because it’s kind of becomes so small in the mix that they no longer really actively drag, thanks?

John Chen

That’s good. That’s great observations. I asked the question about people too. We have a drag on the tools development business. We have a drag on and so called the whole core enterprise software, like connectivity and in this one case it’s the replication servers.

I always said in today’s environment, selling more of the same is an extremely difficult proposition. So, those are areas that actually have negative growth rates, but since the database is so strong it’s kind of trumped and so that’s the answer to that question.

Now, as far as when would that be small enough, probably it’s still got a little bit of way to go. We do expect to see it stabilizing obviously, and then I hope that in 2010 that it will become less and less of a component.

Ross MacMillan - Jeffries

Okay and just one last one. Do you have a growth target for the iAnywhere business in the second half of the year that you could share?

John Chen

Growth target. We always said the year is about 10% and that’s kind of in my head. The year I thought, the second half of messaging is somewhere around 15. So that’s where I have that targeted.

Ross MacMillan - Jeffries

Very good. Thanks a lot.

John Chen

Thank you.

Operator

Our next question will come from Derrick Wood with Wedbush Morgan Securities

Derrick Wood - Wedbush Morgan Securities

Hi, thanks for taking my questions. Over the last few quarters you’ve seen a higher percentage of deals coming from the large $1 million plus yields. I’m just curious, you’ve added some color as to what’s driving that and if that can continue to be in the mid 30% range going forward.

John Chen

I hope not. To answer your question is we are hoping to broaden out. It’s good while they’re less, but we need to be careful not to just relay on it, because you could have nasty surprises when that happens. So we are doing everything possibly we can by smoothing that percentage out.

I don’t expect to keep it at that level personally and looking at the deals going forward, there are some pretty sizable ones, but we’re trying to home it to kind of the $1 million around average deals like that. Statistically when we talk about $1 million, if it’s $1.1 million, it became in that number. So I got to go back and bisect that, but we have in the pipeline still some very, very sizable deals that we are chasing after right now.

Derrick Wood - Wedbush Morgan Securities

I mean are you signing more ELA deals on the database side? What’s the pipeline looking for that?

John Chen

We are in some cases renewing ASC licenses and that included IQ. In some cases they added IQ and RaP to it from the data ASC licenses side, so the answer to your question is that’s correct.

Derrick Wood - Wedbush Morgan Securities

Okay, great. I guess a follow-up, there was a question from the last person. Really if you look at IPG, the growth was about 5% year-over-year, and IQ and ASC is up 23%, the mobile embedded is up 9%, so there’s another component that seems to be down quite a bit. I would imagine that’s your data integration, other various development tools. Can you give us a sense for how big that revenue segment is and what your strategy is with those going forward.

Jeff Ross

We can sit down and do the math on how big. First of all the whole total segment of IPG included the surfaces number.

Derrick Wood - Wedbush Morgan Securities

Okay, I meant just on the license side.

Jeff Ross

Yes, and so it’s not as bad as you think. Let me see; I mean I could do the math in my head; it’s about 20%, 25% of our overall license revenue are associated with these other products, these core products. The strategy right now to be honest is going to try to move as much of this technology into the mobile platform environment, especially in the development and modeling tools areas and not try to just sell them as stand alone as much.

My sales people are pretty focused on getting the IQ messages out on the core side and we are trying to get a lot of these good technology and connectivity and development tools tied up to the SUP platform and that I could present the SUP platform to the enterprise directly, then you would’ve been therefore also be selling those technology.

The other thing I should point out is, all those businesses are profitable businesses for us. While growth is not as high as some of our other businesses, it does generate revenue and earnings to our bottom line.

Derrick Wood - Wedbush Morgan Securities

Okay, that’s helpful. Last question, just margin growth has been quite impressive over the last several quarters, met some deceleration in revenue growth like most other companies. I mean, do you look as you’re going into the back half of this year, do you have any inclination to change that strategy to really start reinvesting maybe at the expense of continued margin expansion?

John Chen

Well, I don’t know we need to be at the expense of that. I think there’s always a balanced equation. I mean we’re committed to get our margin numbers eventually to a 13% number and so we came in at 28% in Q2.

Before I get to 30, I don’t think the company needs to make that strong tradeoff one way or the other. I think we just spent our money wisely in what we have done. Earlier there was a question on why the sales and marketing number is down year-over-year and Jeff provide a good explanation from a mathematical point of view, but I’d like to provide explanation from how the business being viewed as.

We intentionally try to eliminate as many of the overlays and go in between various groups of people and then we ticked out those where we’ve invested into direct sales accounts and partner sales accounts. Yesterday afternoon I went to we deliver a speech with the new higher training and there was like 30 new hire reps in the room. So we are continuing to invest and we are just being very careful of what we are investing in.

We are expecting to see a couple of headways in the second half; one in Beijing and one in Washington DC, that will cause some money in the marketing side, but I think we expected the revenue to continue to go up.

One thing that I wanted to point out is that our margins are very good for the deals and because we are managing our discounting practices very, very tightly, we don’t just discount because it’s the end of the quarter. Frankly speaking we don’t need to and so the deals are pretty firm in terms of dollars and margins and because of that, we’re able to manage the earnings well from that perspective.

So, I wouldn’t equate that’s an investment, therefore the margin will go down. Maybe it’ll try to stay at this level for the year, but I did say that year-over-year we now expect this 300 basis point at least improvements. I think we have this thing well tuned in.

Derrick Wood - Wedbush Morgan Securities

Okay, thank you.

Operator

Our next question will come from Chad Bennett with Northland Securities.

Chad Bennett – Northland Securities

Hey guys. A couple of questions. First of all last quarter I believe you guys gave a percentage of your license revenue coming from IQ and RaP; of IPG license revenue that is and I think you indicated it was about 15% to 20%, do you want to update that figure?

Jeff Ross

That’s probably around the same number. I actually gave a different number. I said about one-third of our license on database or IQ. So I guess you could back into it. I guess that’s mathematically correct. If that’s 30%, one-third is others and the global license, that’s 20%, then you’re in the ballpark.

Chad Bennett – Northland Securities

Okay great, and then I don’t know if you have the data in front of you to talk about how much of your IQ business this quarter was non-ASC related?

John Chen

That we could find for sure, but I don’t know, I don’t have it in front of me on how much is the non-ASC.

Jeff Ross

I mean generally what we track is non-customer and I don’t have that right in front of me, if you follow up new customer.

John Chen

Not non customer. You can’t take revenue.

Jeff Ross

New customers, yes. We normally just focus very much in the new versus existing customers, but I don’t think we have the numbers in front of us. I know I don’t have.

Chad Bennett – Northland Securities

Okay, fair enough. Then kind of jumping around here, the operating margin expansion guidance that you gave would imply and you talked around the sales and marketing and FX and what not, that would imply operating margins actually coming in from this level in the third and possibly even the fourth quarter seasonally, especially in the fourth quarter when you see pretty dramatic expansion relative to the first half of the year. I guess is this just Sybase being conservative or again this question has been asked probably in three different way so for.

John Chen

We stand behind the guidance we just provided on the GAAP and non-GAAP ESP. So you’re right; you back into math and you’ll be at this level of operating margin. We’ll have some investment and there’ll be some expansion. My strong period is please leave the number, it has to be guided, but that way everybody is happy, I mean potentially.

Charlie has the number. He said the IQ non-ASC 50-50; he has actually the data that I don’t have. About 50 of the IQ customers are non-ASC customer. I mean half of that IQ customers are the non-ASC customers. So we won 64 new accounts; we just have to statistically assume that 30% are completely new non-ASC customers.

Chad Bennett – Northland Securities

Then last question on SUP talk. I think recently you’ve given a number around pilots that are ongoing around the SUP platform. Is there an update and can you give us a sense of the magnitude of the engagements or the pilots at your end?

John Chen

No, I don’t have the number. I was not prepared for it. That wasn’t the number that I was looking for. No, the answer is, I don’t have the numbers. The only one thing that I know, that I could tell you personally what I’ve been focusing on.

Personally I’ve been focusing on making sure SAP got delivered. I’m very encouraged by fact that between us and Waldorf, the Engineering Centers, we believe that we could actually get it done just like we said we always. In Q4, releasing to QA, starting to see some revenue in Q1 of next year.

I was very focused on getting the Samsung deal architecture nailed down and I was very encouraged by the fact that we actually had an engineering team come back and tell me that we’re going to a cloud portal for the Blackjack devices or the Jack devices. So I’ve been really very focused on delivering.

In a couple of new deals that I’ve been working on pretty much constantly, which I hope that I’ll share with you in 90 days. Then of course we have a good conversation program and making sure they support our SAP effort, as well as they still support some of our mobile integration, application integration, as obviously SUP base into using the Blackberry device.

So those are something that I’ve been working on. I really haven’t been focusing that much on how may SUP pilot we run, because I really want to make sure that the one that we want we delivered and we have enough of that in front of us.

Chad Bennett – Northland Securities

Okay and I think you eluded to it from a future partnership standpoint on the mobility side of the business. You obviously have a SAP and Samsung; can you give me any type of indication of how you see the carriers participating in the marketing and your interaction with them?

John Chen

Why don’t you wait 90 days. Lets wait 90 days, okay. I hate to get ahead of my own headlights, but we obviously are working hard at it. So, if you could just wait 90 days, I’ll be hopefully be able to talk about it.

Chad Bennett – Northland Securities

Okay, fair enough. Thanks for taking my question.

Operator

Our next question will come from Brian Denyeau - Oppenheimer & Company.

Jeff Ross

Good morning, Brian.

Brian Denyeau - Oppenheimer & Company

Hey guys, how are you? I had just a couple of questions. First, you alluded to in terms of why sales and marketing was down so much and getting channels synergies? So curious if you can talk about how much more you think you have to go and channel synergy you haven’t really realized yet?

John Chen

Well, there’s obviously quite a bit. I mean, my overall long term plan as I stated in the May meeting, is to really think about Sybase as three different channels; direct, indirect and hosting. I’m working hard and towards that. We still got ways to go, but we’re already seeing the synergy in that.

Our hosting group is busy working on hosting IQ and RaQ, especially for the telecoms, our indirect people are expanding their SUP reach and the system integrators reach, but right now we’ve got more IQ than what people try to address. So, we’re going to add to that and for the time being, IQ and ASC is going to be a big part of our core group life.

When SUP 15 finally got stabilized by the partners and us and we’re delivering the Samsung SAP thing, then we’ll have our direct core group start picking up that products going into end-user enterprise. So, I think there’s still a lot of headwind so as to go. I don’t have an issue of where we are going.

Brian Denyeau - Oppenheimer & Company

In terms of the IQ side, how quickly do you think you are going to be able to ramp, expanding your sales capacity? Fairly there is a huge opportunity in front of you here. You have as you just alluded to, more IQ than you have the ability to start right now. How quickly you think you can really ramp this and bring it to kind of the next level?

John Chen

I think pretty quickly. I think we’re hiring a lot of direct salespeople in IQ and then as I said to you earlier, yesterday I was in one of the new sales training course, and we are getting as many people as we possibly can within the affordable model, but we have a lot of rooms that you could see in our numbers. We could probably afford it, because the productivity are reasonably high. So we think we can do reasonably well on that.

Brian Denyeau - Oppenheimer & Company

Great, thanks guys.

John Chen

Thank you.

Operator

Our next question will come from Scott Zeller with Needham & Company.

John Chen

Good morning, Scott.

Scott Zeller - Needham & Company

Hi, good morning. Most of my questions have been answered, but could you give us just an update on the timing of when you expect SAP partner revenue to hit. I believe we last heard it would be early 2010?

John Chen

The answer is, yes. So where we are right now, the plan called for a September to October release to what are on the CRM modules, which is as we said in the March announcement. Then they will qualify that and they said they’re going to take anywhere from two to three months to qualify it. So I expect to see kind of the marketing sales activity in Q1 of next year. We’ll see some dollars on there, but I have to caution everybody on one things.

The first module with CRM; as you know CRM is not huge in the SUP license base or the customer base and as soon as we deliver CRM we are going to work on either the ERP of the MRP portion and that of course is going to be big number, a big opportunity at this way. Anyway, so that’s the general plan and we should be able to see some SAP revenue next year, but not in a very meaningful way until we got the MRP and SRP; the supply chain and ERP.

Scott Zeller - Needham & Company

Okay and then the last question. I know there have been several previous questions about messaging in the mix; could you just tell us again in plain terms, when you talk about enterprise mix improving, what exactly is that going to take the shape of? Is a micro-payments or campaign, what exactly would be growing the enterprise contribution.

John Chen

Yes there are two components of the enterprise contributions; one is the campaign side of the equation, like this one that I talk about, like Procter & Gamble. All the MIS science win which are government messaging alert systems. So, those are the two kind of the major. I would put the messaging alert system in the campaign part of the equation.

Whether the Citibank are using this for fraud detection, identification; whether some banks are using it for mortgage notifications and all of that, those I would call it basically the campaign side, but not so much as downloading ring tone or voting for best song or whatever it might be.

So, what I talk about is now we have 37% of the business in that category already, and those are good businesses, because the margins are quite reasonable and there is a direct connection to the end users. I mean end users meaning enterprise end users, like Citibank of the world and so forth.

Then the other component is the mobile commerce side. I mean currently today I’ll probably say that’s about 10%. We talked about that a little bit and that’s mostly the mobile banking and the micro-payments, like you pointed out the mobile payment, remittance top ups in that environment. That’s roughly about 10%, and the RevPAR are still -- half the business is still very much a telecom.

We call it the PM business in the carrier message routing business. So that’s how it shapes up right now, which of course we believe that at least the top, the first two components could grow it at a reasonable clip

Scott Zeller - Needham & Company

Okay, thanks very much.

Operator

Our next question comes from will come from Brad Sills with Barclays Capital.

Brad Sills – Barclays Capital

Hey guys, just a follow up question on IQ. If you could just comment high level, are there obviously RaP. The financial solution with RaP has been a success. Are there other vertical solutions that you are finding kind of driving that business, especially 50% in the out new customer

John Chen

Yes, so far is still very much financial we are plan to move to Telco and plan to move to healthcare; Telco first, healthcare second.

Brad Sills – Barclays Capital

Good. Then just on the option side, if you could comment a little bit on the clustering option being a newer one, how that’s been performing in terms of attached upgrades versus what you are seeing now with partitioning and encryption.

John Chen

It’s slower than partitioning and encryption. As we expected I told, this environment of just using the cluster, it’s not going to sell as much as the partition obviously, but that said everybody is reporting pretty happy results on the clusters, there were no issues and so when the economy turns back, that should be doing reasonably well. Then in addition to that, we got next year for the time serious, as well as the in memory database as option. So that will anchor some of the AIC growth initiative.

Brad Sills – Barclays Capital

Got it, okay thanks.

Operator

Our next question will come from Curtis Shauger with Caris & Company

Curtis Shauger - Caris & Company

Good morning everyone. Congratulations on another great quarter?

John Chen

Thank you.

Curtis Shauger - Caris & Company

Excellent. John you are quickly on RIM, it was my understanding that they were working with SAP directly and it actually made an announcement on their own platform. Does this is mean that you are going to be replacing that effort there?

Jeff Ross

No, we have not got to that stats yet, and I don’t know whether we will. They have a CRM module that they’ve written about a year and a half goal. The two [Inaudible] they announced a relationship with the SAP and subsequently we came in a relationship with SAP on a much broader platform and non-stick approach, but that’s said RIM already have had ready to go and I think they had demonstrated that in the last SAP show, I’m not 100% sure of that.

So we have not really touched that. I wasn’t going to go and help this argument of that, a potential argument, and so what we have done right now is to have a relation BlackBerry or RIM so that they would support our SAP activities. So, it will also go to Blackberry, so that way the customer has a choice and hoping over time they see the value that we put in, but that’s a decision that RIM has to make. It’s not a scientist decision, I’m not about to create that issue, I just want them to support me.

Curtis Shauger - Caris & Company

Now, it seemed that the two kind of announcements you made here with the SAP on RIM and you and RIM targeting the SMB market would seem to be in addition to your efforts with the CRM modules on SAP. How do you rank those in terms of future opportunities?

John Chen

So the SAP one has a lot more thought process behind it. We have an engineering engagement, we’re starting to have a few engagements and we always have a marketing engagement for day one on that. So it’s a very well thought out complete program between us and SAP now. We’re going through the process of delivery of that.

In the RIM case, we’re still a little early, but Jim met and we both think that this is the big un-served market. People are missing the SMB part of the world and they’ve seen the markets, we’ve seen the market and decided to work together, because they don’t software or they don’t do mobilizing so far and we could do that. So I think this is early and makes a lot of sense. We still need to put all the plans together.

Curtis Shauger - Caris & Company

Thanks a lot. Jeff, this might be a question more for you. It seems that there is going to be a variety of business models involved here. Could you just kind of talk how the 1-4 Samsung might compare in contrast with what’s going on with RIM and SAP?

Jeff Ross

In general, many of those business models will in all likelihood be a subscription or pay-as-you-go model. I don’t necessarily with the ones that you mentioned expect those to be dramatically different within certain instances that we might still sell sight licenses or sell perpetual licenses. So it still needs to be worked out, but our working assumption is that as well move more into this business, into mobilization and into degrees of clouds computing, than in most instances it will be a sort of pay-as-you-go type model.

John Chen

We like the subscription base model.

Jeff Ross

The CFO’s love that model; everybody loves it too. I think this is the one that we don’t have to scramble at the end of a quarter of any sort, because it’s just payer as you go and for 90 days we would have gotten; the last day we’ve gotten 89 days of revenue already.

Curtis Shauger - Caris & Company

Just to clarify that, so that we understand what could happen to the balance sheet as this rolls out. It would seem, as though there will be contract terms unlike what’s going on messaging, where it is truly I think based on transaction volumes. This would be similar to what you see on other annualized contracts for CRM, salesforce.com and so we would expect to see some deferment of revenue through these contracts, correct?

John Chen

Well, each one of them maybe specific, but in many instances we would get a monthly payment for their usage or the usage of their subscribers during the previous month. So in that specific instance, I’m not sure that there would actually be deferral. There could be others where they may pay in advance, in which case you’re right; it could more like maintenance and there could be some deferral.

Curtis Shauger - Caris & Company

Got it, okay. Switching gears to the IQ product, is exit data what Oracle’s talking about a competitive product and what have you seen of it in the market?

John Chen

I think it’s probably competitive in their own installed base. I don’t really see them a lot. I would normally allow into a Terradata environment or a Nepesa environment. Basically I’m using a unique LINUX environment to compete with that. In some cases where very, very large data needs to be crunched through on the vertical base, a column base that is, we may run into a KX or Vertical; again, that’s not a predominant case.

Oracle, no I have not seen much of that. That’s not to say that Oracle is not doing well in those areas. They are only to say that, I think they’re very much into their phase and of course their phase is huge. I’m not making any statements of negative, but it’s just that we don’t normally see adventure outside.

Curtis Shauger - Caris & Company

Thanks for taking my call.

John Chen

Absolutely. One more please, and one last one.

Operator

Yes, our final question will from Ross MacMillan with Jefferies.

Ross MacMillan - Jefferies

I wanted to speak [Inaudible] if I could. Just one point of clarification; I think you said maintenance was 82% of service maintenance and other revenue, and then you said that grew 5% in constant currency terms. If I back into it, am I right in thinking then that if you were the pro-services, the non-maintenance parts of that line maybe were about $25 million run rate right now and that compares to maybe $45 million or so a year ago. Are these numbers still right?

Jeff Ross

That’s high, that’s too dramatic of a decline, but I mean that does decline about 15% to 20%.

Ross MacMillan - Jefferies

Okay. Maybe we could just take that offline and then one last one, just on ASC 12.5 and the sort of sunset to that product, can you remind us of how that works and how that plays out? Thanks.

John Chen

I don’t know exactly the question, which part you are talking about. 12.5, we starting to see sunset at the end of this year and our customer base has been informed. Right now, roughly about say 40% to 50% of our base is already upgraded to 15 and so there would be another half of them to be upgraded here.

Some of them will have a special contract with us, where we carry a little bit more cost that they will pay for to support the 12.5, to support their own migration timing and strategy. That’s not unusual we, see that every cycle for that matter since I been here. Other than that it’s a pretty normal business process. I don’t know which part of the question…

Ross MacMillan - Jefferies

You’ve answered that actually interns of that percentage that have migrated and I guess the type that you are offering, maybe up, a slightly premium priced support offering for those that want it a bit longer. Is that the way to think of it?

John Chen

We don’t normally do that for everybody. You have to have, be pretty big to do that. Even if I charge you a little bit more premium, which we will, it just not the most resource effective for us to keep doing it. The best thing to do is for you to move to 15.

Ross MacMillan - Jefferies

Great. Thanks so much.

John Chen

Thank you.

Jeff Ross

Thank you, Ross.

John Chen

All right folks. I’m sorry for taking a little longer and I appreciate all the great interest in our stock. As I mentioned earlier we have a couple of headwinds coming up. The reason we’re not going to have headwind this years because we’re aware of the fact that customers don’t want to travel. I mean we’ll be able to travel, so we could take it carefully to them.

So we started with this year Beijing and Washington DC; and Washington DC is on August 26, you are all welcome. We will have an analyst part of the program, and this way we believe that we will reach more customers and may spend a little bit more money, but it’s worthwhile to do for us.

So I hope to see you guys on August 26, and it’s a lot sooner. Thank you all very much and have a great day. Bye.

Operator

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

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Source: Sybase Inc. Q2 2009 Earnings Call Transcript

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