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Executives

Damon Wright – Director of Investor Relations

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

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

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

Analysts

Mark Murphy - Piper Jaffray

Peter Goldmacher - Cowen & Company

Ross MacMillan - Jefferies & Co.

Kevin Liu - B. Riley & Company, Inc.

Mark Schappel - The Benchmark Company

Rich Baldry - Canaccord Adams

Brad Sills - Barclays Capital

Epicor Software Corporation (EPIC) Q2 2009 Earnings Call July 28, 2009 5:00 PM ET

Operator

Good day, everyone, and welcome to today's Epicor quarterly earnings conference. Just as a reminder, today's call is being recorded.

At this time I would like to turn the call over to your host for today, Damon Wright, head of Investor Relations of Epicor. Please go ahead, sir.

Damon Wright

Thank you, [Sarah], and good afternoon. We appreciate you all joining us on our call today to discuss Epicor's 2009 second quarter financial results.

Our press release, issued this afternoon, detailing these results may be accessed on our website at www. Epicor.com under the Investor section.

Joining us on today's call to comment on Epicor's second quarter are George Klaus, Epicor's Chairman, President and CEO, and Mike Pietrini, Executive Vice President and CFO. Russ Clark, our Senior Vice President, Finance, and Principal Accounting Officer, and John Hiraoka, our Senior Vice President and Chief Marketing Officer, will also be on the call to participate in the Q&A session.

George will begin the call with a few comments, followed by Mike, who will discuss certain financial results and trends in our business in more detail.

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

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

With that, I'd like to turn the call over to George. George?

L. George Klaus

Thank you, Damon, and thank you to everyone on the call and the webcast for joining us today.

I am pleased to report to you today a strong second quarter for Epicor across all areas of our business. We exceeded the top end of our EPS guidance by $0.02 while hitting the range of revenue guidance provided, despite the fact that hardware revenues came in nearly 50% less than originally anticipated.

License revenues exceeded our internal forecast as we capitalized on the new market opportunities presented by Epicor 9. License revenues were up sequentially by 33%, growing across all of the vertical markets and major geographies we serve.

Epicor 9 drove solid international ERP sales, including Epicor 9 sales into eight new countries. The new global financials and greater distribution capabilities of Epicor 9 also helped us win deals where we would not have been able to compete in past quarters; 65% of the 125 new-name customers we added in the second quarter purchased Epicor 9 and we have shipped to more than 150 new-name customers since going GA in December of last year. We have also shipped Epicor 9 to more than 300 existing customers and to more than 100 partners. We currently have 20 customers live on Epicor 9, and we are on track to have five times that many live by the end of the year.

Our retail business had a very solid quarter also, with retail license sales exceeding our expectations. We closed some large retail deals ahead of our plan as better same-store sales in April and May gave retailers the confidence to allocate more resources to IT investments.

The slight shift in focus we made a few quarters ago to respond to economic conditions by heavily targeting retail value players in addition to our more traditional markets was rewarded with several sizeable wins in the second quarter; however, our largest Q2 deal, which exceeded $1 million in software alone, was directly in our retail sweet spot - an end-to-end solution sale to a large high-end specialty retailer.

While all areas of license sales were stronger than expected, we continued to appropriately respond to market conditions by ensuring that our cost structure is aligned with our anticipated revenues. We made some reductions in our consulting organization to match our bench to book of business as well as some modest reductions in other targeted areas. These moves, in connection with a larger mix of license revenues in the quarter, led to gross margins expanding sequentially over Q1 by approximately 3 percentage points, exceeding 56% excluding amortization. Better gross margins combined with closely managed operating expenses helped drive non-GAAP earnings that exceeded our internal forecast.

While expense control is important, we also continue to keep an eye firmly on future opportunities. Epicor's success has been driven by innovation and profitable growth and the management team and employees are fully committed to being a growth company. We continue to invest in technology that companies desire today and will require in the future.

As you know, we have been investing in mobile solutions for our ERP customers as a part of Epicor Everywhere. This technology supports our vision of where ERP is headed - access to company data anytime, anywhere, and on any device. We are now seeing specific opportunities won based on these mobile solutions, which offer our current and targeted customers additional functionality for areas such as field service and clinical care and they provide increased features for managing inventory, orders and production.

We continue to invest in additional languages and localizations for Epicor 9, as well as industry specific enhancements that will help us better address markets adjacent to those we currently serve, markets such as commercial construction and aerospace and defense.

Mobile solutions are also high on the list for our retailers as they are constantly trying to ensure the best consumer experience while differentiating themselves from their competition. We have launched and continue to invest in the development of mobile retail solutions that allow retailers to come out from behind the counter and interact more directly with their customers. Epicor's mobile solutions help retailers reduce or eliminate customer waiting time while providing them real-time access to outside inventory to drive additional sales. We are beginning to see traction for these solutions and have some extremely well-known retailers currently deploying or in pilot programs for our latest mobile offerings.

We executed well this quarter while continuing to invest in the future. I remain confident that we are taking the right steps to successfully and profitability manage through these challenging times and we are extremely well positioned to capitalize on opportunities as the economy recovers.

I'm now going to ask Mike to cover some of the financial highlights, after which I'll come back with some closing remarks.

Mike?

Michael Pietrini

Thank you, George.

Since we provide detailed financial information in our press release and tables, I'm going to focus my prepared remarks on a few key financial highlights from the quarter.

We are very pleased with our second quarter financial performance. In spite of the current economy, we reported strong license revenue of $17.5 million for the quarter, with margins of 78%. License revenue exceeded our expectations and grew sequentially over Q1 by 33%. As George mentioned Epicor 9 was a key driver of license revenues, as were solid retail sales. We were pleased to see a continuation of the trend from the end of the first quarter, as prospects continued to be more willing to make IT investments in business solutions to drive productivity and efficiencies throughout their companies.

We added 125 new customers to Epicor's portfolio in the second quarter, which helped drive strong sequential license growth in all verticals and major geographies. As we mentioned last quarter, it is not surprising that sales into the base continues to be weaker since the majority of our existing customers are not currently growing their businesses and can ride out the current economic condition with the existing functionality and seat licenses they own today.

There is a positive aspect to this as historically under more normal economic conditions our base customers are a very dependable source of license revenue, contributing 50% or more in any given quarter versus only 45% in the 2009 second quarter. When things turn around - and no one doubts they eventually will - this revenue stream is expected to begin to produce as it has in the past. This should provide an incremental boost to future license revenues, especially in light of all the new features and functionality we offer with Epicor 9 as well as the fact that we are continually building our base with the addition of new logos every quarter.

In reviewing the consulting business, we showed sequential improvement in consulting revenues and expanded consulting margins as promised, increasing margins by more than 2 percentage points over Q1 to 18.7%. Our consulting business has been impacted by lower license sales and customer delays in starting implements over the past few quarters; however, we are doing a good job of matching our consulting work force to our book of business and we expect continued improvement in consulting margins throughout the year. We have also started some large projects in the third quarter which should benefit utilization rates in a quarter that is often impacted by holiday scheduling.

Now turning to maintenance, similar to Q1, maintenance contributed 47% of our quarterly revenue, with gross margins in excess of 76%. We had excellent retention rates of 96%, moving up from 93% in the prior quarter, as we expected, and significantly higher than the industry average of 85%.

We continue to do a good job at bringing customers back on to maintenance contracts that had previously gone off maintenance. Win backs were strong even in the face of current economic conditions, resulting in 143 customer win backs, representing an additional $2.8 million in annual maintenance.

Hardware, which continues to be difficult to forecast, was the one disappointment this quarter. Lower than expected hardware revenues resulted in us achieving the lower end of our revenue guidance range instead of being at or above the high end of the range. Hardware, which had 13% gross margins this quarter, is almost exclusively tied to our retail business point of sale systems and we expect it will continue to be unpredictable as the timing of customer projects and requests for shipments is completely out of our hands. Because of economic conditions, retailers are making do with the existing hardware systems they have, which has caused them to delay or in some cases cancel anticipated hardware rollouts.

Now, combining all revenue lines, total gross margins excluding amortization were 56.2%, growing year-over-year by more than 6 percentage points. Gross margins also grew sequentially by 3 percentage points due to a greater percentage of high-margin license and maintenance revenues and less hardware, as well as the improvement in our consulting margins.

All right, let's look at FX impact. We continued to face FX headwinds as the U.S. dollar strengthened meaningfully over the past year against most foreign currencies. All revenue lines were negatively impacted, with total revenue impacted by approximately 5%. On a constant currency basis, second quarter total revenue would have been $105.6 million, with license revenue of $18.3 million, consulting revenue of $34.1 million, and maintenance revenue of $49.6 million. Hardware revenue was not impacted by FX movements.

Now, turning to operating expense, excluding restructuring, operating expense by line item was essentially flat from Q1, both as a percentage of revenue and in total dollars. We did continue to modestly reduce expenses in certain areas, even in the face of a meaningful increase in license revenues. This was generally done through not replacing normal attrition as well as some targeted work force reductions.

Now looking at some balance sheet metrics, we did a good job in collections even in the face of the weak economic environment, once again collecting more than we sold and bringing in $105 million during the quarter.

Our cash and cash equivalents balance as of June 30th grew to $86 million, buoyed by improved free cash flow of $10.6 million. We continued to use excess cash to pay down our credit facility, with payments totaling $7.5 million during the second quarter. As is our custom after acquisitions, we are quickly deleveraging from the credit facility borrowings used to help finance our acquisition of NSB. Since we drew on the facility in February of 2008, we have already paid down approximately $80 million or half of the original amount borrowed. Our debt balance consists primarily of our $230 million obligation to holders of Epicor's senior convertible notes and $79 million of borrowings under our credit facility. We remain very comfortable with our liquidity position and our ability to continue to delever.

Now highlighting our Q3 guidance, as outlined in our press release we currently expect Q3 revenue to be in the range of $96 to $100 million, with non-GAAP EPS of $0.09 to $0.10. Q3 is historically a softer quarter than Q2 based on extended holidays, especially in our international markets. We also want to be prudently cautious with our financial expectations in light of the relative strength we saw in license revenues in Q2, as we did see some deals move into Q2 that we originally expected would close in Q3, particularly on the retail side of our business.

We saw a lot of encouraging signs during the quarter regarding new customers feeling more comfortable investing in IT projects and Epicor 9 is bringing us into new opportunities; however, we do not have enough data points to definitively call this a sustainable trend under the current economic conditions. We will continue to closely manage our variable expenses and are focused on improving our profitability per revenue dollar. We executed very well in Q2 and we plan to continue to do so.

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

L. George Klaus

Thanks, Mike.

Well, prior to opening the call for questions I want to spend a little time on our positioning in the market and why Epicor wins.

There is a reason we had a relatively strong quarter in a difficult market. Epicor has clearly differentiated itself from the competition with superior products, a demonstrable lower total cost of ownership, faster implementation times, a single point of accountability and a true global support and service organization. We are benefiting from being at the front end of a new product cycle with Epicor 9. We believe Epicor 9 is the absolute best product for the ERP markets we serve, and we are now winning business in additional markets that we were unable to address in the past.

We also continue to add to our full suite of retail solutions with new offerings such as superior PCI compliance tools, increased analytical capabilities and enhancements to our full store and CRM packages, all helping to ensure that we are addressing the key issues for retailers today and in the future. Our superior technology and clear competitive differentiation is being championed by highly respected third parties and our positioning, branding, and the awareness of Epicor's capabilities has never been better.

As evidence of this, during the second quarter Epicor was singled out by leading industry analyst firm Gartner Incorporated in its much-followed Magic Quadrant for Midmarket and Tier 2-Oriented ERP. Gartner said Epicor offers the most visionary and complete solution they have seen made generally available in recent years. Gartner also noted that Epicor has the broadest globally available functional footprint of all vendors and highlighted Epicor as one of only three recognized leaders. The other two happen to be two of the largest companies in the world.

Additionally, Epicor was recognized by Microsoft as its 2009 Partner of the Year for Global ISV Line of Business. We were selected out of an international field for delivering market-leading customer solutions. Epicor was acknowledged by Microsoft for our innovation and leadership in delivering applications that are redefining the enterprise software experience.

On the retail side, Epicor was identified by industry analyst firm Aberdeen Group in a recently released report as the retail loss prevention champion, prevailing over significantly larger competitors. This very important ranking for Epicor has the potential to help garner significant business. Statistics show that retailers lose an excess of $55 billion annually from shrinkage in the U.S. alone, nearly half of which is directly related to employee fraud. As Aberdeen highlights, Epicor's loss prevention products directly address these issues, empowering our customers to run more productive and profitable businesses.

For each and all of these reasons - superior competitive differentiation, excellent branding, outstanding positioning, and better market awareness - we believe we are taking market share in this challenging environment. More importantly, we believe we are well positioned to increase our market share when the eventual market recovery does occur.

We believe our most recent results are a confirmation that Epicor is operating from a sound foundation led by a highly experienced and tenured senior management team that has successfully navigated the company through these challenges in prior times. We're executing to our plan and taking all of the appropriate steps to successfully and profitability manage Epicor though these uncertain economic conditions.

And with that said, I'd like to open up the call for questions, please, Operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Mark Murphy - Piper Jaffray.

Mark Murphy - Piper Jaffray

It's the lightest quarter for you for hardware revenue in about three years and I just wanted to try to dig deeper into the underlying dynamic and what the trend might look like into Q3 and beyond. I understand you commented that your retail vertical performed well, but that the hardware was tied to the retail point of sale systems. I'm not sure I completely understand what happened there, so if you could give more color on that I'd appreciate it.

L. George Klaus

Well, as you know, we have lots of very well-known customers out there that have our hardware installed in their stores and historically in good economic times they're opening up new stores or they're replacing the hardware in their existing stores. And in these economic conditions those retailers, who are fighting to keep their head above water in a lot of cases, have slowed down their CapEx expenditure on replacing some of the existing hardware they have and opening up new stores and, in fact, some of them are actually closing stores. So that is the major impact.

We're still installing hardware in the new accounts; that's not the issue. But the major impact is the large installed base we have who is not upgrading their current hardware or opening new stores.

Mark Murphy - Piper Jaffray

And, George, is the strength in your retail vertical from a license sale perspective? Is that something we should look at as a leading indicator of, you know, the segment that you mentioned as being weak in terms of hardware, is that going to lead what happens on the hardware side or from a bigger picture perspective is there a chance that you would look at this and say you may have an opportunity in the next year or two to actually exist the hardware business?

L. George Klaus

Well, I don't think, first of all, as you know and I've said in the past, the hardware business is something we do as a service to our customer and really, if anything, impacts our margins negatively overall versus if we didn't have the business. But we do it as a service to our retail customers because they like to see us load the software, set up the point of sale equipment and deliver it to the store so that their clerk in the store can just press the buttons and get it to start working.

So, with that said, I don't think you'll see us exiting the hardware business anytime soon because we need to be of service to the customer base out there and it's a capability we provide which they like.

Mark Murphy - Piper Jaffray

And then, Mike, did you have the operating cash flow number for the quarter?

Michael Pietrini

11.5

Mark Murphy - Piper Jaffray

And then just one final kind of mathematical question. On the maintenance revenue line, I'm just trying to reconcile. You're saying that the maintenance renewal rate actually increased in Q2 and, while you had a year-over-year adverse FX hit, I would think you might have had a sequential benefit. So sequentially why wouldn't the maintenance revenue have grown?

Michael Pietrini

Why wouldn't the maintenance revenue have grown?

Mark Murphy - Piper Jaffray

Right.

Michael Pietrini

It was not as big of a renewal quarter for us as it has been.

L. George Klaus

Well, and I think it's also fair to say that license revenues were down in Q1, which is what drives maintenance revenue. As our license revenue - which we're very proud of the fact that it was 33% better than Q1 - is starting to rebound, you'll see our maintenance revenues start to grow also as license revenues grow. Every piece of the business that we have is totally tied to the successful sale of license revenues.

Mark Murphy - Piper Jaffray

So is this kind of $47 million plus or minus - you've been at around $47 million on the maintenance line for about three quarters - from a planning perspective, should we just trend line it out at that level through the rest of the year or do you think it will make some gradual sequential progress?

L. George Klaus

I think it'd be very gradual, but I wouldn't have a problem with you trend lining it out. As our Epicor 9 sales increase and our license sales increase you will see that number start to grow as it had in past years, but for the rest of this year, unless we get a real tailwind in this economy, it's probably not going to grow substantially.

Operator

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

Peter Goldmacher - Cowen & Company

I just want to ask two quick questions. First, you had mentioned that your maintenance renewal you'd picked up to 97% renewals. Just on the terms of those renewals, once you get a win back is it a retroactive renewal so if they haven't paid for three years they have to pay for all the years they missed and then they get update rights or how does that work specifically?

L. George Klaus

That's exactly how it works, Peter, but we do, in fact, negotiate that, as you would expect, for people that have been off for a long time.

Peter Goldmacher - Cowen & Company

And of the clients that you got to re-sign up for maintenance, did they renew because they wanted Epicor 9?

L. George Klaus

We believe that's the reason, yes.

Peter Goldmacher - Cowen & Company

And then you had mentioned some headcount reductions in the services business. Can you give us an update on quota-carrying heads?

L. George Klaus

We have about 175 sales quota-carrying heads.

Peter Goldmacher - Cowen & Company

And then just lastly, when you talk to customers that are running you through your paces on the sales cycle but they ultimately decide to defer a purchase, do you feel like that's a bona fide they're just not sure yet or are they trying to negotiate more aggressively than they have before? How would you characterize that dynamic?

L. George Klaus

First of all, our win rates were very strong in the second quarter, so the deals we played in we had a very high percentage of wins.

I think the economy has still got people very scared about spending money. I mean, we're operating our company on a low CapEx expenditure versus prior years. So people are hanging onto their cash longer and trying to make do with what they have longer.

And if it wasn't for our latest technology and Epicor 9 inspiring people to step up and want to get into some new areas - plus, as I mentioned, we opened up eight new countries with Epicor 9, so some areas that we hadn't been able to get into before - it would be harder. But I think that we are doing better than our competition.

Operator

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

Ross MacMillan - Jefferies & Co.

George, I think you've given metrics around deals over $1 million, deals over $500,000 and then a top 10 deal average historically. Could you give us those metrics?

L. George Klaus

We're going to start listing deals over $1 million, Ross, and we had one this quarter and it was on the retail side of our business. It was a big international retail deal that we sold.

And if we take that deal out - and I think it's only fair that we do - of our top 10 because it would skew the top 10 significantly, our average was about $400,000 in our top 10, which is still up significantly. And it was obviously up more significantly with that deal.

Ross MacMillan - Jefferies & Co.

And then if you had to weight the outperformance in terms of kind of core midmarket ERP versus retail, including the big deal, the one over $1 million, and you look at relative to plan, which had the bigger kind of outperformance? Was it on the retail side or was it on the core ERP?

L. George Klaus

They both beat their plan. They both performed very well. And I'm very proud of both of them, frankly.

Ross MacMillan - Jefferies & Co.

And then just so I understand on Epicor 9, I think you'd gone from I think what you called it was shipped 200, 350, now 450, and you broke out the new customer count, which is helpful. With the 25 that are live can you help us understand, is there a dynamic associated with going live that has a positive implication for license revenue? In other words, for existing customers that are going to go live, is there some potential to catch some new license revenue?

I guess what I'm trying to drive at is as you get more go lives - you mentioned five times that by the end of this year - what does that mean in terms of the P&L, if anything?

L. George Klaus

Well, clearly our CAM organization - our customer account management organization, which sells into our installed base - will have the opportunity to sell new licenses into all those 160-plus new Epicor 9 customers that we have.

And in addition to that we have 300-plus that are evaluating the product right now and if they choose to install the product - 300-plus that are on maintenance and if they choose to install the product they get the product for free for like-to-like technology - or like-to-like functionality, I'm sorry - but Epicor 9 has so much more functionality than what they're currently running that they will also want to expand their functionality capabilities and so they will be buying additional functionality. So I think all of those do allow us to have additional license revenue upside.

Ross MacMillan - Jefferies & Co.

Okay. And then, just as you think about the POS business, is your assumption that this sort of $3.5 million off the June quarter, is that the run rate assumption or I guess you must have some notional assumption as to how that play out in the September quarter - to flat line it, is that the right way to think about it?

L. George Klaus

We think Q3 will actually be down a little bit over Q2 or flat - let's just say flat.

Operator

Your next question comes from Kevin Liu - B. Riley & Company, Inc.

Kevin Liu - B. Riley & Company, Inc.

Talking about seasonality a little bit, usually I think you guys would kind of expect licenses to dip down a little bit quarter-over-quarter. Given the changes we see in the environment going from Q1 to this point as well as some of the demand you've seen on Epicor 9, would you expect that seasonality to shift a little bit and maybe we'd get some more sequential improvement?

L. George Klaus

I think we're going to continue, Kevin, to assume that Q3 will be a little softer than Q2. It has been historically for all the years that I've been here. I hope I get surprised. Clearly, Epicor 9 has given us opportunities and put us in a position that we haven't been in in those previous years but, as you know, people take very extended vacations internationally in the third quarter and so the reason we are guiding $96 to $100 million and $0.09 to $0.10 is because we believe the quarter will be probably slightly down over Q2.

Kevin Liu - B. Riley & Company, Inc.

And on the professional services side, with some of the headcount reductions you've taken this quarter and some new work starting up for Q3, what type of improvement can we expect to see in the overall gross margin here in the near term?

L. George Klaus

Well, all I can say is we expect to see improvement, okay? There's two things working there that I'll share with you. One is that we sold $17.5 million worth of software in Q2, so there's a lot of projects that are being kicked off in Q3 that will increase our utilization of our team.

In addition to that, Q4 is historically our largest quarter and we would expect Epicor 9 to be very successful in Q4 and therefore we don't want to prune our consulting organization all that much in Q3 because it's harder to hire somebody back and train them, so we'd rather make a little investment there if we have to make that choice so that we're ready for the Q4 onslaught.

Kevin Liu - B. Riley & Company, Inc.

And then just lastly, when you kind of look at the mix of sales today - I think you guys said on the software side it was down 45% from existing - looking at the pipeline for the remainder of the year would you expect that to trend back towards about a 50/50 split or would you expect most of the business to continue being driven by new-name customers?

L. George Klaus

Well, this is a guess but I would guess most of the business will still be new-name customers until the economy starts to loosen up. We do have almost 21,000 customers now, so we do have a nice franchise to dip into. But, as you know, lots of companies are laying off and consequently they're not expanding their internal IT function that much. I would say it's still going to be swayed to new names.

Operator

Your next question comes from Mark Schappel - The Benchmark Company.

Mark Schappel - The Benchmark Company

George, as you know, Epicor has a solid customer base in Eastern Europe, mainly from the Scala acquisition years back, and I was wondering if you could just give us a few details on what you're seeing in Eastern Europe? The general business press is painting a pretty bleak picture over there. I was wondering if you had any comments to that effect?

L. George Klaus

Well, Mark, as I mentioned, all geographies did well for us in Q2. Out of the 125 new customers, we did 80 of them in Epicor 9, and most of the rest of them were probably Scala, okay? I shouldn't say most of the rest - at least half of the rest were probably Scala. So that product is still selling over there and is still satisfying some needs that that customer has. We know it's tough over there, but we had a good quarter there.

Mark Schappel - The Benchmark Company

Would you say that your largest competitor in the quarter was probably the no decision or the deferred decision?

L. George Klaus

I think that's true. That's true. You know, you still have to fight hard to get people to let loose of their money these days, that's for sure.

Operator

(Operator Instructions) Your next question comes from Rich Baldry - Canaccord Adams.

Rich Baldry - Canaccord Adams

If my notes are correct it looks like the sales heads went up moderately sequentially. Could you maybe talk about where you'd see adding to the sales, maybe by either geography or end market, and where you think that number could be by year end?

L. George Klaus

Richard, I think we were actually slightly down in sales heads, but we are looking at, as we move into the end of the year, getting ready for next year, thinking of increasing the sales heads a little bit. But I don't think you'll see a lot of adds in our sales. You'll see some 1-2-3-4 in Q3, but most of the sales adds would come in Q4 that we may get ready for '10.

Operator

Your next question comes from Brad Sills - Barclays Capital.

Brad Sills - Barclays Capital

If you could drill in a little more on some of the other verticals, manufacturing, distribution, where you saw Epicor 9 gaining traction, were there any kind of sub verticals there that you're seeing better uptake in?

L. George Klaus

Well, Epicor 9, besides producing global financials, also had a lot of enhanced functionality in the distribution space, and so we did win some distribution deals we would not have been able to compete in prior to having Epicor 9.

And as I mentioned in my chats, commercial construction and aerospace and defense are sub verticals, to use your term, that we see a better opportunity with Epicor 9 to get into than we had previously.

Brad Sills - Barclays Capital

And then if you could provide the GAAP gross margins for license maintenance and services, please?

Russell C. Clark

So on the GAAP side at the gross margin level, I don't have those right here in front of me but you can calculate them. I guess we have them summarized in the release. So, you know, license 78%, consulting 18.7%, maintenance 76.7%, and hardware 13%.

Operator

And it appears we have no further questions at this time.

Mr. Klaus, I would like to turn the conference back over to you.

L. George Klaus

Okay, thank you.

Well, in closing I want to take this opportunity to thank all of our employees for all of their hard work, loyalty and dedication in the quarter, which clearly, I believe, has the company on the rebound and even in a tough economy outperforming our peers.

And plus, last but not least, I'd like to thank all of our customers for their confidence in Epicor and for their partnership in doing business with us.

So thank you all for joining us on the call, and feel free to call at any time. Thanks.

Operator

Again, that does conclude today's conference. We thank you all for joining us.

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