Deltek Inc. Q2 2009 Earnings Call Transcript

| About: Deltek, Inc. (PROJ)

Deltek Inc. (NASDAQ:PROJ)

Q2 2009 Earnings Call

July 30, 2009 5:00 pm ET


Dave Spille - Head, Investor Relations

Kevin Parker - Chief Executive Officer

Mike Cullen - SVP and Corporate Controller


Phil Rueppel - Wells Fargo Securities

David Bayer - Cantor Fitzgerald

Gregg Speicher - Moss Creek

Deepak Panigraha - Credit Suisse

Michael Howard - William Blair & Co


Good afternoon. My name is Loma and I will be your conference operator today. At this time, I like to welcome everyone to the second quarter 2009 earnings conference call. All lines have been placed on-mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator instructions). Thank you.

I will now like to turn the call over to Dave Spille, Head of Investor Relations. You may begin.

Dave Spille

Thank you. Good afternoon, everyone. I want to welcome you to today's conference call announcing Deltek's financial results for second quarter ended June 30, 2009. The press release we issued this afternoon containing our Q2 financial results and a spreadsheet, which summarizes the changes to our historical share count and EPS figures, as a result of our writes offering are available on our website at

This call is being recorded and will be available for replay on Deltek website or by dialing the following numbers: 1-800-642-1687 or 1-706-645-9291. The access code for the replay is 19459768. The conference call replay is available through August 5th, 2009.

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

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

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

And with that, I will turn today's call over to Kevin Parker, Deltek's, CEO.

Kevin Parker

Thanks, Dave. Good afternoon everyone and welcome to our Q2 earnings conference call. As you can see from this afternoon's press release, we had a very strong Q2, especially in the current economic environment and delivered license revenue, total revenue, operating income and EPS, that all significantly exceeded expectations. From my view there are few key factors that contributed to our ability to deliver a strong quarter.

First on that list is the improving sense of economic stability that positively impacted the decision making for many of our customers. The level of economic uncertainty that we saw in Q1 was significantly reduced during the quarter. That uncertainty is being replaced by a sense of stability action and activity as customers face the challenges arising from today's economic realities.

That growing sense of stability, while well short of a technical economic recovery, provided many customers the basis for moving forward with their purchase in Q2. We expect that sense of stability to continue for the remainder of 2009.

In Q2 we saw sales of our core GovCon solutions, Costpoint and GCS increased 50% from Q1 levels. We also saw sales of revision applications into the A&E and professional services markets increase almost 30% from the prior quarter. We're very pleased with the strong sequential improvement in licensed revenues across the Board in Q2, with total licensed revenue increasing 40%.

While the overall reduction in economic uncertainty helped us, it's not the only factor that drove our strong performance. Our results were also impacted by the improvement in our execution and key processes across the company. One greater example of that focus on process is our sales linearity in Q2.

Looking back, we entered June with a significant portion of the quarter's license sales already completed. From a seasonality perspective, it was a major improvement from where we've been at recent quarters and a trend we're working to continue.

We also saw significantly less discounting in Q2 and offered substantially fewer payment terms to our customers than in recent quarters. All of that is a result of changes to our internal processes and great client engagement on the part of our sales team and sales leaders. I am very proud of their efforts and their results speak to their hard work and commitment.

Looking a bit further at our license revenues, our Q2 results reflected the same trends we've been describing for the past few quarters, that the GovCon market continues to be healthy while the A&E and professional services market remains very challenging.

In fact, looking at the year-over-year-year license results, the combined revenues from our portfolio of GovCon products, GCS, Costpoint and EPM are essentially at the same level as in the prior year, while the results envision in the A&E market account for 100% over the year-over-year decline in total license revenues from Q2 2008.

In the GovCon market we continue to experience healthy demand for our products. While our license revenue from core government contracting products, Costpoint and GCS was unchanged from the prior year, as I said they increased 50% sequentially driven by Costpoint sales to both new and existing customers.

In Q2 we had $1million plus deal in the GovCon market as an existing GCS customer upgraded to Costpoint to help grow and accelerate their business as a federal contactor. While it was a large existing GCS customer, there was a great competitive win against the largest ERP players who put in, an all-out effort to win against our Costpoint solution. From our client perspective, we won because of the great combination of functionality, subject matter expertise and superior ROI.

In Q2 we experienced strong sequential license growth in our Vision business, but revenues still remain below last year's levels as a result of the weaker economy. Our sequential license revenue is driven by a significant increase in the conversion of legacy customers for the new Vision 6 platform and improved execution across the business.

Our A&E consulting customers continue to be fairly cautious, but we see less pessimism than we did in Q1. We've seen some signs that companies in this industry now feel they are in a position to begin investing again in their future, after significantly reducing their costs in prior quarters. While it's still too soon to predict to a recovery, it's certainly more stability in the market and we're hoping that we will continue to see signs of an improving outlook.

In Q2, our EMP license revenue experienced double-digit sequential growth, but was relatively flat from the prior year. Our EPM results would have been potentially a bit higher, but we had several deals slipp out of the quarter. Most of those deals have already closed, and we're expecting the remainder to close in the coming months.

Our Q2 international business represented approximately 5% of our license revenue. We've made a lot of progress in our international initiatives over the past year and the pipeline has grown significantly as a result. At the same time, the UK has been hit hard by the current recession.

While the UK remains a strong focus, we've also been busy increasing our penetration in other markets. We have a growing presence in Canada and are making additional progress in the Middle East, South Africa and India.

In the quarter, we also saw continuing strength in our maintenance business as revenues grew 1% sequentially and 10% year-over-year. Our maintenance renewal rates continue to be strong with renewal percentages in excess of 90%.

Year-to-date, we've seen a modest increase in a number of maintenance downgrade requests we've been receiving. These downgrades are compensated almost exclusively at the very low end of the [AD] customer base. While the number of downgrades has increased, the dollar value isn't having a material impact on our revenues, and is fairly consistent with what we anticipated at the start of the year.

Our consulting revenues declined slightly from the prior quarter and dropped nearly 14% from the prior year. The majority of the sequential and year-over-year decline was in the implementation services for our GovCon customers, as a result of lower Q1 license revenues. Overall, our utilization remains good and our average billing rates continue to be in the $180 to $185 range, consistent with what we have seen historically.

During the quarter we maintained our focus on driving profitability and cash flow and we've done very well. In Q2, we delivered a 20% non-GAAP operating margin which was a significant increase in the prior quarter's results of 17%. At $7.6 million, our Q2 non-GAAP net income increased 35% from the prior quarter and was essentially unchanged from the prior year. I think that's a strong performance and noteworthy in light of the 10% decline in revenues from 2008.

If we exclude the additional shares we issued with our common stock rights offer, our non-GAAP EPS would have been $0.17 or $0.03 to $0.05 better than the guidance we gave in April. Including the additional shares we issued, our non-GAAP EPS is $0.14 or $0.03 ahead of consensus estimates. We are able to achieve these strong bottom-line results by aggressively managing our business and costs.

During the quarter, we implemented a number of activities to lower our costs, including a reduction in force of approximately 30 employees, a reduction in travel and telecommunication costs, and a variety of other activities to focus on improving our profitability. We are to maintain that focus going forward and continue to target our operating margins in the 20% range for the remainder of the year.

From our product perspective, Q2 may have been our most successful quarter ever. In the past 90 days, we introduced new solutions in all of our major product families. In the government contracting market we released several new solutions, including Premier Analytics for our GCS customers and update to our GovWin business development application and Cobra 5, the industry's leading earned value solution, now updated on a newly .NET platform.

These new products enable our customers to gain important insight to the performance of their business with real-time analytics, collaboratively manage sales opportunities from RFP to contract close-out, and increase their ability to find and win new business in today's very competitive government contracting market. All the while maintaining the transparency and accountability that has become a de facto requirement in today's GovCon world.

In the professional services market, we released Vision 6, Deltek Project Connect and Vision Performance Management. These additional projects further or extend our market leadership position of professional services market and enable our customers to unlock and analyze data, so they can gain real-time visibility in their revenue streams, costs, profits and other business metrics in order to make better business decisions.

Importantly, Vision 6 provides a platform for translation of Vision into multiple language and I am pleased to report we sold the first French version of Vision in the past few weeks. We expect to have a Spanish version in the coming months.

The launch of these products all in the past few months, demonstrates the continuing focus on our leadership position in each of the markets we serve. We're continuing to invest in our products and solutions, so that we're well positioned when we're through the current challenging environment.

In May, we also held our annual Insight Conference in Orlando, Florida. Insight 2009 featured approximately 3,000 business leaders and partners that attended and attendees representing thousands of unique organizations.

This conference showcased all of the new product announcements that we just discussed, featured over 325 unique breakout sessions on Deltek products and best practices, and included 30 technology partners. All in all, Insight 2009 was a great success and included our largest and most comprehensive program ever.

The energy and enthusiasm of our customer, prospects and partners is a great testament to the strength of our company even in uncertain times. As we look ahead to Q3 we're expecting another successful quarter, much like Q2. The government contracting market remains healthy and it appears that the A&E market may have stabilized.

Our sales pipelines have increased during the quarter across all of our products during Q2 and we are very engaged with our customers and prospects across the board. At this point, we are expecting like Q3 license revenue to be very similar to Q2's results.

We are also continuing to manage our business very aggressively by focusing on our cost structure, delivering innovative products in the markets and implementing various initiatives to maximize revenues. We remain committed to driving the business forward and delivering healthy revenue, operating income, EPS and cash flow.

Before I turn the call over for more in depth review of our financial statements, I want to share with you a recent change here at Deltek. Earlier this week Mark Wabschall submitted his resignation as our CFO citing personal and family issues. His resignation is unrelated to our results or any disagreements or concerns regarding financial or reporting matters.

As we begin to search for a new CFO, Mark will be available as a consultant to assure a smooth transition. In Mark's absence joining me today on today's call is Mike Cullen, our SVP and Corporate Controller. Mike will take us through the financial statements and our guidance for Q3. Mike?

Mike Cullen

Thank you, Kevin. As Kevin previously shared with us we had a very strong quarter. I will walk you through the results in more detail starting with our operating performance.

Our Q2 license revenue of $15.8 million was well ahead of our $11 million to $12 million guidance range, it represented a 40% increase from Q1 levels. Our sequential increase in license revenue was primarily driven by the increase in our government contracting revenue, while all of our product family experienced double-digit license revenue growth from Q1.

As compared to prior year, license revenue decreased 29%. This decline was attributable to lower Vision sales. In Q2 our Vision license sales represent little more than 20% of our total license revenue, which was relatively consistent with last quarter.

We added approximately 80 new customers to our installed base in Q2 and these new customers accounted for approximately 15% of our license revenue. In total we had 1200 licensed transactions, one of which was over $1 million.

During Q2, sales from our reseller partners were 11% of our license revenue compared to 8% last quarter and license revenue from our international operations was approximately 5% of license revenue sales, which is consistent with last quarter's results.

Q2 consulting revenue of $19.2 million decreased 4% from Q1 and 14% from last year, due to lower implementation services, reimbursable expenses and training revenue. Our consulting margin for the quarter was 16%, which is up from the 14% reported last quarter and the prior year.

Q21 maintenance revenue increased 1% sequentially to $31 million, which is in line with our expectations and a 10% increase from last year, due to a higher customer count and our ability to maintain a strong retention rate.

Our Q2 maintenance margin was 82%, consistent with historical results and objectives. Our Q2 R&D expenses of $10.8 million were relatively flat from last quarter. R&D expenses were down 7% from last year, primarily a result of lower labor and related expenses.

Our Q2 sales and marketing cost were $10.7 million, which is down 8% from Q1 and 21% from last year. Decline from Q1 was a result of lower labor and labor-related expenses and marketing program cost offset by increased travel and commissions. The decrease from last year is primarily a result of lower labor, related expense and commissions.

Our Q2 G&A expenses were $9.4 million, which is up approximately 19% from Q1 and 12% from prior year as a result of higher labor and related cost, bad debt expense and professional fees. During the quarter we implemented a reduction in force of approximately 30 employees or 3% of our staff. As a result of this action we recorded a $1.1 million restructuring charge, which is comprised primarily of severance and related payments.

As a result of our ability of exceed revenue guidance and manage our cost effectively we reported Q2 non-GAAP operating income of $13.8 million, which is well ahead of our guidance range of $10 to $11.5 million. This represents a margin of 20% as compared to our guidance range of 17% to 18%.

In Q2 our interest rate was flat from last quarter but down by $1 million from prior year as a result of lower interest rates. The effective interest rate this in period was 3.24% and we expect that to continue in the foreseeable future.

Through tax planning initiatives we implemented in the second half of 2008 we were able to lower our effective tax rate to 37.6% this quarter from 45.5% last year. Q2 non GAAP net income of $7.6 million increased 35% from the prior quarter and 2% from last year.

Our non GAAP EPS was $0.14 per share compared to $0.13 last quarter and $0.16 last year. Our current and historical EPS results have been impacted by additional shares issued in conjunction with out Q2 rights offering. Excluding the impact of the rights offering our non GAAP EPS would have been $0.17 per share, which is well ahead of our guidance of $0.12 to $0.14.

On a GAAP basis our Q2 net income increased 85% from last quarter and was comparable to last year. Our GAAP EPS was $0.09 per share compared to $0.06 last quarter and $0.11 last year. GAAP EPS results were also impacted by our rights offering.

Excluding the additional shares issued in conjunction with the rights offering our GAAP EPS would have been $0.11, which is also well ahead of our $0.07 to $0.09 guidance range we gave on our last call. Our strong financial and operational performance in Q2 translated into $15.3 million in cash flow from operations of which $10.8 million was generated from net income and non-cash expenses, and $4.5 million was generated from working capital changes.

We are continuing to focus on cash management to maximize and accelerate the cash flow. So in Q2 we began accelerating our maintenance billing and collection efforts which contributed an additional $6.2 million to cash flow from operations.

DSOs for Q2 increased to 61 days compared to 58 in Q1 and 59 a year ago. Excluding the impact, the acceleration of maintenance billing had, our DSOs would have decreased to 51 days as a result of our strong collection efforts.

We continue to expect our future DSOs, to be within our benchmark range of 55 to 65 days. The composition of our agent remains very healthy with few significant issues. We ended Q2 with a record cash balance of $113.5 million, a $70.5 million increase in our cash position was driven by the $58.2 million and net proceeds were received from our rights offering and cash flow generated from operations.

Our rights offering was clearly a success and further strengthened our balance sheet. We ended the quarter with $180 million of debt outstanding under our term loan. Our next principal payment of approximately $0.5 million is not scheduled to occur until next June.

Given our healthy balance sheet, long history of profitability, strong cash flow from operations and fact that we are well in compliance with all our financial covenants, we are confident that we'll be in a good position to refinance our debt when the time is appropriate.

We had a deferred revenue balance of $37 million at the end of Q2, which is up $12.2 million in Q1, primarily as a result of accelerating our maintenance billing process, which added 14 million to our deferred revenue balance. This increase was partially offset by 2.4 million recognized in revenue from prepaid insight registration fees.

Our deferred license revenue remained flat from Q1 and continued to represent less than 5% of total deferred license revenue. In reviewing the quarter, we are very pleased with our results given the current economic environment.

Looking back over the past 90 days, we increased our license revenue 40% from Q1, achieved double-digit sequential license revenue growth in all of our product families, grew maintenance revenue by 10% year-over-year, continued to achieve maintenance retention rates in excess of 90%, reported a 20% operating income margin, achieved over 15 million in cash flow from operations, and entered the quarter with more than $100 million in cash for the first time in our company's history.

We believe we are executing well and we continue to grow our pipelines. At the same time, the economy remains challenging, especially in the professional services market. Looking forward, we will continue to monitor our cost structure closely, so we can maximize profitability and cash flows during these difficult economic times.

In terms of our guidance for Q3, we expect license revenues to be in the range of $14.5 to $15.5 million, and total revenues to be between $64 and $66 million. We expect non-GAAP operating income to be in the range of $13.5 to $15.5 million, which represents an operating margin of approximately 21% to 23%.

Our non-GAAP operating income excludes the impact of approximately 2.4 million of stock-based compensation expenses, and approximately $1.2 million of intangible amortization expenses. Our Q3 GAAP earnings per share is expected to be in the range of $0.08 to $0.10 per share.

On a non-GAAP basis, we expect our earnings per share to be in the range of $0.11 to $0.13 per share. Our Q3 GAAP and non-GAAP EPS targets assume an effective tax rate of approximately 38% and an average share count of approximately 64.5 million shares.

Now I'll turn it over to the operator for the Q&A portion of the call. Operator?

Question-and-Answer session


(Operator Instructions). Your first question comes from the line of Phil Rueppel with Wells Fargo Securities.

Phil Rueppel - Wells Fargo Securities

Great. Thank you very much and good afternoon. The new license strength, could you tell us is that primarily driven by selling product into new customers or upgrading existing customers moving them to Vision or selling them new modules?

Kevin Parker

Phil, it's Kevin. The majority of the revenue -- actually the largest single point of revenue is selling new products into the installed base of customers and particularly in the GovCon market. So that's a very big driver for us, as we generate a fair amount of revenue of any quarter, as people expand the use of their existing applications and we've got a lot of new applications in the market that we now have the ability to go back and sell in to that installed base.

We did see some recovery and some strength in the conversion of the upgrade of people from legacy A&E apps to the Vision platform, so that was an important factor. We're also generating revenue from people upgrading from GCS, which is, if you recall that entry level application on the GovCon site to Costpoint and that was over the $1 million plus deal was, with somebody actually upgrading from GCS to the Costpoint suite.

Phil Rueppel - Wells Fargo Securities

Okay, great. Thanks. And sort of following up on that, you listed a whole host of new products you've introduced. Are those the type of products that are revenue producing meaning that existing customers will have to pay to move to some of them or are they mostly covered under software maintenance contracts?

Kevin Parker

They are almost entirely revenue producing. The only one that might not be is the release of Vision 6 and if you are on Vision you can upgrade division 6 as part of your professional maintenance agreement. But every single one of them other than that I listed there is an opportunity to go back in to that install base and sell them new applications to them.

Phil Rueppel - Wells Fargo Securities

Okay and my final question is just to clarify. It sounded like you are seeing, potentially some stabilization in the A&E segment and is it fair to say the government contracting business is sort of moving back towards a more normal period? It doesn't sound like we are there yet, but at least it's headed in that direction?

Kevin Parker

I would agree with both of those comments. I think on the A&E side, we saw a sense of stability. Q1 versus tremendous dislocation for a lot of people and just weren't really show whether where things going to head. I think we've hit bottom and I think there is a returning sense of stability. On the GovCon market, I think that we are seeing some good signs there. The pipelines continue to grow as I mentioned.

One of the things that we track is the recovery spending or the spending, the stimulus spending and we know that less than 10% of the dollars have actually left the federal government at this point of this 787 billion. The last time we tracked it only about 67 billion had actually been spend. So more and more that's going to come and I think 75% of it actually slated to come in fiscal 2010. So we still have a lot in front from our view.

Phil Rueppel - Wells Fargo Securities

Great. Thanks very much and a nice rebound in your business.

Kevin Parker



(Operator Instructions). Your next question is from the line of David Bayer with Cantor Fitzgerald.

David Bayer - Cantor Fitzgerald

I think I'd like to follow-up on that last question. It would appear the A&E market the vision market is still a tad soft. I'm so curious what sort of feedback are you getting from the customers there, in terms of, are there seeing any sense of uptick or is it still sort of a wait and see?

Kevin Parker

At the lower end of that market, they are not seeing much improvement, as them have with, you might discover as A&E firms with fewer than a 100 employees. In general, I think it's still a very challenging market. As we move up in the market in terms of the larger A&E firms. They are more global in nature. They are exposed to more things.

There is a sense of things sort of unlocking a little bit or loosening up in terms of their view of the future. We're seeing a couple of pockets of I think strong activity, the Canadian markets looks very strong and that Canadian economy is in much better shape from the US perspective.

They haven't had the credit crisis and we see a number of large Canadian firms continuing to grow, making acquisition, making decisions to move forward with things like that. We're seeing some activity in South Africa as well. So, and the larger global firms there is some sense of confidence, but at the lower end of the market probably not so much this year.

David Bayer - Cantor Fitzgerald

All right. Thank you.


(Operator Instructions). You have a question from the line of Gregg Speicher with Moss Creek.

Gregg Speicher - Moss Creek

Hey guys, good quarter. So starting at the user confidence and you've also had a quite a few months to talk to these customers. When do they really think, the stimulus will start helping them?

Kevin Parker

Well on the GovCon side, it's pretty vibrant already. There are a couple of hot segments of the government contracting sector and these are, just talking about our customers and maybe we could talk about how it affects us. There is a lot of activity in areas like cyber security, cyber intelligence, a lot of professional services going in to that market. And so it's a pretty vibrant market and there's a lot of M&A activity within that, that actually benefits us as customers have to grow through acquisition, they actually have to grow their cost point implementation as well. But they were really looking at 2010 as being the real time that the dollars are willing to start to impact them in the GovCon market.

In the A&E market they are also looking forward to that and whether it is infrastructure spending on things like high speed rail or all of the things that are coming in the coming year or two all of that will start to benefit them. They are just getting started with that, they are trying to figure how to win government contracts. Many of them have never done it before. But it is really not till the second half of this year and probably even more so in the first half of 2010.

And I also remember that some of these user conferences talking a lot of these customers that they are pretty able to shift their focus kind of to wherever the money is right. I mean, in the government contracting market a lot of the M&A activity sometimes is built around what experience do you have that I need and what contract vehicles do you have and to what agencies that I might be able to piggy back on to sell new services or expand my footprint in there so there is they can move pretty quickly.

In the A&E market a lot of the M&A activity seems to be more built around acquiring skills. So that we need people in a subcategory of the engineering market that are particularly good at water or environmental. And environmental quite, seems like it is recovering quite quickly here but it is really built around building the skill sets, so they are prepared to pursue some of this business.

Gregg Speicher - Moss Creek

Okay and last question. I know on the I guess on the sort of project management area, sort of in to it and NetSuite and a couple of others are trying to make head waves. Are you seeing any competitive changes at all or are you not seeing them at all?

Kevin Parker

Not really certainly, not in the A&E market that we see. We see them -- in the professional services market, I think we come up against NetSuite once in a while. Intuit is very, very low and some of our partners might be seeing that, but we don’t see them directly.


Your next question is from the line of Bryan McGrath with Credit Suisse

Deepak Panigraha - Credit Suisse

Hi, this is Deepak Panigraha on behalf of Bryan McGrath. Just first question I missed to capture that. How much was that from channels?

Kevin Parker

I think channels is about 15% of our license revenue.

Deepak Panigraha - Credit Suisse

Okay, so one more thing, could you give us some color like international market. How is that? Is there any kind of expectation, now since Vision 6 is out?

Kevin Parker

So let me go back, and I actually misspoke, the channel component was 11% this quarter. So a little bit lower than I said at 15%, and I'm sorry could you repeat the second question?

Deepak Panigraha - Credit Suisse

So, I was asking about like international market. Could you give us some color about how is the trends in the international market and especially when Vision 6 is out, do you see any kind of trends in international?

Kevin Parker

We do, and we're expanding our profile international, and we will talk about Canada as part of that international marketplace distinct from the US. As I said a moment ago, I think the Canadian market seems to be going very, very well, and across Canada there's a number of firms that we are engaged with and at the very high end that are looking for at Vision 6 as a potential solution, so we're encouraged about that.

The market, the overall pipeline in EMEA has increased very significantly over the course of the last year. It is a challenging market and UK market, in particular getting deals closed. I think people are engaged with us, they're just a little reluctant to make decisions right now, so we're making some changes to the way we go after that and potentially even changing the way we sell to close some of that business.

We are casting a wider net into places like South Africa, where we are seeing some opportunities. We are engaged for the first time in India as well with a potential deal.

Vision 6 is a platform that allows us to translate. All of this is happening with an English-only version of the product, and so with Vision 6 in the marketplace, with us having the ability now to do translations in a very short period of time, we are going to continue to focus on expanding that beyond where we are today.

The first areas that we’ll probably see the translated versions of Vision 6 really get adopted is within our installed base. There are many of them are multinational companies that have been waiting for a Spanish version, a French version, to run their Spanish and French speaking offices on. And so, there’ll be an opportunity to sell back into the installed base there as well.

Deepak Panigraha - Credit Suisse

Great. So, any color on the partner facts and are you able to – I mean, how is that sales through the channels right now. You said like 11%, but how do you see going forward?

Mike Cullen

Well, I think we’ve -- as I said, we’ve got 11% of the revenue there. They are probably more challenged than we are as a company in the sense that they are very focused on the low end, primarily in the professional services and the A&E market which is where -- we’re not seeing very strong signs of recovery just yet. And so, they’ve got probably the more challenging end of the business, and that’s just the nature of a partner community and partner channel. Some of them are doing very, very well and continue to grow. Some of them are not doing as well, and we’re evaluating whether we have the right partners or should make some changes there.


Your next question comes from the line of Corey Tobin with William Blair & Co.

Michael Howard - William Blair & Co

Hey guys, it’s [Michael Howard] for Corey. Congrats on a great quarter. As you talk about further cost controls, what areas are you targeting and whether you still see room to kind of trim down?

Kevin Parker

Well, we’ve been looking pretty hard at the way we think about offices in the company, and we’ve got a number of remote offices in an age of video conferencing and we’ve switched through an entire IP telephone network. Do we really need people in physical offices the way we've traditionally thought about them, so we've got an effort underway there to really look at our real estate portfolio and see if it makes sense to us.

We're trying to make sure we take advantage of the labor rate differential between our domestic operations and development. We now have nearly 200 people in the Philippines and that's a very significant increase. It's our largest site outside the US. It’s a very important part of how we think of ourselves as a company and we are looking at how do we leverage those very strong skill sets that we are developing overseas. And there's a very significant labor rate differential too. So, we're looking at those areas.

I think some of the things that we're looking out from the business process improvement, Mike talked a little bit about the acceleration of cash flow. So we are looking at a lot of our internal processes and if the company has opportunities to really significantly improve the way we do a variety of things, even simple mundane things like billing and things like that that we could streamline and drive some further cost out of the business.


You do have a follow-up question from the line of the David Bayer from Cantor Fitzgerald.

David Bayer - Cantor Fitzgerald

Just a quick question, obviously it seems like it was a rather short notice situation with Mark. I hope everything's okay with him but, how long do you think there will be replacement process might take?

Kevin Parker

I appreciate that. It was short notice and Mark felt that this was the time he had and as I said, he had some personal and family issues that required his attention. I think we are going to go after it right away. We are talking to our recruiting and our agencies as early as this morning to get the process started and we have some folks that we know here in town that we may reach out to. I would like to have somebody on board by this time next quarter so that we’ll move pretty quickly. Its not a long process that we want to take months and months to do. We should be able to do this pretty quickly.


You do have a question, a follow-up question from the line of Bryan McGrath from Credit Suisse.

Deepak Panigraha - Credit Suisse

This is Deepak Panigraha again on behalf of Bryan McGrath. One more about our mix of license in talks which is A&E. I don’t know what you meant there. Can you just something like what's the mix situation there?

Kevin Parker

I'll plus of numbers, I think the GovCon of an A&E license revenue was probably about 30% of the total.

Mike Cullen

20% of the total.

Deepak Panigraha - Credit Suisse


Kevin Parker

So A&E and Vision product was about 20% of the total.


We've reached the end of our allotted time for questions and that was the last question in queue.

Kevin Parker

Thank you very much everyone for joining us. We look forward to talking to you at the end of Q3.


And this concludes today's second quarter 2009 earnings conference call. You may now disconnect.

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