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Executives

Todd Kehrli – MKR Group

Todd E. Wille – President and Chief Executive Officer

Steven D. Bonham - Chief Financial Officer

Analysts

Don McKernan – Landoak Securities

[Marcel Hertz] – [Hertz] Capital Management

Nathan Schneiderman – Roth Capital Partners

Unify Corp. (UNFY) F1Q10 Earnings Call September 14, 2009 5:00 PM ET

Operator

Welcome to the Unify fiscal 2010 first quarter financial results conference call. (Operator Instructions) I would now like to turn the conference over to our host, Todd Kehrli with MKR Group. Please go ahead.

Todd Kehrli

Thank you operator and welcome everyone. Thank you for joint Unify’s fiscal 2010 first quarter financial results conference call. I am Todd Kehrli with the MKR Group, the investor relations firm for Unify. Presenting today are Todd Wille, President and CEO and Steve Bonham, Chief Financial Officer.

Before we begin, I would like to add that during the call management will make a number of forward-looking statements that involve risks and uncertainties, as well as assumptions that if proven incorrect will cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical facts could be deemed forward-looking statements including general economic conditions in the computer and software industries, domestically and worldwide, the company’s ability to keep up with technological innovations in relation to its competitors, products defects or delays, developments in the company’s relationships with its customers, distributors and suppliers, changes in price and policies of the company or its competitors, the company’s ability to attract and retain employees in key positions and the risks and uncertainties associated with the acquisition and integration of a significant business unit.

These and other factors that can cause events or results to differ from those expressed or implied by such forward-looking statements are described in our most recent report on Form 10-K, quarterly reports on Form 10-Q, as well as other subsequent filings with the Securities and Exchange Commission. We assume no obligation and do not intend to update these forward-looking statements.

Today’s call is being recorded and will be accessible on our website at www.unify.com in the Investor Relations section of the site. A replay of the conference call will be available starting approximately two hours after the call and will be available until September 21, 2009, at 11:59 p.m. You can access the replay by dialing 1-800-406-7325 and entering the pass code 4155692 followed by the pound sign. The international replay dial in is 303-590-3030.

At this time I would like to introduce Todd Wille, President and CEO of Unify. Go ahead, Todd.

Todd Wille

Thank you Todd. Good afternoon everyone and thank you for joining us on the call today. I will begin with a discussion of the tools, database and migration businesses. Then following Steve’s review of the financials I will go over our new content archiving business and overall strategy moving forward as well as what we expect for the remainder of the fiscal year.

Q1 has seasonally been our weakest quarter for the tools and database business and that was true again this year. However, after weathering the economic storm pretty well last fall and during the winter months we really felt the impact of the economic environment in Q4 and again now in Q1. As compared to the quarterly averages for last year we saw a 30% decline in the number of product deals and a nearly 60% decline in the amount of product revenues booked during Q1. Thankfully, maintenance revenues remained consistent with high renewal rates and it has been a very strong Q1 bookings quarter for the Composer portfolio at $4.7 million which will generate additional revenues for the remainder of the year.

During Q1 we saw our tools and database customers continue to delay product purchases or reduce their buying patterns back to multiple, just in time small deals versus the larger deals we experienced in previous years. We have always stratified the orders by deal size for this business as less than $10,000; $10,000 to $20,000; $20,000 to $100,000 and over $100,000. For deals under $20,000 we were down about 25% in both the number of deals and in revenues.

However, the deals over $20,000 are much more significant as we averaged 17 plus deals representing nearly $1 million in revenue per quarter last year. In Q1 of this year we only had four deals for $245,000 representing a decline of over $750,000 from our averages. In addition the decline in the Euro reduced our revenue by another approximate $200,000 and we know some customers delayed product purchases as a result of upcoming new product releases which are scheduled to begin in September, this month.

Despite these challenges we added 15 new software customers the first quarter and more importantly we are seeing an improvement at the midpoint of Q2 having booked 50% more deals and 30% more revenue than at the midpoint of Q1. This early uptick and the release of new versions of Team Developer Report Builder and our newest product Q scheduled for this month we are cautiously optimistic about our core software business for the remainder of fiscal 2010.

In our migration solutions business our first quarter revenue results were impacted by customer delays that pushed project revenue into the second quarter. Revenues for the first quarter were $250,000 as compared to more than $500,000 in Q1 last year. However, our Q1 bookings were very strong at $4.7 million including $4 million in Composer COBOL orders which resulted in a $5.2 million revenue backlog. We expect to recognize the majority of this revenue over the next two quarters which should make up for the shortfall in Q1.

During fiscal 2009 we successfully expanded the migration portfolio beyond the Composer Notes offering. We had Oracle Forms and Team Developer migration solutions as well as COBOL migration solutions all of which significantly expanded our addressable market opportunity.

Let me just briefly discuss the mainframe migration solutions. As the population of mainframe programs continues to retire over the next several years organizations are evaluating how to move their applications to modern code and relational databases. Our initial focus has been on penetrating the government sector as it represents an extremely large number of legacy mainframe applications and a high rate of retirement among IT professionals. Additionally, many state agencies have received federal stimulus money to modernize their aging systems.

We believe there is significant market potential as there are over 10,000 mainframes still in use with tens of thousands of mainframe applications still in production. The Composer COBOL solution automates the conversion of mainframe applications thereby reducing the risk and often provides a cost savings pay back in 12-18 months by transitioning these legacy applications [on] systems that have very high maintenance and integration costs.

The difficult economy has delayed several projects but for other projects it has become a catalyst for moving forward based on the cost savings that migration delivers. This has resulted in a growing pipeline for our Composer Forms and Sabertooth migration solutions as well as mainframe solutions. We are extending our endorsed vendor status with Oracle in new regions throughout the world and we have a strong roadmap of new products that enable companies to modernize Oracle applications while remaining on the Oracle and Java platforms. With a $5.2 million backlog and a growing pipeline we expect strong year-over-year growth from our migration solutions portfolio.

I will discuss the new content archiving business as well as our expectations for the remainder of our fiscal year after Steve has reviewed our financial results. Steve?

Stephen Workman

Thank you Todd. Good afternoon everyone. Total revenue for the first quarter was $4.5 million compared to $5 million in the first quarter of fiscal 2009. Software license revenue was $1.4 million compared to $1.6 million in the first quarter last year. Services revenue was $2.9 million compared to $2.9 million in the year-ago quarter and migration solutions revenue was $253,000 compared to $519,000 in the same quarter last year.

Gross margin for the first quarter was 87% compared to 81% in the first quarter of fiscal 2009 as a result of the startup costs of the archiving division which carries a gross margin in the range of 70-75%. Looking forward we expect our gross margin to continue to be in a range of 85-90%.

Loss from operations was $2.3 million compared to income from operations of $437,000 for the first quarter last year. The primary factors impacting operating expenses include the AXS-One acquisition deal and the [inaudible] costs and the revenue shortfall from the software migration businesses.

GAAP net loss was $2.2 million or $0.27 loss per share compared to net income of $391,000 or $0.05 per share in the first quarter of fiscal 2009. Non-GAAP net loss for the quarter was $874,000 or $0.10 loss per share compared to non-GAAP net income of $713,000 or $0.09 per share in the same quarter of last year. Total cost of sales for the quarter were $594,000 which is up from $461,000. Product development costs increased to $1.4 million from $748,000 a year ago. The increase in costs was the result of our acquisitions of CipherSoft and AXS-One since Q1 of last year.

Selling, general and administrative expenses increased to $4.8 million compared to $3.4 million in the year-ago quarter also a result of the acquisitions of CipherSoft and AXS-One. In our press release issued earlier today references were made to both GAAP and non-GAAP financial measures relating to operating income, net income and earnings per share. The GAAP income statement includes in the listed expenses costs related to amortization of intangible assets, stock based compensation expense and acquisition related expenses which are excluded from the non-GAAP financial measures.

As a result, we have provided in the press release a complete reconciliation of these non-GAAP financial measures to the applicable GAAP measures. Although not a substitute for the GAAP presentation, we feel that the non-GAAP information allows for meaningful year-over-year comparison and fairly identifies the actual operating results of the company. It is this non-GAAP information that we use internally to monitor our financial performance.

Some highlights of the balance sheet are cash and cash equivalents of $3 million as of July 31, 2009 compared to $6.1 million at April 30, 2009. Cash used from operations was $3.1 million for the first quarter. Of this amount over $2.2 million was used to pay deal costs and accumulated payables associated with the AXS-One transaction which closed on June 30, 2009. With the majority of the AXS-One accumulated payables and deal costs now paid coupled with the collection of a couple of very large receivables our cash balance has increased since the end of Q1.

During the quarter the company also made payments of approximately $200,000 for principle interest. Net accounts receivable on July 31, 2009 were $7.5 million versus $4.5 million as of April 30, 2009. Deferred revenue on July 31, 2009 was $9.8 million compared to $5.6 million as of April 30, 2009. The increase in deferred revenue was related to the close of a large services project in Q1 along with maintenance related to a large license deal that was also closed in Q1.

Our total debt outstanding was $2.5 million as of both July 31, 2009 and April 30, 2009. Our headcount as of July 31, 2009 was 143 employees worldwide compared to 72 a year ago. Our current headcount includes 54 employees from the AXS-One acquisition and 10 from our acquisition of CipherSoft in January of 2009.

Earlier today we filed with the SEC an extension to file our Form 10-Q for the quarter ended July 31, 2009 to allow us additional time to complete our analysis of the purchase accounting requirements for the acquisition of AXS-One.

This concludes my prepared remarks. Now I will turn the call back over to Todd.

Todd Wille

Thanks Steve. Now let’s discuss our newest business segment which we call our integrated content archiving, compliance and e-discovery software segment. We acquired this business from AXS-One on June 30, 2009. While the first quarter only had one month of AXS-One operations we are pleased to report $1.1 million in revenue. Since the acquisition we have worked hard to build the sales pipeline and rekindle strategic partnerships.

One example of our early efforts was a strategic OEM license agreement we signed towards the end of July. The customer agreed to a multimillion software licensing fee plus royalties for a period of time following the first sale from the customer’s integrated solution. We recognized approximately $700,000 in the first quarter and expect to recognize the remainder of the revenue in the third quarter.

We see this type of OEM licensing arrangement as a way to generate revenue from a new market segment. While this deal was opportunistic, we believe it is possible to close additional OEM types of license agreements in the future.

Let me briefly review the archiving market. Within corporations there is a growing demand for solutions that address e-discovery, the growing amount of data in the enterprise and compliance and technology risk. The content archiving platform from AXS-One has an unmatched, 15 year track record addressing electronic stored information (NYSE:ESI), in an archive that enables the management, retention and disposition of disparate data types for legal discovery, case management, regulatory and compliance requirements. This is a market with significant growth potential according to various industry analysts. They are beginning to tout that every organization will need software to manage their electronic records in the next several years as a result of business requirements, regulatory compliance or legal risk management.

The archive platform built for AXS-One is recognized as the leading archive for Lotus Notes and Domino customers helping those customers address storage needs related to Lotus Notes email and business side of download databases. To that end we are underway with our cross-selling strategy into the Lotus Notes community leveraging our large prospect base and Notes market expertise. The leading product in this rapidly growing market, we are excited about the growth of this new business segment. We have added to the sales team and have reengaged with a number of industry leading companies to pursue strategic partnership opportunities. We have been meeting with the customer base to learn their requirements and produce a roadmap that addresses their needs as well as market needs.

While AXS-One had an impact on our balance sheet as we paid down deal costs and Q1 payables during the first quarter the business was nearly break-even on a non-GAAP net income basis. On a go-forward basis with some investment in growing this business we believe the content archiving business can be non-GAAP profitable with approximately $500,000 in new license revenue per quarter. We are very excited about this new piece of our business and look forward to reporting on our progress in the quarters to come.

We have guidance for the remainder of fiscal 2010. We are reiterating the guidance we produced and provided in our fourth quarter conference call back in July. We continue to expect revenue to be in a range of $23.5-28.5 million and non-GAAP net income in a range of $2-4.5 million. Lastly, while we do not provide quarterly guidance I would like to produce a little color since as of today we are at the midpoint of our second quarter.

We expect second quarter revenue to be up year-over-year as we see all three of our business segments improving this quarter. In particular our migration revenue backlog of $5.2 million gives us confidence and as of today we have substantially completed the acquisition integration so that the majority of the transition costs will be behind us by the end of the second quarter.

From an overall company bottom line perspective we expect a substantial improvement in our non-GAAP operating results for the remainder of this fiscal year and our intent is to return to non-GAAP profitability as quickly as possible.

In closing, while we are not pleased with our first quarter results we are encouraged by the future prospects for our three business segments. We are already seeing improvement in our core software business and with a strong backlog in our migration solutions business we continue to expect strong year-over-year growth in this segment. In the content archiving business we are excited to be in talks with companies looking for Lotus Notes, e-discovery and risk management archive solutions and look forward to reporting our progress in the near future.

Now I would like to turn the call back over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Don McKernan – Landoak Securities.

Don McKernan – Landoak Securities

I want to go back over the bookings in the quarter. You said it was $5.2 million? Could you give me that break down again?

Todd Wille

The bookings I believe were $4.7 million and the backlog, so the carry in backlog and new bookings less revenue was $5.2 million going out of the quarter.

Don McKernan – Landoak Securities

Then did they split it up amongst Composer?

Todd Wille

That is all in Composer Solutions.

Don McKernan – Landoak Securities

When does the new Q product launch?

Todd Wille

End of this month.

Don McKernan – Landoak Securities

Regarding AXS-One you had to pay down some payables. I guess there was quite a bit of that to take care of. All that is current? There are no lingering issues there?

Todd Wille

I would say a vast majority of it. Yes. We have got it caught up. There was a tremendous amount of payables that we assumed. We knew about it and expected it. We have dealt with those. Now we are pretty much back to operations as normal.

Don McKernan – Landoak Securities

What was something about $700,000 in Q1? I didn’t catch that. What was that?

Todd Wille

The large OEM license we signed towards the end of July was a multimillion dollar opportunity and we were able to record $700,000 of software licenses in the month of July. The balance of that will be in the third quarter we expect.

Don McKernan – Landoak Securities

It sounds like things are picking up. The first quarter was what it was but congratulations on all the new stuff going forward.

Operator

The next question comes from the line of [Marcel Hertz] – [Hertz] Capital Management.

[Marcel Hertz] – [Hertz] Capital Management

What kind of quarterly SG&A expense run rate are you targeting once you have AXS-One fully integrated?

Todd Wille

That is an excellent question. I don’t know if I have a really good answer for you yet. We are still working on that model. As you can see from our numbers SG&A was pretty significant here in the first quarter. We believe we can certainly work on taking that number down. It goes up automatically because we will have the AXS-One costs in there for three months in the second quarter versus only one month in the first quarter. We will be able to then eliminate all the transition costs and the other deal costs. So it will be down we believe over time and certainly by the second half of the year is our expectation.

[Marcel Hertz] – [Hertz] Capital Management

Looking at your database license revenue without AXS-One, how much revenue did you generate in the quarter?

Todd Wille

For the product licenses it was about $700,000.

[Marcel Hertz] – [Hertz] Capital Management

This economic backdrop steadily declined over the past three quarters. When talking to your customers about those particular products do you think this trend will continue for a little while longer or have we seen the low point yet?

Todd Wille

Of course that is an excellent question. It certainly declined in the fourth quarter and then declined again in the July quarter. We are feeling more optimistic today than we were certainly in the middle of June halfway through the first quarter. The April quarter ended, most of the business we actually booked in the early part of that quarter so there was not much of a flurry at the end of the quarter. Our year-end as we normally expect certainly gave us some concern. The first of the quarter, May and June, started out very, very quiet. So we were not surprised at the results. We are happy. Normally August is a tough month for us and August turned out to be a pretty decent month from that perspective with Europe of course primarily all being on vacation in the month of August.

We are more optimistic than we were in the middle of Q1. We are certainly not feeling ecstatic by any stretch of the imagination. We feel there is a little bit of an upbeat and uptick. We are hopeful we have seen a bottom and are bouncing back upwards. Probably the best news is the maintenance and so forth have continued to be solid and our big core customers, our ISVs that buy products from us every quarter have been a little bit soft in the fourth and first quarters here. They are telling us their businesses are picking up so when they pick up we pick up. So we see a little glimmer of light and believe this is going in the right direction.

[Marcel Hertz] – [Hertz] Capital Management

I agree. We do hear some better news out of the big customers. I see that Oracle is doing better and I was wondering your CipherSoft product for Oracle Forms, how is the pipeline developing for you there and how are the bookings looking there?

Todd Wille

That certainly was one of the bright spots I would say for the business as well. From a bookings perspective it was down a little bit from the fourth quarter. We had an excellent fourth quarter which was the first quarter we owned them. It was down a little bit in Q1 but not substantially down. Just $100,000 or so down. We have had a lot of excellent work with Oracle Corporate at the field level and every major region here in the West and we are working our way to the East. We view that as part of the business that is definitely accelerating.

We have Oracle World coming up in October which is their big annual show. We have a good sized presence there. We have some new products that we are going to be unveiling there which we think is going to be quite impressive to both the Oracle Forms application customers and frankly Oracle’s own internal developers and their R&D guys. So we have some things we believe are going to be quite positive with both groups; corporate and the customers.

[Marcel Hertz] – [Hertz] Capital Management

I was wondering about your Composer for Lotus Notes product and how your alliance with SAIC is progressing. Obviously that is a very large company and I don’t think they would sign up with you for a handful of licenses. I was wondering what is happening there?

Todd Wille

Great question. You are absolutely right. They are a significant company and only work on significant projects. The opportunity we have with them is one of the federal agencies and it is percolating very nicely. It is moving in the right direction. It is a significant opportunity and therefore slow. We are very excited about some time before this fiscal year is up there can be some real fun news to report with everyone regarding that opportunity. It is just a matter of when.

Operator

The next question comes from the line of Don McKernan – Landoak Securities.

Don McKernan – Landoak Securities

I wanted to follow-up on Marcel’s last question there on the SAIC. Do you have any other licensing deals in the works for Notes like you have with SAIC?

Todd Wille

We do actually. It is kind of interesting. After really being quiet for May and June and most of July all of a sudden in August and September, the first 15 days of this month or 14 days we have 4-5 new similar sized systems integrators that have kind of come forward. We just released the product as a licensable product and it really just became available really at the end of April. So it has only been today 4.5 months and the people have found us in the last 45 days here so we do have some other proof of concepts and evaluations going on. We have come up with kind of a jump start program to assist those folks to be able to analyze information quicker and see the technology, etc.

We are hopeful that there is more great news coming on that front as well. We knew we were doing the right thing to make the product licensable and we finally got that done at the end of last fiscal year. I hope that certainly long before the end of this fiscal year, maybe even before the end of Q2 we have some more fun news to share with folks on that front.

Don McKernan – Landoak Securities

You are still pursuing direct business right? Doing pilots and proof of concepts to do it in-house?

Todd Wille

We are but not that many to be honest with you. We certainly have the pipeline we had before but we have really slowed down lead generation and are really treating that as much more of an opportunistic business as we are working on both the archiving business which is being sold to Lotus Notes customers where we of course have our expand on those and so forth there. We are making more of a portfolio on the Composer front which is talking about all of our solutions including the Composer Notes solution.

Operator

The next question comes from the line of Nathan Schneiderman – Roth Capital Partners.

Nathan Schneiderman – Roth Capital Partners

I missed a little bit of the call so excuse me if I am asking a question that has been asked before. I was curious if there were any items that were of a one-time nature that were in your income statement cost structure this quarter that were beyond the $660,000 that you called out in the pro forma acquisition related?

Todd Wille

There are. The $660,000 was kind of the high level, easy to think of transitional costs. There are other costs we are incurring still as we are trying to work on the processes, the departments and the way things are going to be structured and so forth. We expect there will be some more costs that will be addressed as we go forward. I think we hit the big points. It wouldn’t be substantially larger. It really just is a factor of our revenues were down and therefore flowed directly to the bottom line in a negative way.

Nathan Schneiderman – Roth Capital Partners

On the headcount you ended with a little more than 140 employees. Is that going to be the go-forward level or are you taking that a step function down after the acquisition?

Todd Wille

We are taking a look at that as we speak. We believe it will be modified a little bit but for the most part we are just trying to finish the acquisition integration which we are feeling pretty comfortable with and now we need to work through the transition of all that.

Nathan Schneiderman – Roth Capital Partners

You reference some work with Oracle Corporate. Could you be a little more specific about it and the other Q product you were referencing maybe a little more detail on that?

Todd Wille

On the Oracle Corporate front the opportunity there is really Oracle Forms customers, customers that have built applications with Oracle Forms, the vast majority of those at about 80% of them are on older versions of Oracle Forms. The opportunity Oracle Corporate or the field sales guys are primarily interested in using our solution helps those customers move forward to 10G or a newer release of Oracle Forms or to move to the Oracle Java platform including ADS or the standard Java implementation.

Either way they are interested in working with us to help those customers move forward which brings those customers forward and are new license opportunities for those sales guys. So we are very much aligned with the field sales organization of Corporate. The other part of those discussions with Oracle is we are also working closely with the R&D teams, particularly I believe the Apex development team which is kind of a new, rapid application kind of technology that Oracle is selling and we have been able to help Oracle Forms customers convert to the Apex technology as well which according to the Apex R&D sales and product management folks are very excited about the help to get those new technologies off the ground and into the field.

So we are well aligned with them as well. We are seeing a lot of traction and we have got some things planned for Oracle World that I mentioned that I think will be real positive. So that is a lot of potential there. An awful lot of potential.

The other item I think you asked about was the new product called Q. Q is really a reincarnation of a reporting analysis tool that was a GUPTA product way back when that we have brought back and have modernized and rebuilt. We see it being very, very powerful for our Team Developer and single base customers. Many of the customers with whom we did some surveys in the last year were still using a product even though it was barely functional because it was 8 or 9 years old. We have updated it. We believe we will be able to sell it to that customer base. It is a pretty neat little product for user based reporting and analysis. So we don’t know exactly what the non-existing customer base will think about it but we know it can make money and get a nice return on just an internal base and if we get a lot of it with the new market opportunity even better. We are holding our breath to see what happens there.

Operator

We have no further questions at this time. Ladies and gentlemen this concludes the Unify fiscal 2010 first quarter financial results conference call. If you would like to listen to a replay of today’s conference please dial 800-406-7325 or for international participants 303-590-3030 and enter the access code 4155692. Thank you for your participation. You may now disconnect.

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Source: Unify Corp. F1Q10 (Qtr End 07/31/09) Earnings Call Transcript
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