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Executives

Linda Snyder - Senior Director, Investor Relations

Godfrey R. Sullivan - President, Chief Executive Officer, Director

Robin L. Washington - Chief Financial Officer

Analysts

Adam Holt - JP Morgan Securities

Steven Ashley - Robert W. Baird

Paul Steep - Scotia Capital

Jason Maynard - Credit Suisse

Christopher Sailer - Goldman Sachs

Frank Sparacino - First Analysis

David Rudow - Piper Jaffray

Robert Schwartz - Jefferies & Company

John Torrey - Montgomery & Co.

Peter Goldmacher - Cowen & Co.

Adam Holt - JP Morgan Securities

Ed Maguire - Merrill Lynch

Vikram Churamani - Lehman Brothers

Atul Bagga - ThinkEquity

Yun Kim - Pacific Growth Equities

Christopher Sailer - Goldman Sachs

Hyperion Solutions Corporation (HYSL) F1Q07 Earnings Call October 19, 2006 5:00 PM ET

Operator

Good day, everyone, and welcome to the Hyperion Solutions first quarter fiscal year 2007 earnings conference call. Today’s conference is being recorded. For opening remarks and introductions, I would like to turn the call over to Linda Snyder, Senior Director of Investor Relations. Please go ahead, madam.

Linda Snyder

Thank you. Good afternoon. Thank you for joining us today as we discuss our results for our first quarter fiscal year 2007. Slide 2, please.

During today’s call, we may make projections or other forward-looking statements, guidance, market size, future events or future performance for our company. I caution you that these statements are only predictions and actual events or results may differ materially.

I refer you to the documents we filed with the SEC, including Form 10-K. These documents identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

The company undertakes no obligation to update the forward-looking statements to reflect future events or circumstances.

Today, we will also discuss non-GAAP financial measures. For a quantitative reconciliation of those measures, please refer to our earnings press release posted in the investor relations section of our website at www.hyperion.com, where you will also find the slides we are using on this call.

On our call today are our President and CEO, Godfrey Sullivan, and our CFO, Robin Washington. They have prepared remarks and will then be available for questions.

We are going to end today’s call promptly at 3:00 p.m. Pacific. We ask that you limit yourself to one question each, so that we can give everyone a chance to participate today. If we have time left after completing the first round of questions, you may queue up again to ask an additional question.

Before we begin, I want to call your attention to the analyst day we will be hosting on the morning of December 1st here at our California headquarters. We will send you more information regarding the agenda and registration. You may contact Nick Taber or me directly with specific questions.

Now, I will turn the call over to Godfrey.

Godfrey R. Sullivan

Thank you, Linda. Welcome, everyone. Thanks for joining us. Slide four, please.

We are very pleased to have completed another strong quarter. We delivered double-digit license revenue growth, driven by the continued success of System 9. Business was strong across all geographies and all revenue streams.

License revenue increased 13% year over year, to a Q1 record of $68 million, and total revenue grew 17%, to $199 million. Each of our three geographies generated double-digit license revenue growth. Our APAC team had a particularly strong quarter, producing license growth of 27%.

System 9 continued to gain momentum, and generated more than 70% of our Q1 license revenue. We posted 27 transactions over $500,000, and nine over $1 million.

In addition to this strength at the high-end, we also had a healthy transaction mix across all price points.

These strong results are even more encouraging, because we delivered them during our Q1, a quarter that is generally our weakest seasonal period.

System 9 is the management system for the global enterprise. Our customers depend on Hyperion to better understand their business with a complete view of all performance drivers, to gain the ability to report the past, to monitor the present, and to anticipate the future, and to increase confidence in their numbers with a single version of the truth that is accurate and reliable.

Transaction systems improve operational efficiency and help organizations run their business, but by design, they suffer from being process-driven and inflexible to change. While they generate large amounts of valuable data, most organizations have multiple transaction systems that are not integrated, making access to and sharing of this data complex and difficult.

Traditional business intelligence solutions allow companies to understand the past and monitor the present, but they do not enable organizations to look ahead and plan for the future. They also lack support for management processes like modeling, planning and analysis. It is a critical part of the business planning cycle.

Only Hyperion delivers the management system for the global enterprise. One year after its introduction, System 9 continues to be the industry’s only management system that integrates market-leading financial applications with a world class BI platform.

We will continue to define this market and will drive innovation even further in the coming year. Slide 5, please.

On the organization front, I am delighted to welcome Jon Temple as Executive Vice President of our Worldwide Field Organization. Jon is well-known as one of the strongest executives in the BI market. He brings more than 20 years experience in the software industry to Hyperion. Most recently, he was President and Chief Executive Officer of Above All Software, a privately held firm providing business integration software. Prior to that, he spent 12 years at Business Objects in a variety of executive sales and operational leadership positions, most recently as President of the Americas.

In his new role, Jon joins our worldwide field organization, including all customer-facing and revenue-generating operations. Jon reports to me and is a member of our executive management team. We are delighted to welcome Jon to the Hyperion team.

Now I will turn the call over to Robin.

Robin L. Washington

Thank you, Godfrey. Good afternoon, everyone. In my comments today, I will summarize our financial results for the quarter, provide you with an update on our stock repurchase program, and conclude with our guidance.

In my discussions, all of my comparisons will be year over year, unless I specify otherwise. Slide 7, please.

Hyperion achieved excellent Q1 results. Total Q1 revenues grew 17% to a Q1 record of $199 million. License revenue grew 13% to $68 million. Maintenance revenue increased 15%, and reached an all-time high of $90 million, and consulting and training revenue grew 28% to $41 million.

Each of our three geographies executed very well and delivered double-digit license revenue growth. The Americas increased license revenue 12% and grew total revenue 18%, but EMEA team recorded 10% license revenue and a 15% increase in total revenue. Asia-Pacific delivered 27% license revenue growth and a 9% increase in total revenue. Slide 8, please.

On a constant currency basis, we had a benefit in EMEA and a slight headwind in Asia-Pacific. Excluding the impact of foreign exchange fluctuations, license revenue would have increased 11%, compared to 13% reported; maintenance and services revenue would have increased 17%, rather than 19%; and total revenue would have grown 15%, compared to 17% reported. Slide 9, please.

Turning to our key operating metrics, we closed 27 transactions over $500,000, compared to 15 last year, and nine transactions over $1 million compared to six last year. This is the highest number of large transactions we have reported in a Q1, and the second highest in our history.

Our average selling price was $145,000, an increase of $24,000 over last year and down only $3,000 from our all-time high in Q4.

Hyperion System 9 continues to gain momentum in the marketplace. Consistent with the past three quarters, it drove many of our large transactions, including all of our top 10 transactions, and more than 70% of our license revenue across all geographies. While a majority of these sales were to existing customers, two of our $1 million plus transactions were System 9 sales to new customers.

Our new customer acquisition continues to be strong, with 272 new customers. Consistent with recent quarters, the vast majority of new customers bought our business intelligent software.

In regard to our channel partnerships, we generated $12 million, or 18% of our licensed revenue through our partners. Keep in mind that this does not reflect any influence transactions, where we work with partners but ultimately contracted directly with the customers.

Our overall partner ecosystem remains strong, and partners continue to play a key role in our sales cycle. No single partner represented more than 10% of total revenue during the quarter. Some of our key performers included IBM, Immix Technology, and TopDown Consulting. Slide 10, please.

Our gross margins for license revenues declined due to higher third-party royalties and the amortization of intangible assets associated with the UpStream acquisition. Gross margins for maintenance and services declined as a result of increased contract staffing to support higher business volumes.

Turning to our operating expenses, sales and marketing expense increased 10% on a GAAP basis and 9% on a non-GAAP basis, due primarily to incremental commission expense associated with higher revenue and investment in our field organization to increase our selling capacity.

R&D expense increased 8% on a GAAP basis and 7% on a non-GAAP basis, due to our investment in off-shore R&D contracting support.

G&A expenses increased 43% on a GAAP basis, and 51% on a non-GAAP basis, primarily due to litigation and settlement expenses of $4.2 million for our patent cases. Going forward, we expect G&A expenses to decline as a percentage of revenue to the 8.5% to 9.5% range.

Our operating margin, measured on a GAAP basis, was 8.2%, compared to 10.5% last year. On a non-GAAP basis, charges for deferred maintenance revenue write-downs, stock-based compensation, restructuring charges, and the amortization of intangible assets are excluded from our operating results.

Our non-GAAP operating margin was 14.6%, compared to 16.4% last year. Both GAAP and non-GAAP operating margins include a 2.8% negative impact from our litigation and settlement expenses.

Our Q1 effective tax rate on a GAAP basis was 39.8% and 37.9% on a non-GAAP basis, consistent with the guidance we provided in Q4.

EPS on a GAAP basis was $0.20 compared to $0.22 last year. EPS on a non-GAAP basis was $0.34, compared to $0.33 reported last year. These results also include the one-time charge for the settlement of litigation of $0.04 per share. Slide 11, please.

Now turning to cash flows and other balance sheet items, we generated $24 million in cash flows from operations in Q1. Cash and short-term investments totaled $436 million, and deferred revenue came in at $171 million, both flat compared to last quarter. DSO was 64 days, an improvement of 9 days from Q4. Slide 12, please.

During Q1, we repurchased 870,000 shares of Hyperion stock at a weighted average price of $28.74 per share. Total cash used was $25 million. We have now repurchased $60 million of the $100 million stock repurchase program that our Board approved. Slide 13, please.

Now I will address our guidance. For Q2, we expect total revenues to be in the range of $210 million to $215 million. On a GAAP basis, which includes the impact of stock option expensing, we expect Q207 EPS to be in the range of $0.26 to $0.30.

We expect non-GAAP EPS to be in the range of $0.41 to $0.45.

This assumes diluted shares outstanding of 59.7 million, a GAAP tax rate of 40.2%, and a non-GAAP tax rate of 38%. As we prepared our guidance, we assumed a license revenue growth rate of high-single to low-double-digits, and an exchange rate of $1.27 per Euro.

Consistent with our prior practice, our non-GAAP guidance excludes the amortization of purchased intangible assets and equity-based compensation expense. We have provided a reconciliation of the differences between GAAP and non-GAAP earnings in our earnings press release, which is posted in the investor relations section of our website. Slide 14, please.

In summary, we are very pleased with our results and continued success of Hyperion System 9 in driving double-digit license revenue growth. We generated meaningful cash from operations and continued our stock repurchase program. Our balance sheet continues to be strong. Going forward, we will continue to focus on gaining market share through profitable revenue growth, as customers increasingly choose Hyperion as the management system for the global enterprise.

Now, I will turn the call back over to Godfrey.

Godfrey R. Sullivan

Thank you, Robin. Slide 16, please.

Turning to our major Q1 customer wins, a key BPM standardization transaction this quarter was with the University of Texas Medical Branch, a major academic health center. An existing Hyperion customer, UTMB will migrate their full suite of products to the System 9 environment to leverage its centralized security, user management, and its unified workspace.

Every quarter differs in terms of product strength. This quarter reflected typical September quarter seasonality with strong demand for our planning and budgeting solutions. A major planning customer win was with Constellation Brands, a leading global beverage producer. They chose System 9 Planning as their enterprise wide forecasting and planning solution to keep pace with their rapid growth. Hyperion partner Deloitte Consulting will manage the implementation.

Another planning customer was Marathon Oil, the fourth-largest U.S.-based energy company. They selected System 9 Planning, Essbase, and Strategic Finance to improve their strategic planning, field level forecasting, operational forecasting, and analysis. Key to the selection of Hyperion was our partner, MarketSphere.

A major financial data quality management and System 9 Financial Management customer in Q1 was Sodexho Alliance, a leading provider of food and facilities management services.

Our data quality solution helps finance organization eliminate data integrity risks associated with collecting, mapping, verifying, and moving critical financial data across the entire organization.

Sodexho is migrating to System 9 to help with Sarbanes Oxley compliance. Hyperion partner Parson will carry out the implementation.

Another customer migrating from Hyperion enterprise to System 9 financial management was Alcan, a leading global materials company. Alcan’s success with their existing Hyperion implementation, plus the benefits of System 9, were key factors in their decision. Hyperion partners Accenture and the Goal Getters were selected to assist with the implementation, along with Hyperion's consulting group.

Q1 was also another strong quarter for enterprise analytics. UBS, the investment, banking and wealth management firm, upgraded to System 9 Essbase analytics. They will roll it out to 500 finance and sales users worldwide, and have plans to expand it to thousands of users in the next few years.

We are seeing continued strong momentum with Hyperion master data management. Anadarko Petroleum purchased Hyperion MDM to improve the efficiency of managing their master data across their Essbase analytic and SAP transaction environments. Hyperion partner Answerthink will assist with this implementation.

Our BI business is strengthening, as we are competing and winning in BI transactions. A major BI enterprise adoption win was with Cash America International. They will roll out Hyperion dashboards for analysis and performance managing in their regional offices, and in all their stores.

They also purchased Hyperion MDM for point of sale synchronization and hierarchy management in their planning and Essbase analytics environments. Cash America selected Hyperion for System 9’s integrated architecture and completeness of vision. Slide 17, please.

On the development front, we plan to announce Hyperion System 9 version 9.3 on October 30th, with general availability occurring within 90 days after the launch. This release will provide powerful new capabilities in financial applications, BI, and data management, including:

  • BPM Architect, a new development environment that ensures alignment between planning scenarios, financial and operational plans, and financial consolidation processes;
  • A new capital expense planning module within System 9 Planning, for helping plan the acquisition, life cycle management, and retirement of capital assets;
  • Enhanced offline planning, that provides users with more advanced modeling capabilities while disconnected from the network;
  • Enhanced reporting and visualization in Smart View for office; and
  • Data integration management, a new module that leverages Informatica’s power center technology to integrate Hyperion applications with transaction systems.

System 9.3 also features support for Google’s one box for enterprise, a feature of the Google search appliance. This new search capability will access not only BI related dashboards, reports, metrics, and so forth, but unlike our competitors, will also access financial applications' business content, such as business rules, calculations, annotations, and forms that enable BPM.

All of this information will be available through a single, Google-powered, integrated search window. Slide 18, please.

On the marketing front, Hyperion was once again named the revenue leader for worldwide business performance applications by market research firm IDC. Hyperion leads the space, with 19% market share, more than twice the nearest competitor, according to IDC’s estimates for calendar year 2005.

Our OEM team demonstrated the power of our BI platform by winning three highly competitive OEM partnerships for reporting and analytics. These competes involved replacing the existing BI tools providers.

Four Hyperion customers captured the Computer World BI Perspective Awards, and a fifth earned an honorable mention for best practices in BI. These customers were BNSF Railway, Chicago Mercantile Exchange, IBM, Rensselaer Polytechnic Institute, and Helzberg Diamonds. Congratulations to our customers.

As part of our BI demand generation activities, we sponsored the CIO 100 Symposium, a three-day invitation only event, which brought together about 400 CIO and senior level IP decision makers. We also co-sponsored the World Business Forum in New York, an event that grew an audience of 4,000 senior executives from 37 countries to hear leadership strategies from renowned global leaders, such as Bill Clinton, Jack Welch, and Rudy Giuliani. Slide 19, please.

In summary, we are very pleased with our results and our progress. We generated double-digit overall license growth, double-digit license growth in all three geos, double-digit growth in our three revenue streams -- license, maintenance, and consulting -- and record maintenance revenue.

We saw continued momentum for System 9 and broad-based product demand, with particular strength in planning and analytics. Our BI business is strengthening. We recorded the highest number of large transactions ever in a Q1, and our $145,000 ASP was the best ever in a Q1.

New customer acquisition continues to be strong, driven by our BI platform, and we have hired a proven industry veteran to lead our field organization, and we are really excited about the debut of System 9.3 coming in January.

In closing, I want to thank our customers, our partners, and our employees for their tremendous support. I hope to see all of you at our analyst day on December 1st, where you will have the opportunity to meet Jon Temple, the rest of the Hyperion executive team, and hear a lot more about our product roadmap.

Thank you for joining us today. Operator, we are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions)

We will take our first question from Adam Holt of JP Morgan.

Adam Holt - JP Morgan Securities

Good afternoon, and congrats on a solid first quarter. My first question has to do with the System 9 upgrade. If you were to look at your installed base currently, how many people would you say have upgraded to System 9, and how should we be thinking about the penetration of the installed base opportunities as we get into the 9.3 release?

Godfrey R. Sullivan

I do not have exact metrics for you off the top of my head, but I would have to think that we have probably sold between 500 and 1,000 System 9 licenses, and I would think that at a rough guess, our installed base penetration is in the 5% to 10% range. Robin is telling me she thinks it is more like 8% to 10%, so in that range.

Operator

Thank you. We will take our next question from Steven Ashley of Robert Baird.

Steven Ashley - Robert W. Baird

My congratulations on a solid quarter as well. Robin, was the litigation settlement expense in the initial FY1Q earnings per share guidance you had provided to us?

Robin L. Washington

No, it was not.

Operator

Thank you. Moving on to our next question, we will hear from Paul Steep of Scotia Capital.

Paul Steep - Scotia Capital

Maybe you could talk a little bit about what plans, if any, Jon Temple, or the thoughts there in terms of changing field ops that we see him making over the next little bit. Then, just maybe a clarification going forward, on the patent side, Robin, just in terms of what that is going to do to G&A coming down on the legals. Thank you.

Godfrey R. Sullivan

A quick response on Jon’s side, we have been having a great week this week. I think now it is day four for him, so I am trying to make sure that this week, he meets all of his team. People have been in from around the world, and he and I are off to Europe together next week to meet some of the folks over there.

Just like any other executive coming into a company of our size, the first 60 or 90 days is all about the people that are part of the team and getting to know the business and all that. I think it is a little early to talk about changes, but certainly the early reaction to Jon’s arrival and everybody’s working relationship has just been great. I am excited about him being here. I can give you more feedback on that on the next call.

Robin L. Washington

You had asked about the impact going forward on litigation. We anticipate that G&A will be back in our normal ranges of 8.5% to 9.5% going forward.

Operator

Thank you. We will now hear from Jason Maynard of Credit Suisse.

Jason Maynard - Credit Suisse

Robin, I have a question on cash flow. Cash flow is a little bit below our expectation, and down year over year. How would you maybe think about cash flow next quarter, and then just any rough indicator on where it could shake out for the full year?

Robin L. Washington

The full year, I would have to think about a bit. I think in terms of the quarter, there was an unusually high variance in terms of some tax payments that we made, Jason, which took that down normally above what we would have expected and below what we forecasted, but we do think going into next quarter, we are thinking $20 million to $30 million, which is kind of typical of our Q2 quarter, but probably more in the mid-range of that, 25 to 26 or so.

Operator

We will now hear from Christopher Sailer with Goldman Sachs.

Christopher Sailer - Goldman Sachs

You said that you were increasing investment in the sales capacity, yet headcount decreased by eight in the quarter. Could you guys talk about turnover you guys are seeing in the industry?

Godfrey R. Sullivan

Our turnover rates are just normal. We have not seen any kind of a spike or interesting variance, but most of the turnover that we saw in terms of the decline in Q1 was in Asia, so we had a few countries that were making some changes over there, but we continue to add both technical capacity as well as sales capacity to he company. We think the growth opportunity is there, and so I have given Jon and team continued reign to continue to expand. We expected something like 70% of all of our headcount expansion this coming year would be field based resources, so we are still very bullish about that, and expect for it to continue to grow.

Operator

Thank you. Our next question comes from Frank Sparacino of First Analysis.

Frank Sparacino - First Analysis

In terms of just the BI strengthening, I am wondering if you could maybe comment a couple of things, quantitatively as to why you feel that -- if it is win rate, just number of sales cycles you guys are competing with, or other things you might highlight.

Godfrey R. Sullivan

Well, we are very bullish on our ability to compete in the BI space because over the last three years, we have been working to strengthen our BI platform with better integration between our reporting and analytic environments. Looking at competes that we won in Q1, a large German bank chose our reporting environment -- just straight reporting, no analytics -- head-to-head against all the folks you know and love, and it was because we have a lot easier dashboard building capability and much better off-line support.

A large French bank displaced a large French BI’s company’s products with ours because our analytics power is so much better. They needed a combination of reporting and analytics in order to solve their BI needs, and we happen to be the best at that of anybody in the industry.

We had large U.S.-based companies and the government who chose our reporting platform with analytics as a complementary adjacent solution, but they chose our reporting solution head-to-head against all the normal players because we can build dashboards the fastest, they are the easiest to author and use, and they are the quickest to deploy and have the best scalability.

We are starting to win direct head-to-head BI competes against all the folks who grew up in that space. I think our opportunity to continue to grow market share in that space is -- the wind is blowing in our favor. We are continuing to build demand and continuing to build field capacity to take advantage of it.

Operator

Thank you. We will now hear from David Rudow of Piper Jaffray.

David Rudow - Piper Jaffray

Good afternoon, everybody. Any update to the fiscal year guidance?

Godfrey R. Sullivan

It is probably a bit early to update the year. We are sure off to a good start with the Q1 results, but I think only being four months into the year, it is probably best if we give you a year update in January after we have two quarters under our belt, but we are certainly feeling good about the progress we made in Q1.

Operator

(Operator Instructions)

Moving on, we will hear from Robert Schwartz of Jefferies and Company.

Robert Schwartz - Jefferies & Company

Robin, you had given some explanations for the decline in license margin and service margins, and I was hoping maybe you could dive a little bit deeper into that, explaining where you expect them to go, the contour in the future. Whether we should think, for instance, the license margin in the 91.4% is more typical going forward, or should you expect it to rebound, and how quickly? Same thing for the service margins.

Robin L. Washington

I think on license, as we mentioned, there is always some variability around that based on the mix of products we sell and our royalties. There were a few royalties where we changed agreements and moved from fixed to variable, and some of our higher revenues generated higher royalty expense than we had initially thought, so that was pretty much the key driver there. The other thing overall in the margin is again just the impact of the UpStream acquisition amortization as well.

On the services side, we have talked about this for the last several quarters, but one of the things we are experiencing is an inability to keep up with the demand of business that we have with our existing staff, so we are having to supplement that with third-party contractors, which is more expensive. We are working towards improving that and getting people up to speed, but it has been problematic for us relative to being able to have people on board to schedule the business when we would like, but it is something that we are working towards.

Godfrey R. Sullivan

Just one additional comment on the services side, the good news is that demand for Hyperion services is at a very high point all over the world, and we are doing our very best to satisfy customer demand. That is keeping our teams running flat out, and we are having to supplement that with third-party services, so you see some revenue that is going to be low margin coming through the books. Obviously we will try to manage that to a minimum, and it is still about us being able to acquire more and more field talent to take advantage of the demand that is out there.

So over the next several quarters, we hope to be able to continue to improve the services business, but do so based on core services revenue as opposed to what is more of a path through revenue with low margins to it.

Operator

Our next question comes from John Torrey of Montgomery and Company.

John Torrey - Montgomery & Co.

Good afternoon, nice quarter. You had a return to growth in your new customer business for the first time year on year in a couple of years. Can you talk about the strength of the pipeline you are seeing around that and your confidence in kind of returning to a 20% to 25% contribution from new customers steady state?

Godfrey R. Sullivan

Sure. Probably the biggest factor in new customer acquisition is our reporting business, and that has been consistent for every quarter since we acquired Brio three years ago. Our reporting business has continually been the number one place where new customers enter a relationship with Hyperion, so the fact that that product continues to get stronger and our win rates continue to increase, bodes very well for our new customer acquisition rate in the future.

The second biggest provider of new customers is our analytics technology, the Essbase technology, and it had nice year-over-year growth, so the whole aggregate storage, the speed and capacity, a lot of the new functionality that is in it, that business is really going nicely for us, so the two products that are keys to our new customer acquisition are both doing great. I think that bodes very well for new customer acquisition.

The contra to that is that System 9 gets a lot of our sales people focused on helping their installed base customers migrate from whatever it is they have to System 9, so I think that we have a few more quarters to go where the field organization is focused on helping existing customers and after that, then we will start to see the new customer counts start to come back up as we get to a more normal sort of new and existing mix.

Operator

(Operator Instructions)

Our next question comes from Peter Goldmacher of Cowen.

Peter Goldmacher - Cowen & Co.

A couple quick questions on the expense side. Did you mention, or did you say the details behind what that expense litigation settlement was?

Robin L. Washington

I think we have talked about them in the past publicly. They were two patent settlements that we had. They have both been announced.

Peter Goldmacher - Cowen & Co.

Okay, so that is done?

Robin L. Washington

Yes, they are done, kind of.

Peter Goldmacher - Cowen & Co.

Okay, and just another quick question on the services piece of the business. Help me understand when the expense is coming. Is it coming in the sales cycle or is it coming in the implementation cycle?

Godfrey R. Sullivan

Well, on the services piece, the expense that you are seeing, the overage in expense that you are seeing is coming during the implementation cycle, where we are using third parties to fill in gaps in our own resources to help customers reach their implementation dates, but those billing rates have very low margins attached to them. Peter, I hope that was the answer to your question. Come back and tell us if it was not.

Operator

We will now hear from Adam Holt of JP Morgan.

Adam Holt - JP Morgan Securities

Just two quick follow-ups. The first was a continuation of my other question about where we are in the upgrade cycle. I was wondering, Godfrey, if you could talk about what kinds of buying activity you are seeing when people do move to System 9? Is it really just sort of the platform upgrade, or are you seeing some sort of consistent module attached with that upgrade?

I guess the second question was you made some changes to the overlay sales force in the first quarter. I was hoping you could detail where you are in that process. Thanks.

Godfrey R. Sullivan

The thing that is consistent now, Adam, about the way migrations are going to System 9 is that every purchase order still has a small enablement fee, and then it typically has additional modules being acquired and additional seats. I cannot give you exact statistics on it, but if you were trying to imagine your way to a purchase order, the bulk of the revenue would be around new modules and new seats. So it is customers expanding their relationship with us. We are very pleased about how that is going.

From the standpoint of the overlays and the like, what we are really trying to do is to put more product specialists into the field to take advantage of the technology lead that we have. There is nobody that has the master data management solutions that we do, and yet you need some product specialists in the field who can help the territory field sales people be more productive more quickly, so we are continuing to invest in that. The same thing with our financial data quality management, the same thing with strategic finance.

Some of those solutions are specialized enough that having specialized resources in the field, in a team selling capacity, is a really good way to grow the license revenue, so we want to take advantage of our technology leadership and the momentum we have, and just continue to expand our investment in those resources.

We have not made very many changes, but we are continuing to expand the team selling through product specialists and through some additional BI overlay positions.

Operator

Next, with Merrill Lynch, we will hear from Ed Maguire.

Ed Maguire - Merrill Lynch

Yes, good afternoon. I was wondering if you could talk about the potential for the alliance with HyperRoll, kind of what that brings to the product portfolio, and also talk about the performance of master data management during the quarter?

Godfrey R. Sullivan

Just a quick one around HyperRoll. They have been a partner of ours for years, and it is a lot better for us to partner with each other than it is to sue each other, so I am glad that we are moving from one side of the coin to the other.

Their solution is well-known as being a way to accelerate the performance of relational databases on their way to a management system like ours, and so that is the work we are doing is, now that we have all the lawsuit stuff out of the way, we can now go forward and start focusing on how their solution can be used alongside ours to help accelerate some of the applications that rely on fast, relational database movement.

HFN is a good example of a product. In the consolidation phase, if a very large customer has tons of relational data that need to come out of multiple ERPs and needs to accelerate that aggregation of that relational data, that is what their solution does. It does it well, and we are delighted to partner with them in that respect.

The other question was about MDM. We continue to have just phenomenal success with MDM, in terms of our license growth, year-to-year and all that sort of thing. I do not have that number in my head for the quarter, but we are continuing to invest in field resources.

The number one success factor for master data management is having people in the field who understand the CIO’s pain point when it comes to managing reference data dimensions and hierarchies. We are just continuing to expand on that. We are very bullish about the future of that product.

Operator

Thank you. Our next question comes from Vikram Churamani of Lehman Brothers.

Vikram Churamani - Lehman Brothers

Just real quickly, Robin, what was the EPS impact, given the lawsuit? I might have missed that.

Robin L. Washington

Sure, the EPS impact was $0.04.

Operator

Our next question is from Atul Bagga of ThinkEquity.

Atul Bagga - ThinkEquity

A very quick question, can you give us an update on UpStream acquisition? Is it better than your expectation? How is the result coming from that? Also, if you can quantify the contribution from UpStream?

Godfrey R. Sullivan

The financial data quality management solution may be one of the most natural acquisitions we have ever done. This was a team that we had worked with for years as a partner. We have been in team selling situations across the world with them for a long time. It was almost as if they were already a part of the family.

So from an integration process, this is the smoothest one we have ever done. It has been the most natural. There has been the least amount of work to do on integration and all that sort of thing. Our field sales organization knows exactly what to do with the product, and so it is being presented in every case that our financial management consolidation solution has presented. You can bet that it is being presented at every single one of those cases.

Customers are happy. It is a great competitive differentiator. Nobody else in the market has anything like it, and the results are ahead of what we had expected.

Operator

Thank you. We will now hear from Yun Kim of Pacific Growth.

Yun Kim - Pacific Growth Equities

Thank you. With System 9 gaining strength here for the past couple of quarters, which is obviously leading to a bigger deal size and higher number of large deals, were there any changes in your sales organization to maybe accommodate some of this trend, or do you feel comfortable with the current sales talent that you have and the way it is organized to execute consistently in a larger deal environment?

Godfrey R. Sullivan

I am a big fan of having a healthy transaction mix across all price points, so you love large transactions, but those small transactions are the ones that ultimate grow up to be a large one, so I really believe it is important to have a geographically diverse and a market segment diverse set of field resources, so that we can take advantage of all the opportunity that is out there in front of us, starting with inside sales and telemarketing and everything, and growing up to strategic account execs.

Jon will, I am sure, have some opinions to bring to that. When we see you at the December 1st analyst conference, that will be a good time for you to grill Jon for how he sees the field model in the future, but I would tell you that based on where we are today, we are doing a great job managing the larger transactions as customers migrate to System 9. I just want to make sure that all over the world, we are still reaching out to new customers with our entry-level products, and growing that to make sure that we are expanding the base at the same time that we are expanding the large accounts.

Operator

Our next question comes from Christopher Sailer of Goldman Sachs.

Christopher Sailer - Goldman Sachs

Another question about the large deals. Is it something specific to System 9, that option, or is it kind of a macro thing?

Godfrey R. Sullivan

It is a little bit of both. Two of our top 10 transactions were System 9 to new customers, so it is not just a migration story. Clearly a lot of the customers who moved to System 9 elect to buy additional modules and seats at that time, so we have seen some pretty good-sized customer orders coming in, just because it makes sense to expand the overall Hyperion footprint at the same time. There is nothing magical there, just happy customers. We hopefully will continue that success.

Operator

Thank you. We will take our final question from Jason Maynard of Credit Suisse.

Jason Maynard - Credit Suisse

I just wanted to follow-up, actually, on the announcement you had with Movaris and just get a little bit of color from you, Godfrey, on where you think this goes, and some of the solutions that you are trying to provide to kind of tackle more capabilities for the office of the CFO?

Godfrey R. Sullivan

The Movaris solution -- I should probably let Robin talk to this, because she is the expert here, but they really think about themselves as being sort of the last mile in finance, that ability to get from compliance to some of the reports that have to be generated. I have a very nice solution in that respect. It works in a complementary fashion to our own financial reporting products, so we have made a small equity investment in that company to help them along and have made them a part of all of our marketing alliances.

I think any time they are successful, it is either in a Hyperion environment or it is helping us expand a Hyperion environment, so they are a great partner and we are delighted to bring them in a little bit close to us.

Operator

At this time, there are no further questions. I would like to turn the call back to Mr. Godfrey Sullivan for any additional or closing remarks.

Godfrey R. Sullivan

All right, thanks, everyone. Thanks again for joining the call. We are feeling very bullish about the business and look forward to seeing all of you on December 1st here in our headquarters for the analyst day meeting. Thanks again.

Operator

This concludes today’s call. We thank you for your participation and have a wonderful day.

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Source: Hyperion Solutions F1Q07 (Qtr End 9/30/06) Earnings Call Transcript
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