Business Objects Q1 2007 Earnings Call Transcript

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Business Objects (BOBJ)
Q1 2007 Earnings Call
April 25, 2007 8:00 am ET

Executives

John Schwarz - CEO
Jim Tolonen - CFO
John Ederer - IR

Analysts

Joseph Bori - Deutsche Bank
David Hilal - Friedman Billings Ramsey
Steve Ashley - Robert Baird
Mark Murphy - First Albany
Robert Schwartz – Jefferies & Co.
Adam Holt - JP Morgan
Tom Roderick - Thomas Weisel Partners
Ed Maguire - Merrill Lynch
Michael Briest - UBS
Keith Weiss - Morgan Stanley
Mohammed Moawalla - Goldman Sachs
David Wright - BMO Capital Markets
Frank Sparacino - First Analysis

Presentation

Operator

I would like to welcome everyone to the Business Objects first quarter earnings results conference call. (Operator Instructions) I will now turn the call over to Mr. John Ederer. Sir, you may begin your conference.

John Ederer

Great. Thank you and welcome to the conference call to discuss our financial results for the first quarter of fiscal 2007. Joining me on the call today from Business Objects are Chief Executive Officer John Schwarz; Chief Financial Officer Jim Tolonen; and Bernard Liautaud, Chairman and Chief Strategy Officer.

Today's call includes a set of slides that accompany the speakers' comments. The press release and slides are available on the investor relations section of our website. This call may not be reproduced in whole or in part without the written permission of the company.

During the course of today's presentation, our executives will make forward-looking statements, including statements regarding the company's expected financial performance for the second quarter and full year 2007, expected growth and profitability, product and business strategies, strategic relationships, licensing and adoption of its Business Objects XI products, IDD growth, the introduction of Mobile BI, on-demand business intelligence solutions and our mid-market initiative. We wish to caution you that such statements are just predictions based on management's current expectations or beliefs and that actual events or results may differ materially.

We refer you to documents we file with the SEC, including Form 10-K for the year ended December 31, 2006. These documents identify important risk factors that could cause actual results to differ materially from those contained in our forward-looking statements.

These potential risks and uncertainties include, but are not limited to: fluctuations in our quarterly and yearly operating results; our ability estimate and sustain, or increase our profitability; our ability to attract and retain customers; our ability to successfully integrate the companies we acquire; changes to our current accounting policies; our ability to preserve our key strategic relationships; and our reliance upon selling products only in the business intelligence software market. We assume no duty to confirm, update or revise the financial forecast for the year or any other forward-looking information in this call as a result of new developments or otherwise.

Today, we will be discussing our results on a U.S. GAAP as well as a non-GAAP basis. These non-GAAP results -- also sometimes called pro forma results -- exclude write-off of in-process research and development charges, amortization of purchase intangibles, stock-based compensation expense and other non-recurring or non-cash charges. We use these additional non-GAAP measures as we believe they give useful operating information in addition to the U.S. GAAP results. A reconciliation of U.S. GAAP to non-GAAP financial statements is available on our press release and on our investor relations webpage.

I will now turn the call over to Jim Tolonen to review our financial results for the first quarter.

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Jim Tolonen

Thanks, John. Good afternoon and good morning to you all and thank you for joining us. We are very pleased with the results for the first quarter of 2007, as we achieved the high end of our revenue guidance and exceeded our range for non-GAAP EPS. In terms of some of the highlights for the first quarter, we continued our three-year quarterly trend of double-digit year-over-year revenue growth with total revenues up 20% and license revenues up 9% in the first quarter. We saw continued year-over-year improvement in our non-GAAP operating margin, which improved about 2 percentage points versus Q1 of last year. The strong revenue growth and margin expansion drove our non-GAAP EPS performance over the top of our guidance and cash flow from our operations was very strong.

Looking at our specific financial results, total revenues for the first quarter were $334 million, up 20% year over year and at the top end of our guidance of $328 million to $334 million. Net income on a U.S. GAAP basis for the first quarter with was $6 million, or $0.06 per share, after including a legal contingency reserve of $26 million or $0.15 per share relating to the previously announced Informatica litigation. This compares to our Q1 guidance for U.S. GAAP EPS of $0.14 to $0.18 which did not include this subsequent event. While no cash payment has been made and this trial is still ongoing, we did record a reserve for the full amount in Q1 since a jury verdict had been rendered.

Non-GAAP income for the first quarter was $40 million, or $0.41 per share and above our guidance of $0.35 to $0.39 per share. Non-GAAP earnings per share for the first quarter were up 24% as the margin improvement drove EPS growth to even outpace our 20% revenue growth. Currency did provide a benefit to revenue this quarter and accounted for approximately 6 percentage points for a total year-over-year revenue growth, but less than $1 million with regard to our guidance rate. As we are naturally hedged, currency also caused operating expenses to increase, offsetting virtually all of the revenue benefit at the operating profit line.

Our total revenue growth of 20% was driven by strong growth in all geographies and all revenue lines. License revenues for the first quarter were $137 million, up 9% year over year. License revenues continue to be driven by the very rapid growth in enterprise performance management and enterprise information management. As expected, license revenues for information discovery and delivery, formally called Core BI, were almost flat year over year, improving from recent quarters as the continued strong revenue performance in Business Objects XI offset the declining sales of the older product lines.

As we have said in the past, we are seeing more and more customers buying integrated BI solutions and in many cases it has become difficult to draw clear lines between the various product families when purchased on a single customer order. More than half of our customer base now has begun the migration to the XI platform, which underlies all of our IDD, EPM and EIM products. We expect each of these trends to continue and even more importantly, the offering of complete end-to-end BI, EPM and EIM solutions is one of our strategic differentiators. Accordingly, we believe the more relevant number for tracking our businesses is our total license number and we will no longer be providing the separate product line license revenue breakouts.

Turning to maintenance, we had a very strong quarter with revenues of $144 million, up 32% year over year. Overall maintenance renewals have continued in the 90% plus range. We continue to have success in upselling premium maintenance packages to both new and existing customers, and Q1 was particularly strong in terms of renewal activity and also had favorable currency and acquisition year over year comparisons, so we do not expect maintenance to continue to grow at quite this rapid a pace for the remainder of the year.

Finally, our professional services revenues for the first quarter, including global services and training were $53 million, up 21% year over year. Our global services team is coming off two very strong years of 30% plus revenue growth and our emphasis this year is a more balanced approach to revenue growth and margin improvement. Global services revenue margins did improve again this quarter.

Taking a look at revenues from a geographic standpoint, we were very pleased to see all divisions contribute to our double-digit growth in the first quarter. The Americas division continued its multi-year trend of double-digit growth with total revenues of $173 million for the first quarter, up 18% year over year, with strength in the government sector and in license revenue transactions over $200,000. Key drivers for the Americas region this year will be growth in the midmarket and upselling the new products into the enterprise market, including our EPM and EIM solutions, as well as the recently released Business Objects XI Productivity Suite.

The EMEA division also turned in a good performance with total revenues of $137 million for the first quarter, up 22% year over year and up 11% in constant currencies with strength in the midmarket in Europe and six transactions over $1 million. The EMEA region is benefiting from a surge of migration activity to the XI platform during the fourth quarter of 2006 and we expect to see a pattern of upselling and cross-selling activity during the year as customers complete their migrations.

Last, but certainly not least, the APJ division led the pack in growth this quarter with total revenues of $24 million for their first quarter, up 27% year over year. We have made continued investments to capitalize on the significant revenue opportunities we see for the Asia Pac Japan region.

In terms of profitability, our non-GAAP operating margin improved by more than 2 percentage points in the first quarter, reaching 16.5% versus 14.4% in Q1 a year ago. This improvement was driven primarily by higher gross margins and improved sales force productivity. Our non-GAAP gross margin for Q1 came in at 80% as compared to 79% last year on the strength of our maintenance revenues and improving service margins, and our non-GAAP sales and marketing expense improved to 40% of revenue from 41% of revenue last year.

On a U.S. GAAP basis, expenses were generally in line with expectations, except for the non-cash legal reserve taken in Q1 for any potential award in the Informatica case. Also of note in the U.S. GAAP expenses is that our stock-based compensation expense in quarter one declined by about $2 million from the year-ago quarter.

We continue to see substantial opportunities from continued margin improvement, particularly in areas of service margins and sales force productivity. We expect to gain leverage in our services business as we provide higher, more strategic services to our customers, continue to work closely with and increase the number of our partners, and take the processes and the success we've had in the Americas this last year to other regions. In addition, our sales force is continuing to work to expand our geographic reach with our newly acquired products, to streamline our global lead to cash processes and to expand our indirect channel.

Our balance sheet also strengthened again in the quarter, driven by very strong cash flow from operations. Total cash, cash equivalent and short-term investments were $637 million at March 31, up $125 million from December 31, 2006. Our total deferred revenues also grew significantly to $341 million at March 31, up $47 million from December 31. Today, we also announced in a separate release a stock buyback program of up to $100 million that we will execute over the remainder of 2007.

Today, we are providing guidance on both a U.S. GAAP and a non-GAAP basis. This annual guidance reflects continued double-digit revenue growth and non-GAAP margin expansion. We expect to drive revenue growth from solid execution in all geographies with particular focus on Asia Pacific and Japan and license and maintenance revenue growth are expected to be at or above industry rates with continued strength in our services revenue.

The pending acquisition of Cartesis is not included in the guidance for either the second quarter or full year of 2007 as this transaction has not yet closed. We are raising our revenue and non-GAAP EPS guidance for fiscal 2007 to reflect the upside we delivered in quarter one and increased revenue benefit from currency rate changes, although no currency-related EPS changes, as we are naturally hedged and expenses will also increase. We are also adjusting our U.S. GAAP EPS guidance to reflect the legal contingency reserve we took in the first quarter.

Our revised guidance for fiscal year 2007 consists of: total revenue of $1.426 billion to $1.446 billion; a U.S. GAAP diluted earnings of $0.91 to $1.01 per share; and non-GAAP diluted earnings of $1.94 to $2.04 per share. Our guidance for the second quarter of 2007 consists of: total revenues of $345 million to $350 million, with U.S. GAAP diluted earnings of $0.21 to $0.24 per share and non-GAAP diluted earnings of $0.42 to $0.45 per share. The U.S. GAAP guidance assumes an effective tax rate of 43% for the second quarter and full year of 2007 and the non-GAAP guidance assumes an effective tax rate of 33% for the second quarter and full year of 2007. Finally, this guidance is based on a U.S. dollar to euro exchange rate of $1.34 per euro and a U.S. dollar to Canadian dollar exchange rate of $0.88 per Canadian dollar.

With that, I will turn the call over to John Schwarz to provide some additional detail on the quarter and our growth strategies.

John Schwarz

Thanks, Jim. Let me add my thanks to all of you for joining us on the call today. I would like to add a thanks to my team who have been here all night getting ready for this. As Jim has just highlighted for you, our team did well across all geographies, delivered 20% total revenue growth, improved operating margin and posted non-GAAP EPS that exceeded expectations. In my view, Q1 was a solid quarter for us.

Looking ahead, we continue to see significant opportunities for our company. The market demands for BI remains very robust and a top priority for CIOs. In fact, a recent Gartner survey highlighted BI as the number one priority, up from number 14 in 2002. BI is also becoming a top priority for CFOs as well, and we are strengthening our position with this important group. Our customers, driven by the need for better governance and real-time business visibility, are making BI an imperative and seeking to get these tools into the hands of more and more end users.

We believe that the majority of customers will look to a focused independent and open player to help them to address their business performance management needs. Early response from customers and from partners such as HP, Accenture, Deloitte and others provide support for this view. I believe we win in the marketplace because we are the category innovator and the leader in the open end-to-end business intelligence. Business Objects XI is the only single platform that covers the spectrum of business intelligence needs from data integration and quality to picture-perfect reporting, to flexible and deep analysis, to planning and performance management; and in the future with Cartesis, financial reporting and consolidation.

The strength of our solution stems from our focus on the needs of the customer. We provide applications that are open, broad and integrated. However, product alone is not enough and our global distribution and solution selling approach in both the enterprise market and in the mid market is another key competitive advantage. Today, we are already a trusted adviser to chief information officers and we intend to sustain the support of the IT department with the broadest, most feature-rich portfolio of business intelligence applications in the industry.

Leading with our enterprise performance management solution, we have opened a direct line to the decision makers that most need critical, high-accuracy access to all the information in the business universe. We believe that the business line executives will use their operational budgets to acquire enterprise performance management solutions that make their job easier and more effective.

Increasingly, customers are adopting all three elements of our BI solution, from performance management to information discovery and delivery to enterprise information management. Whether it's a CIO buyer that focuses on infrastructure needs first, but also requires modeling and presentation capabilities; or a CFO or a line of business executive who focuses on performance management but is dependent on trusted quality data, each requires an end-to-end solution.

Our solution and relationship selling strategy is working. Large deals are getting larger with several multimillion dollar deals in recent quarters and numerous transactions involving multiple BI elements. We had 12 deals with greater than $1 million in license revenue this quarter, which was up from nine in the year-ago quarter. Overall, we continue to add new customers at a rapid pace, including more than 1,200 in the first quarter alone, bringing our total installed base to more than 43,000 worldwide.

Customers in the enterprise market are making BI an enterprisewide solution, often progressing from a single component of the IT infrastructure to adopting BI as one of the most critical management tools in that portfolio. For example, China Mobile has integrated our EPM solution into its Oracle database to increase the visibility into its billing and is using our IDD solution to build a 360-degree view of their customers' products and services so they can tailor new offerings.

In the midmarket, organizations are finding how easy to implement and user-friendly our solutions are, especially when dealing with the constraints of a small IT department. At Cellular South, they are utilizing our midmarket solution to push reports to managers at their 75 retail stores every morning; reports containing customer purchase patterns and customer traffic so store managers can allocate their resources accordingly.

As always, constant innovation is the key to our success. We are already at the forefront of the industry in areas such as query delivered as a web service, BI on demand, dynamic data visualization, integrated search and mobile BI; functionality that extends the reach and the utility of business intelligence. In the near future, we will further expand the traditional boundaries of business intelligence by incorporating additional data sources such as unstructured data and content from outside of the enterprise that enrich the end-user experience and provide ready-to-use comparative analysis.

Already this year, we have launched several important new products, including Business Objects XI Productivity Suite and the midmarket-oriented Business Objects Crystal Decisions. The Productivity Suite provides new capabilities which extends and enhance our market-leading platform with improved simplicity for end users and greater scalability and better performance for IT managers. More specifically, the Productivity Suite offers new search features and a new OLAP client, a new version of Live Office and query as a Web service.

Business Objects' Crystal Decisions Standard Edition is the first of several products to be rolled out this year that specifically target the needs of midmarket customers and are packaged to be delivered by solution provider partners. With this new product line, we will be providing midmarket customers with all of the features of the enterprise class Business Objects XI platform in a product that is custom fit for their needs, including streamlined deployment configuration to speed implementations.

We will also launch a Professional Edition of this product line that will add data integration functionality, and a Premium Edition that further adds performance management functionality, including advancement metrics and scorecards. All three editions of the product line are built using Business Objects' XI technology, allowing for easy migration to enterprise class solutions as the midsize companies grow.

Additionally, we are continuing to enhance our support for the development community with a stream of new features and tools provided under the Eclipse umbrella, as well as for the Microsoft environments. These developments are specifically targeting the large, in-house development community of our enterprise customers and the OEM development team of our partners who embed our software.

Finally, we continue to make great strides with crystalreports.com, our BI on-demand platform. We have taken XI and deployed it as a flexible, scalable, multitenant solution. Behind this endeavor is some truly remarkable innovation in the web services data integration. It is a very complex undertaking to connect not just to web-based data such as salesforce.com, which we of course do, but also to connect via web services to customer data behind the firewall. We have now added live data connectivity to on-premise data management platforms.

We are proud that our XI products have been selected from many competing offerings as the 2007 winner of the prestigious SIIA CODiE Award. This award celebrates technological innovation as well as customer-perceived usability and quality of the product. We will be highlighting these and many other technologies at our Insight User Group conference in Berlin and we hope to see many -- if not most -- of you there for our analyst meeting on the 21st of May.

In addition to our own development programs, we are supplementing our R&D investments with strategic acquisitions. This quarter marks the one-year anniversary of the First Logic acquisition, and our growth in EIM demonstrates the leverage that we can achieve by taking acquired products and distributing them through our global sales channels.

A couple of days ago, we announced our intent to acquire Cartesis, a leading specialist in enterprise performance management software. This acquisition marks an important step in our strategy of building out the industry's best performance management platform adding financial reporting, consolidations and planning capabilities as well as new governance, risk and compliance portfolio. As a result, we will have the market's broadest offering for the CFO and for the line of business users, from analytics to profitability to consolidations and one that appeals to CIOs as well, because it is built on the industry's leading integrated BI infrastructure.

By early next year, we expect to deliver our Business Performance Suite and analytic applications based on an open web services platform that enables effective and dynamic integration of the customers' own applications and data, regardless of their source. It is also important to note that Cartesis as a financial reporting and consolidation specialist solution supports both the U.S. and international financial reporting standards, thus giving Business Objects an advantage in global customer deployment. Furthermore, Cartesis brings a very professionally managed and efficient services organization that enables rapid solution deployment and integration.

In terms of our product growth strategy, I believe we are executing very well against our goals to lead in the end-to-end BI, to provide global strategic services, to gain significant share in the midmarket, to further extend our global sales coverage and to develop innovative new offerings, such as BI on-demand. I am particularly pleased that our execution on these initiatives has been solid across all our geographies. The acquisition of Cartesis will further solidify our leadership in end-to-end BI and create the broadest and best-of-breed offering in the enterprise performance management. As I described, our constant innovation will ensure that we maintain this leadership position.

To summarize, this was solid quarter for us and I'm pleased that we have started off the new year where we have left the last one: with all geographies executing well, operating margins continuing to improve and delivering consistently on the guidance that we provided to you. We have a solid growth plan for 2007 and beyond, and more importantly we are more executing well against this plan. We also remain steadfast in our commitments to improve margins, and certainly the result in Q1 was a very good step towards that goal for this year.

These are exciting times for us and of course for the BI market, and we believe that it has reached an inflection point. People at all levels of an organization are using BI as the daily window on their operations. They make business decisions based on trusted data and use BI solutions to align execution with strategic objectives and budgets. This is why so many customers are turning to us, customers of all sizes in all geographies, spanning all industry sectors from health care to banking and from governments to retail. We are proud to count so many of the world's most innovative organizations as our customers and partners, and even more pleased to see so many of them turn into real advocates for Business Objects.

Thank you for joining us this quarter. We will now turn the call back to the operator to open up the lines for your questions.

Question-and-Answer Session

Operator

Your first question comes from Joseph Bori - Deutsche Bank.

Joseph Bori - Deutsche Bank

You announced last November a partnership with IBM. Can you provide us any update on how things are going and maybe some anecdotes or details about the specific wins that you achieved thanks to this partnership? Thank you.

John Schwarz

Sure, happy to. Yes, the partnership is indeed progressing well. We are making significant strides in three different aspects of the partnership. First and foremost, we're working with the IBM Software Group to make sure that our products are built in a way that is complementary, and if you will, aligned with where IBM is heading with their database management strategies and information service strategies.

Secondly, we are working with the IBM sales organization to align our go-to-market execution where we have overlapping customers.

Thirdly, we are working very closely with IBM Services to make sure that as the services team -- either in the outsourced organizations or in the organizations where they do consulting -- understands our technology and is able to represent Business Objects well. The result of this has been a dramatic improvement in the revenues that are flowing both ways to both companies, and I think a significant improvement in the trust between organizations as we learn to work with each other around the world.

Operator

Your next question comes from David Hilal - Friedman Billings Ramsey.

David Hilal - Friedman Billings Ramsey

In relation to Oracle's acquisition of Hyperion, have you guys changed or are you trying to capitalize on that in the near term by offering different programs or incentives for that part of the business until maybe that integration with Hyperion gets completed?

John Schwarz

You bet we are. There are many opportunities that have opened up as a result of this move. Most importantly, I would suspect that the Brio BI solution that Hyperion was and may even still be selling has become unhinged from the strategy since it had been cut loose and adrift. So we have an opportunity to underpin the Hyperion customers with a real BI solution from Business Objects.

Secondly, we have seen customers rather confused and concerned about what Oracle intends to do with the plethora of the different financial planning management tools they offer and which one of those is actually going to survive. So we have an opportunity to capitalize on that confusion.

Last but not least, we have been inundated with requests from Hyperion employees for a job and so we have an opportunity to pick some good skills from that stable.

I would say for the foreseeable future, this move has opened a competitive avenue for us that might have been much more difficult to reach in the past and we expect that to be with us for quite some time to come since the integration of Hyperion will take, in our expectation, quite awhile.

David Hilal - Friedman Billings Ramsey

I just wanted to ask a quick question on gross margin on services. A nice improvement in the quarter and I'm wondering where do we plateau on this, or is there more room for improvement from a margin standpoint?

John Schwarz

I believe there is more room. If you take a look at what we have done around the world, in the Americas we have done I think a very credible job in shifting our focus to the high value-added services with higher prices and engagements that last longer that are in their own very nature much more profitable. We have yet to execute fully that strategy in Europe, and we have only just begun in Asia. So as Europe and Asia become as efficient as what we're doing in the U.S., we will continue to improve. Frankly, even in the U.S. there's still room for improvement because we still do quite a bit of services which are what I would call in the implementation category as opposed to in the consulting or advisory category. So we continue to work on shifting the balance forward.

I would say there is more yet to come. Interestingly, by the way, the services that we will inherit from Cartesis are at a higher profitability standard than our own at this point in time, so we expect to learn from their implementation. By the way, since Cartesis services are dominantly in Europe, we will have an instant benefit from that in the European geography.

Operator

Your next question comes from Steve Ashley - Robert Baird.

Steve Ashley - Robert Baird

I have a couple of questions on license revenue as it relates to what used to be the core BI business that is now the information discovery and delivery. Would we hope to see that license in that core business grow sequentially as we go forward through this year?

Jim Tolonen

Yes, I would say that we are expecting that category to grow. If you have been following along over the last three or four quarters, as the XI platform has continued to grow as our customers migrated, that growth was being somewhat foreshadowed or offset by the declines in the older products. That decline has pretty much slowed to what we think is a flat remaining amount from some of the OEM Crystal business and distribution shrink-wrap business. So we would expect now to see the XI poke through and start showing growth in that core area as soon as this quarter.

Steve Ashley - Robert Baird

Can you maybe comment on the early channel response to the Crystal Decisions product introduction?

John Schwarz

Yes, it has been virtually double we actually planned to be so a very strong response, very strong reaction. As you might expect, many of the midmarket channel partners are relatively small companies, and so they have to spend time to find the resources to get themselves up to speed. But both in terms of initial reaction from the sales of that product and from our ability to sign our partners to join us in that program are very, very encouraging results.

Steve Ashley - Robert Baird

Lastly, you had a nice step up in the percentage of your customers migrating in the fourth quarter. Would you hope that those people who began that process would complete that maybe in the middle of this year, and that we might see improved spending from them in the second half?

John Schwarz

Certainly, that's my expectation. By the way, the step up in the first quarter was virtually as good as what we saw in the fourth quarter. We're now well with 50% of our customers migrating or having migrated, and that gives us the confidence that the XI cycle is well into its maturity and will begin to produce the kind of revenue results that we had all expected it to.

Operator

Your next question comes from Mark Murphy - First Albany.

Mark Murphy - First Albany

Thank you. John, a question on the maintenance revenue strength in the quarter. When existing customers are migrating to XI release 2, to what extent are they paying incremental maintenance fees versus license fees? Is the approach any different than it has been in prior product cycles? Just because some of the feedback indicates that possibly you are emphasizing the maintenance line.

Jim Tolonen

Mark, I'm going to jump in for a second, John may also add some color on this. As I mentioned in comments, the maintenance growth has been very good for a variety of reasons. We have industry-leading record renewal rates. Certainly that is customers who are excited about their migration to XI. We also have increased our customer satisfaction scores around the globe over this last year, so people are getting really good service and happy with their maintenance that they're getting their service level agreements. We have also introduced several categories of premium maintenance and while people are migrating, they can also get more product if they move to the higher level of maintenance. So all of those things are contributing to continued very strong maintenance.

We did also get benefits of currency there, just like on some of the other lines, year-over-year at least, and we certainly have some compare given that First Logic was only acquired in quarter two last year, so we have the deferred revenue coming back in and helping us as well. So just strong on all fronts in maintenance.

Mark Murphy - First Albany

It looks like you're raising the 2007 revenue guidance by more than the currency benefit would indicate. Is that reflecting confidence in the core BI traction emerging during the year, or more of an ongoing strength in the EPM and EIM?

Jim Tolonen

Really all of those factors, I think. Certainly, we've seen some currency help this quarter, we've also beat the number this quarter and we feel very confident in all lines and all geographies, so that all goes into our thinking about guidance.

Operator

Your next question comes from Robert Schwartz - Jefferies.

Robert Schwartz - Jefferies

Thank you very much. It looks like the guidance implies for next quarter about 17% growth against what was a weaker quarter in Q2, and for the year about 14.6% at the midterm. John, you referred to this as an inflection point for this business. I would like to know what parts of the business are you seeing accelerating and how did you think about the accelerating pieces when you put together this guidance?

John Schwarz

We are seeing acceleration pretty much across the board. Last year we struggled with one geography or another being on board with the XI platform. This year, we really are seeing a very consistent performance, very consistent execution around the world with Asia leading the growth numbers, of course, from a relatively smaller base. So on the geographic pattern, the great advantage we have is that the whole company is executing on the plan.

As you look across the product lines, we have been reporting numbers of growth quarter on quarter and year on year for EIM and EPM that are astronomical. While that of course is not sustainable at those kind of rates, we continue to see very strong demand and very strong growth. And very much a realization by customers that have traditionally been just core BI customers that they need these other components as well. So we've been able to up sell and cross sell.

Finally, the IDD platform, as Jim had commented, has finally poked through or is in the process of poking through the downdraft that we have seen from the slowdown of the sales of the older versions of that product line, and what we're doing with IDD with respect to enhancing or expanding into the midmarket is adding some of these really new exciting technologies. We expect it to begin to, if you will, pull its own weight in the portfolio as well and so that is going to be an important contribution going forward.

Finally, if you look at the services part of our business both in terms of maintenance, which has been super strong and the consulting services, which we frankly are constraining in that growth just to make sure that we can improve or continue to improve our margin, across the board all of these different segments, geographies and aspects of our business are executing well and delivering on our expectations. So the inflection, in our view, is based on demand and it's based on our ability to execute, and both are hand in hand, doing well.

Robert Schwartz - Jefferies

Given that all of these pieces are improving, is it reasonable to expect that the growth rates could approach what you did last year? The guidance does not indicate that, but it sounds like all cylinders are firing right now.

John Schwarz

Well, we grew about 15 points last year, maybe 16 points I guess at the end of the year. While that's not out of the realm of possibility, I would certainly not want to guide to that level at this stage of the game. So let us get our quarters under our belt that we will see how things play out.

Jim Tolonen

Guidance cannot include any acquisitions that haven't closed. We've already announced one, and so that ultimately -- assuming that closes -- will be factored into guidance at a later date.

Operator

Your next question comes from Adam Holt - JP Morgan.

Adam Holt - JP Morgan

My first question is also about the guidance. As you think about the build up to the second quarter, given the second quarter last year, have you made any material changes to assumptions with respect to close rates? How would you put the pipeline with respect to coverage in the context of where we were at this point last year heading into Q2?

John Schwarz

The guidance that we've given you for Q2 is based on our understanding of the pipeline as it stands right now. So obviously we manage that very closely, we focus on closure rates, we focus on conversion of leads to sales, we focus on linearity week by week across the quarter. What I would suggest is that we are pretty comfortable with where we are at to have given the guidance that we have provided for the current quarter.

I also would like to say that we have seen strength in EMEA that we have not seen for quite some time, which is very encouraging from our perspective. Asia, while Asia we talked glibly of Asia as one place, it really is five or six different markets. We are seeing strength in the majority of the Asian markets that we've also not seen for quite some time. So across the board, the outlook for the business in the current quarter is strong.

Adam Holt - JP Morgan

If I could just follow up on some of the product questions, understanding that the individual product lines may be less relevant to the broader thinking about the business going forward. As you drill down into the analysis of the current quarter, which product lines might have come in a little bit better than you had expected and which product lines might have come in inline or even a little bit worse than you had expected for the March quarter?

Jim Tolonen

Adam, as we said, we're not going to give a lot of detail on the individual lines, but since we have already said that the IDD was approximately flat, I can comment that while the other two areas were slightly different, they were quite high in the double-digit growth rates. So, continuing to do very well with EIM and EPM.

Adam Holt - JP Morgan

Should we be thinking about the buyback to primarily offset dilution going forward, or will you be looking to buy back more aggressively than that? Do we have to wait for Cartesis to close to see it start?

Jim Tolonen

Combination question, let's see. One, the press release that was separate, but what it said was the Board has authorized up to 2 million shares, up to $100 million, or EUR75 million, primarily to offset dilution from stock options and it could begin immediately.

Operator

Your next question comes from Tom Roderick - Thomas Weisel Partners.

Tom Roderick - Thomas Weisel Partners

Good morning. I just wanted to ask a question about the planning and the performance management business here as you think about Cartesis and the impact that is going to have on the business. Can you just offer a reflection on the performance of SRC in the last quarter and in prior quarters? What happens with SRC in the segmentation of the business on a go to market strategy going forward?

John Schwarz

Great question. Let me start with SRC since that product has been fully integrated into our portfolio. It is now based on the XI platform and it has been doing extremely well. As you have seen, the growth rates for EPM in the past quarters as we have quoted nearly 100% year on year, that rate of growth, as Jim just commented, is continuing unabated. We're very pleased with the acquisition and the success of that team.

More importantly, we are pleased with the ability that we have gained to learn how to sell to the CFO, how to sell to this new buyer with a new budget, if you will, that gives us an access to money that we could not reach prior to the SRC acquisition. Now SRC did not have consolidation, did not have financial reporting of the sort of corporate major Fortune 100 company strength, if you will, and so this is where Cartesis comes in.

Cartesis is an enterprise-wide consolidation capability, enterprise-wide financial reporting. They also have financial planning budgeting which overlaps with SRC to some degree. Initially, our intent is to continue to sell SRC the way that we always have and to allow the Cartesis team to continue to go to market with their planning solution. We will integrate the Cartesis planning as well as the other Cartesis components to the XI platform to make sure that our customers get a consistent implementation across the board. Ultimately, we intend to converge and rationalize the different planning functions of the two organizations.

We are positioning SRC as the corporate top-down planning and budgeting tool. We are positioning the SRC planning and budgeting as the divisional or functional planning and budgeting tool and we'll allow those two things to find their natural level.

Tom Roderick - Thomas Weisel Partners

Did you say that SRC will be the divisional budgeting tool and Cartesis will be the corporate budgeting tool, or was it vice versa?

John Schwarz

No, that is correct.

Tom Roderick - Thomas Weisel Partners

On the ETL business what impact did you see, if any, from the lawsuit with Informatica during Q1, and what are you seeing thus far in Q2?

John Schwarz

No impact, and I don't expect to see any.

Operator

Your next question comes from Ed Maguire - Merrill Lynch.

Ed Maguire - Merrill Lynch

In looking at the growth in constant currency at 3%, could you comment just in terms of geographies or product segments, which areas performed to your expectations and which areas may be a drag on the growth rate there?

Jim Tolonen

Let's start with a couple of thoughts, Ed. I will not challenge the 3% but maybe clarify the 3% as you're saying that would be 9% licensed globally as everyone else reports. We give constant currency as well, yes, 3% on license. If we look at the IDD metrics, which typically combine license and maintenance to define the market where they talk about 6% to 10% growth for BI, our combined metric there is 17%. So, clearly, we've been taking share, growing at double the market rate there this quarter.

What John said also with regard to your geographic question is that all of the geographies performed equally strong if you look at it. They're all double-digit growth, they're all around 20% growth, some of that helped by currency in Europe. To call out some of the key growth points: return to large licenses in EMEA, so we had six over $1 million in EMEA. We had two in Asia Pac Japan, one of which was the largest one ever in the country of Japan. The Americas having the largest ever strength in license, between $200,000 and $1 million. So they all contributed to the overall license this quarter.

Ed Maguire - Merrill Lynch

A follow-up on the channel business. It looks like you did about 40% of licenses through indirect channels but with your some of your initiatives, I would expect that to start to increase. What are your goals medium term and long term in terms of the mix you hope to get through the channel?

Jim Tolonen

As you're well aware, the mix between direct business and indirect can vary; this is a little unusual. It's at the 60/40 level, 60% direct and 40% indirect this quarter and really didn't have much of a change on our small/medium business. What we saw was a couple of the larger deals, particularly in Europe this quarter were direct, where in a number of the previous quarters that they have been with SI partners. So that's really the number one change that affected the percent for this quarter. I think in general, our 50-50 mix plus or minus 5 is where we would expect to see it most quarters.

Operator

Your next question comes from Michael Briest - UBS.

Michael Briest - UBS

Jim, could you talk a little bit about the acquisition contribution in the quarter to date? Specifically First Logic and ALG? Neither of them were in Q1 last year. What did they bring in terms of revenues and licenses?

Jim Tolonen

Actually, we don't really break out those individual contributors a year later, and to do so would sort of be drilling down not only below license and below EIM and EPM but into sub-segments of that. As John pointed out, what we have found is that our ability to grow that revenue dramatically after we have acquired the business, they're all up significantly in those products areas as we've taken them to new geographies and integrated them into the XI platform, it accelerates their growth.

Michael Briest - UBS

In terms of the sales in the quarter, what proportion of those were on XI? In the past, you've given that metric just to give us an idea of how large the legacy business is.

Jim Tolonen

I actually don't have that right in front of me. Let's see if we can get that for you and come back in just a second. Let's go onto to the next question.

Operator

Your next question comes from Keith Weiss - Morgan Stanley.

Keith Weiss - Morgan Stanley

Can you tell us what the number of quota-carrying reps you guys ended the quarter with, and also give us a little bit of visibility into what you guys' plan for overall headcount growth in the business through 2007? It seems like you had a nice pickup, especially on a sequential basis in headcount in the current quarter.

John Schwarz

We ended up with just under 650 quota-carrying reps in the quarter. That's up by about 40 or so since the fourth quarter. We are pretty much on our headcount plan. We will continue to drift up a little bit on the direct quota-carrying reps, but not by a very large number, of course notwithstanding the acquisitions that will be additive to that, of course. As far as the rest of the company is concerned, we have gained about 200 people headcount overall in the business in the quarter; and again, are relatively close to where we want to be at this point in time.

Keith Weiss - Morgan Stanley

If I could follow-up just real quickly on the large transactions or small transactions. It looks like you guys had a really nice quarter in larger transactions. By my count, $200,000 to $1 million number of transactions are up about 16%, which is above the growth in your overall license revenues on a dollar basis. If we see large transactions up 16%, which is above the dollar growth in overall license revenues, can you help us work through growth in large business in dollar terms versus growth in small business in dollar terms and how that ratio vets out?

John Schwarz

So overall, both the enterprise business, if you will, and the midmarket business are growing at about the rates that we would expect them to do. I would say the enterprise business had done this last quarter better relatively speaking than the midmarket business and that was reflected by some of the large transactions from Europe that Jim talked to.

I think what you're seeing if you look underneath the covers is that the Crystal Reports business, which is the old Crystal Decisions solution that we have, in a sense, taken to end of life is dragging some of the low end of the business down; and the XI business, which is primarily enterprise and primarily included in large transactions, is bringing the business up. That ratio would explain the biggest part of the difference that you just pointed out.

Jim Tolonen

We've got that number for you on the XI revenue. On license only, if we exclude the Crystal Reports and the OEM and those products in EIM and EPM that are not on the XI platform yet, about 75% of all shipments were on the XI platform this quarter.

Operator

Your next question comes from Mohammed Moawalla - Goldman Sachs.

Mohammed Moawalla - Goldman Sachs

Can you just clarify that on the IDD business, which you said was about flat, would that be down on a constant currency basis in the quarter? In terms of if your expectations of it growing again, is that on a constant currency basis or a reported basis going forward?

Jim Tolonen

Slightly down on constant currency, and growth in constant currency expected.

Mohammed Moawalla - Goldman Sachs

Secondly, the larger deals, those were the 12 $1 million deals you had this quarter, again this seems quite high for a Q1. Do you sense a change in the underlying business that we should get a greater mix of large deals going forward, or is this just a one-off?

John Schwarz

I would not want to read into the 12 $1 million deals as some significant shift towards the large transaction. We always had a pipeline of large transactions, Mohammed, and they tend to close when they close. I think the better metric for our business is to take a look at the run rate, the fact that we had so many of the transactions that are in the $200,000 to $1 million range, that's probably a much better metric of the real health of the business.

Mohammed Moawalla - Goldman Sachs

Finally, can you just comment on the pricing environment and what you are seeing out there?

John Schwarz

If you look at the size of transactions and the amount of money that customers are spending, there clearly is an increase in spending. We would support the IDC estimates of about a 10% growth rate in the overall BI market. Now clearly, the customers are expecting more for their money than they used to in the past, and so what we are finding is that while the ASP is about what it was and maybe growing by 10 points, there is a lot more content that the customer expects for their money. So our new functions, new features, new capabilities that we release and build and acquire are essential to sustain the opportunity to grow the overall contribution to the business.

Mohammed Moawalla - Goldman Sachs

Finally, the mix of existing versus new customers, has that changed? Is it still predominately existing customers?

John Schwarz

I don't think so. We have added 1,200 new customers in the quarter, which is perhaps slightly lower than usual, but not significantly so. We continue to see a significant opportunity to bring new customers on board. We have gained a few customers that were markedly Hyperion customers in the current quarter. So, no, I would not suggest that the mix of 70/30, which is our traditional mix of established business versus new business, should change dramatically over time.

Operator

Your next question comes from David Wright - BMO Capital Markets.

David Wright - BMO Capital Markets

Your services growth rate was very strong, congratulations. I wondered if you could talk about the various elements that are driving that and if at all possible, the relative importance of those. So perhaps there was a rate change, perhaps number of people hired, your data quality initiatives, number of partners, all those sorts of factors.

John Schwarz

If you look at our services business, including maintenance and consulting and training, the maintenance business grew I believe 32% year on year, and it has been the real Cinderella story here. The success of our maintenance business is really due to, I would say, three factors:

(1) As Jim pointed out, the renewal rate is very, very high, world-class. (2)We are continuing to add value to our maintenance capability and support, and we are upselling customers to higher-priced maintenance contracts, such as for instance, including our on-site technical support people or providing 24/7 coverage or providing coverage on some sort of preferential basis that we charge for. (3) And the last point with respect to maintenance is that our customer support capability and success has improved dramatically and our customers are very willing to pay for that maintenance since they really get great value from it.

If you look at the consulting and training part of our business, which grew 21% during the quarter, that is actually a growth which is somewhat less than what we reported the last three or four quarters running. That is a conscious decision on our part to focus on profitability of that part of our business perhaps more than focusing on just growth for growth's sake. So at this point in time, it was maintenance that was really carrying the growth numbers into the high 20 territory.

David Wright - BMO Capital Markets

Could you comment on the sales cycle and is it changing? I can imagine some factors like as the deals get larger maybe it's lengthening and the economies, if they are slowing, then it's lengthening, but there could be other factors that are speeding it up because you have a more complete solution. Do you see a change at all in the sales cycle?

John Schwarz

Not really. The sales cycle for the large deals appears about what it was, always influenced by internal political considerations or the newness of our sales rep on the account or the competitive activity in the account. So I would not say that there is any marked difference in the length of the time that it takes us to close large deals. The midmarket, if anything, is getting more effective, more efficient because we are improving the way that we are delivering the product packaged for the midmarket customer, making it easier to make a decision and easier to make a sale.

David Wright - BMO Capital Markets

Just a couple of quick questions tied to Cartesis if you can answer them. Was there any excess cash or debt with Cartesis? Going forward, do you expect that your capital expenditures are going to rise because you now have this larger entity, or are you in the short run able to decrease capital expenditures because you have stuff that you can move around?

Jim Tolonen

Nothing significant expected on the Cartesis transaction. It's actually an enterprise value calculation, so the cash is netted into the purchase price. We don't expect any significant differences with regard to capital. As you know, in the software business, our capital really is leasehold improvements or computers, and so it tends to be a fairly small percentage and Cartesis being well under 10% of our size, I don't expect any dramatic changes.

Operator

Your final question comes from Frank Sparacino - First Analysis.

Frank Sparacino - First Analysis

When you look at the Productivity Suite and the list of new features in there, are all of those included as part of the maintenance agreement or are some of those new license opportunities for you?

John Schwarz

Yes, there is a change in the price for the Productivity Suite of about 16%, 10% to 16% depending on how much of the new feature content you acquire. So yes, we expect to see an increased value from the sale of that platform into the marketplace.

I had incidentally misspoke in one of the answers I had given earlier on the shift, if you will, from Crystal to the XI platform. I had said that as we see Crystal Reports going to end of life -- we have not end of life the Crystal Reports. Crystal Reports continues to be a significant part of our business. What I had really meant to say is that, as the customers are shifting their focus to the XI platform, they're buying less of Crystal Reports, more of XI, not to suggest that Crystal Reports in and of itself is being taken to end of life.

I think we are at the end of our question period, so let me thank you all for joining us today for our program. Let me invite you again to join us in Berlin on the 21st of May. We're looking forward to seeing you there and we will be sharing with you some of our more detailed and concrete plans and outlook for the future at that session. Thanks for your support and we will be talking soon. Good bye.

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