Executives
BillPowell - Director of Investor Relations
JohnColbert - Chief Executive Officer
FrankSansone - Chief Financial Officer
VictorLimongelli - President
Analysts
PhilipRueppel - Wachovia Securities
JoshuaJabs - Roth Capital
KevinButtigieg - A.G. Edwards
BrianEssex - Morgan Stanley
VicChuramani - Lehman Brothers
Guidance Software Inc. (GUID) Q3 2007 Earnings Call November 13, 2007 5:00 PM ET
Operator
Welcomeeveryone to the Guidance Software third quarter earnings results conferencecall. At this time, for opening remarks and introductions I will turn the callover to the Director of Investor Relations, Bill Powell.
Bill Powell
Thanksfor joining us on Guidance Software’s third quarter 2007 earnings conferencecall. As your host for the call this afternoon I have the pleasure once againof introducing John Colbert, Chief Executive Officer of Guidance Software, andFrank Sansone, Chief Financial Officer of Guidance Software to present anddiscuss with you our financial performance and other operating metrics. VictorLimongelli, President of Guidance Software is also present as he has been onall our prior earnings calls and will be available during the Q&A session.
BeforeFrank and John begin, I have a few administrative notes I’d like to go throughfor the benefit of our audience. First, we encourage everyone to review ourfinancial results presented on a GAAP basis which are detailed in our pressrelease, issued today. I understand there were some difficulties with theprovider in getting that release out, and it is now on the wire so if you havenot seen it, please go to your favorite news source and pick that up.
Theseresults may differ from results published by analysts or the media featuringpro-forma financial results, which may not be in conformity with regulatorystandards. Second, I need to remind everyone that some of the informationdiscussed on this call, including projections regarding revenue and operatingresults, may contain forward-looking statements; these statements involve risksand uncertainties that may cause actual results to differ materially from thoseset forth on the statements.
Additionalinformation concerning these risks and uncertainties can be found on theCompany’s most recent periodic reports, filed with the U.S. Securities andExchange Commission (SEC), including the Company’s most recent annual report onForm 10-K. Guidance Software assumes noobligation to update any forward-looking statements.
Finally,today’s call will be divided into three parts. John will start the call with a review of our third quarter; whathappened in the quarter and what he sees on the horizon now that we’re in thefourth quarter, and start to enter 2008. Frank will follow John with a detailedreview and analysis of the numbers. Thenwe will open the call up to hear from you so that we can take your questionsand provide you with answers before ending our call today.
Now,it is my pleasure to turn the call over to John Colbert, CEO of GuidanceSoftware.
John Colbert
Thankyou all for joining our earnings call and for your continued interest in ourCompany.
Isuspect that, by now, you’ve all had a chance to review our press release andare aware that we have now reached pre-tax GAAP profitability. We beat our internal expectations and reachedprofitability, which came as a result of solid execution by both our salesfunctions and our management focus on expense control. These results denote oursixth consecutive quarter of record revenue, to which we owe a great deal ofgratitude to our employees, for coming together and working hard to support thesale of our product lines, increase the industry’s acceptance of our Enterprisebased software product line, and achieve the significant milestone, pre-taxGAAP profitability.
Wealso owe appreciation to our customers. Many of our recent customers have permitted us to announce via pressrelease, the purchase of our Enterprise class products. This has truly helped withindustry awareness and market acceptance of our products which benefits theentire industry.
Further,our law enforcement customer base continues to grow, which as you know, greatlyinfluences the legal acceptance of our solutions. Our Enterprise customer base is ever-expanding and now includesmore than half of the Fortune 50, nearly half of the Fortune 100 and over 100of the Fortune 500.
Thoseof you who listened to our previous calls may remember our continuingresolution disclosures regarding possible challenges to our third quartercivilian federal sales. We reported riskrelated to the lack of government appropriations bill for certain civilianfederal agencies which we believe may have caused a bit of alarm. Certainlythat was not our intent. We were actually somewhat adversely affected by thissituation but both the scalable and the diversity provided by our multiplesources of revenue, led by higher commercial and international sales, offsetthe negative effects.
Thecontinuing resolution issue has continued into the fourth quarter, which couldchallenge a small portion of our business. Frank will discuss that in moredetail in his report.
Despitethe perceived risk for our third quarter business, our employees pulledtogether and delivered growth and earnings. Another positive note in thefederal space, is the recent increased adoption of our Information Assurancesuite. We have high hopes for this technology and expect it to continue to gaintraction and acceptance.
Ourthird quarter success resulted from government year-end business, increasedEnCase Forensic demand, execution from our sales and services teams,development of new Enterprise customers, further Enterprise suite sales and infrastructure build-out fromexisting customers, and as expected, continued investigative infrastructure andeDiscovery product demand.
Asyou know, eDiscovery has been a key driver of our business this year. We continue to see growth in the eDiscoverymarket and greater adoption of our eDiscovery solution and methodology, whichfocuses on obtaining just the relevant data at saving customers’ time andmoney. This approach to eDiscoverymakes us more of a competitor to consulting firms, rather than a competitor toother software providers or storage solution vendors. Though we haveoccasionally competed with certain archiving and document storage vendors.
Arecent article noting a litigation-readiness survey by Control and OptimaResearch reported that more than 69% of companies surveyed are “largelyunprepared” for responding to litigation and requests for electronically-storedinformation. According to that survey, only 6% of the organizations surveyedstated that they could “immediately and confidently” handle eDiscoveryrequests, and 51% do not yet have internal personnel that can competentlyhandle an eDiscovery matter.
Weby the way, train a vast number of digital investigative experts, somewhere inthe range of 4500 a year, who naturally evolve to fill these competencydeficiencies. You can easily see the value and strength this adds to ourCompany’s mission and why our software is continuing to gain traction.
Thesurvey also specifically addressed the internal ability to provide courttestimony regarding a collection of data, noting that most organizations do nothave the personnel who are so capable; that said, when somebody is going totestify in court, they want to know that they are backed by solid practices andtechnology, which is why our history in the court systems has proven sovaluable. These are a testament to the continued and expanded adoption of oureDiscovery technology by corporations.
Withrespect to other technologies designed or aligned to solve eDiscovery matters,we have found that certain opinion leaders in the industry [] speak to theissue that archiving technologies are not practical solutions for eDiscovery,which many archiving vendors currently promote. It’s been reported that thesearchiving solutions are unmanageable, constantly requiring maintenance. Most ofthese solutions deploy a massive index and we have heard that the index quicklybecomes obsolete as it contains indexed data of deleted documents that causessignificant problems in the eDiscovery collection process.
Arecent Forrester report mentioned that the “archive everything” approach, suchas archiving all email, does not bring the relief and efficiencies thatorganizations expected. And the report suggests in fact that nothing can befurther from the truth.
Webelieve that the proper approach to eDiscovery is, as we have designed it, asystematic ability to quickly locate and collect potentially relevant datawithout altering the data, and without system downtime that can then beprocessed by our software and ultimately posted for review. The numbers oforganizations that agree with this philosophy are expanding, which is greatlybeneficial to our business, as our digital investigative platform coupled withour eDiscovery suite is, in our opinion, the best solution.
We’vealso added the service to process and host data for those organizations who donot want to perform these functions internally. As an aside, Gartner hasindicated that they intend to release their E-Discovery MarketScope later thismonth, which we are anxious to review as it will contain the latest informationon the eDiscovery competitive landscape.
Closingout my commentary on eDiscovery, we believe that it is still our largest marketopportunity and we will continue to progress. The adoption of our eDiscoverysoftware and methodology by influential organizations continues to rise, and webelieve the growing critical mass of customers using our solutions will leadothers our direction, and just as our Forensic product is the standard in lawenforcement, our eDiscovery solution will emerge as the standard foreDiscovery.
Ourservices business, which incorporates training and professional servicesperformed well in the third quarter. We continue to see a strong demand fortraining, which is another indicator of the progression of the digitalinvestigative market. Our consulting business also continues to grow as westill maintain to the best of our knowledge the only consulting practice thatspecializes in enterprise class digital investigative matters, using our EnCaseEnterprise software.
Eventhough the option is open to other consulting firms, they avoid the use of our Enterprise software as it reduces the billable hours for asingle consulting engagement. This leaves us in a very good position goingforward.
Our2007 mission was to increase the market’s awareness and acceptance of our Enterprise solutions. The industry’s general acceptance ofour technology as a need-to-have would create a tipping point for ourtechnology, propagating increased pipeline and decreased sales cycles and costsof sale.
Wemade significant progress in this regard thus far, but there is still much roomfor improvement. For this reason, we intend to continue with the primarymission of increasing the market awareness and acceptance of our Enterprise solutions; there are still thousands of largeorganizations that do not own our Enterprise platform, and hundreds that do own it, but haveyet to purchase a suite.
Thetwo combined create a large, immediate opportunity that we will continue toaddress to our established sales methods. With eDiscovery as our largest marketopportunity, we intend to further our development efforts and training andprofessional services efforts to better address this market’s demand. We believe that we still have the bestapproach to eDiscovery and plan to strengthen that position even morethroughout 2008.
Ourinternational channel sales have increased over 2006, and signs indicate thatthe international market is primed for a strong Enterprise software growth. We plan to increase our international channel efforts to includetraining through authorized training partners in the EMEA, APAC and LatinAmerican regions.
Resellor training localized customer education and localized services are significantchallenges that we are addressing in 2008. Finally, I believe that we have theright combination of people, technology and infrastructure to lead us into, andthrough, 2008 and beyond.
Now,let me turn the call over to Frank for our financial discussion.
Frank Sansone
Thefinancial information presented on this call will be presented on a GAAP andnon-GAAP basis. To reconcile between GAAP and non-GAAP please see our thirdquarter press release. I am proud to be able to report the results of thequarter, as this was our sixth consecutive quarter of record revenue and theCompany achieved pre-tax GAAP and non-GAAP profitability for the first time asa public company.
Thisis only accomplished through the hard work and dedication of the entireworkforce. And to our customersrecognizing the value our products and services deliver to their organization.
Youhave probably noticed that we have reported pre-tax non-GAAP and pre-tax GAAPnumbers. This is because this quarter’sprofitability, coupled with our year-end estimates, placed us in a distinctivetax position. On a tax basis, we are forecasting profitability as a result ofcertain timing differences between tax and financial reporting, includingshare-based compensation and increases in deferred revenue.
Assuch, we are subject to a tax position whereby we are incurring a $1 milliontax provision in Q3 2007 on approximately $600 thousand of pre-tax income. Thistax treatment on its face is not intuitive; however GAAP requires suchtreatment as we have emerged into tax profitability. Oddly enough, we expect toreceive a tax benefit of approximately $500 thousand in Q4 2007, as a result ofthis tax position.
Forthe purposes of this call and next call, we will be discussing the Company netof this tax effect, unless otherwise noted. It bears mentioning that we do notexpect this tax impact to continue into 2008. All in, this tax position is agood problem to have as we have beaten our internal expectations and havereached profitability.
Forthe third quarter of 2007, revenue was $20.3 million, up $5.5 million or 37% ascompared to the third quarter of 2006. For the nine months ended, revenue was$56.4 million which has exceeded the entirety of 2006 revenue.
Non-GAAPpre-tax income increased to $1.6 million or $0.07 per diluted share, whereaslast year in the same period we reported a loss of $200 thousand or $0.01 pershare. Referencing our GAAP results, ourpre-tax income was $621 thousand or $0.03 per share as compared to pre-tax lossof $536 thousand or $0.03 per share that we reported for the third quarter of2006.
Share-basedcompensation for the third quarter 2007 was $1 million, up approximately $600thousand year-over-year and remaining flat sequentially. Product revenueincreased from $9.2 million in Q3 in2006 to $11.6 million in Q3 2007, a 26%increase. Enterprise license revenue grew from $5.7 million in Q3 2006to $8.3 million in Q3 2007, a 46% increase.
AsJohn mentioned, we did feel some effects of continuing resolution in ourperpetual Enterprise license sales. Not only did we see delays inpurchasing, we saw potential perpetual license transactions purchased on aterm-based license structure. Historically the amount of term-based Enterprise license bookings has been immaterial; however, inQ3 2007, we booked approximately $1.4 million in term-based Enterprise licenses, which will be primarily recognized overthe next 12 months. These bookings are significantly higher than any previousquarter.
Asfor Q4 2007, in our federal business, certain civilian agencies remain underthe continued resolution. We do not expect this to have a significant effect onour results for the fourth quarter, as historically, federal civilian Enterprise sales have been a small portion of our fourthquarter revenue.
Thegrowth in Enterprise license revenue was driven by sales of ourInformation Assurance suite in our federal customers, and Enterprise eDiscovery suites in our commercial customers.Specifically, in Q3 we sold 27 of our Enterprise product suites, 9 of which were InformationAssurance and 10 of which were eDiscovery. For the same period last year, wesold 17 suites, of which 8 were Information Assurance and 7 were eDiscovery.
Inthe last earnings call we began to report Enterprise license transactions greater than $250 thousandin recognized license value. In Q3 2007, we had 8 sales that were greater than$250 thousand in recognized Enterprise license revenue, as compared to 5 in Q3 2006, and 9 in Q2 2007. These transactions have traditionallyaccounted for approximately half of our quarterly Enterprise license revenue.
Servicesrevenue increased from $5.6 million in Q3 2006 to $8.7 million in Q3 2007, a55% increase. Third quarter is historically a seasonally slower period for ourservices business; however we saw a growth of 37% in training, 32% inconsulting and 93% in our maintenance renewals, as compared to Q3 2006. These areas are continuing to grow as theusage of our software expands into new and existing customers.
Ona non-GAAP basis we experienced a 2.2% increase in gross margin and 7.9%increase in operating margin as compared to Q3 2006, and a 3.1% in gross marginand 8% increase in operating margin as compared to Q2 2007. On a GAAP basis, gross margin increased 1.6%and operating margin increased 5.4% as compared to Q3 2006, and a 3.1% increasein gross margin and 8.9% increase in operating margin as compared to Q2 2007.As you can see, share-based compensation is having a significant impact on ourGAAP margins.
Ona non-GAAP basis, operating expenses remain flat at approximately $14 million,as compared to Q2 2007, although they were up 26% from $11 million in Q32006. On a GAAP basis, operatingexpenses increased approximately $200 thousand as compared to Q2 2007 and $3.4million as compared to Q3 206.
Themost notable changes in operating expenses since Q2 2007 are as follows:Depreciation expense has increased 11% from Q2 2007, and 86% from Q3 2006 as aresult in the investments we have made in our facilities over the past 12months. We have one additional facilityopening in Q4 at which point we believe we will have the infrastructure inplace to cover our needs for the foreseeable future.
Wehave experienced increased cost in Q3 as a result of the implementation ofSarbanes-Oxley. In Q3 2007 we incurred approximately $500 thousand in SOXimplementation costs as compared to approximately $200 thousand in Q22007.
Cashand investments increased from approximately $31.8 million in Q2 2007 to $35.1million. This increase is a result of aseasonal increase in cash collection and exercises of employee stock optionsoffset by purchases of property and equipment. For the quarter were cash flow from operations positive of $2.9 millionand through the nine months ended September 30, 2007 we are cash flows fromoperations positive of $5 million.
Deferredrevenue increased 45% from $18.4 million at Q3 2006 to $26.6 million at Q32007, which is line with our overall revenue growth. As compared to Q2 2007 deferred revenueincreased 16% as a result of increased bookings of our Forensic product,term-based Enterprise product and maintenance offerings.
Wesaw our sales-weighted DSOs at 68 days in the third quarter, a 6-day increasefrom the 62 days we saw in the second quarter. Our DSOs typically fluctuatebetween 60 and 80 days.
Ourinternational revenues remained consistent at approximately 25% of our totalrevenue; we have continued to see notable growth in our Europe and Asia revenue of approximately 78% the nine months of2007 versus the first nine months of 2006.
Nowfor an update on our fiscal 2007 expectations. As we have previously explained,our policy is to report annual guidance with quarterly updates if materiallynecessary. At this point, with what we are seeing in the markets and the demandfor our products and services we are tightening our annual revenue target to arange of approximately $74 to $76 million. Share-based compensation expectations are at a range of $4 million to$4.5 million.
Wehave now adjusted our GAAP EPS estimate to include the net tax effectsdescribed earlier to a range of -8/10 to -16/10 per share. We adjusted the range of estimated byapproximately $0.02 to account for these taxes. Our non-GAAP expectations,including the net-tax effects are in the range of +$0.01 to +$0.09.
Inour last call, I mentioned we would provide preliminary 2008 guidance on thiscall. In this call we will be providing a fairly wide range of guidance for2008, as we finish up our 2008 planning and my expectation is that we willupdate our range on our Q4 earnings call in Q1 2008.
Ourexpectations for 2008 are as follows: our revenue range is expected to bebetween $94 to $99 million. Our EPS expectations on a GAAP basis are -$0.14 to-$0.01. On a non-GAAP basis, our expectations are +$0.11 to +$0.24. Our current diluted share count isapproximately 22.7 million and our expectation is that this will increaseapproximately 300 thousand shares per quarter throughout 2008.
Additionally,I want to remind everyone of the seasonality in our revenue as had historicallybeen reflected in our results. Our expectations are that there will be a lossearly in the year and revenue in Q1 will not exceed that of Q4 as a result ofour historical seasonality. Please be mindful of this as you consider ouranalysis of our forecasted 2008 results.
Furthermore,with the growth in our business and infrastructure, we have begun to exceed theeffectiveness of our current ERP system. As such, we will be implementing a newOracle ERP system in 2008.
GuidanceSoftware is focused on driving growth and driving the value from our leveragein our model. We believe we are taking areasonable approach in running the business and setting achievable financialexpectations; we believe with our results thus far, we are making headwaytowards achieving our objectives, and look forward to continuing to providepositive shareholder value.
Thankyou. Bill?
Bill Powell
ThanksFrank. Before we move into our questionand answer period, we’d like to extend a warm welcome to Joshua Jabs of RothCapital Partners who [distorted: initiates coverage on Guidance Software in thethird quarter] family of analysts who follow our Company.
Next,I’d like to let our listeners know we are presenting at three upcoming investorconferences over the next few weeks. As always we are seeking opportunities foryou to get to know our Company and to meet with us on a more personal level. OnThursday, November 15th at 1:15 p.m. ET, 10:15 PT we will bepresenting at the UBS Global Technology and Services Conference at the GrandHyatt in New York and we will be meeting with Investors outside of that eventin New York City, Philadelphia and Delaware between tomorrow and Friday whilewe are on the east coast.
AfterThanksgiving at Tuesday, November 27th at 1:30 p.m. ET, 10:30 PT, we will be presented at the Venetian in Scottsdale, Arizona at the Credit Suisse 2007 Annual Technology Conference, courtesy ofCredit Suisse software analyst Bill Winslow.
Concludingour conference presentations for 2007, on Wednesday, December 5th at1:00 p.m. ET, 10:00 PT, we will be presented at the Lehman BrothersGlobal Technology Conference at the Fairmount in San Francisco, with a very special thanks to our coveringanalyst Israel Hernandez.
Pleasebe aware that the audio from each of these conference presentations will bebroadcast live on the Internet and will be accessible from the investor portionof our website, which is investors.guidancesoftware.com.
Withall that said, it’s time to hear from you. We’d like to take your questions.
Question-and-Answer Session
Operator
Yourfirst question comes from Philip Rueppel - Wachovia Securities.
Philip Rueppel - Wachovia Securities
Could you talk about the pipeline? It looks like the number of big deals hasreally increased and now that it sounds like you’re becoming more reliant onthat, could you talk about the pipeline,going forward? Especially given that continuing resolution is still an issue,is there a logjam there? If that wereever to be resolved, would there be a potential increase in your pipeline?
Secondof all, could just address financial services as an industry? Have you seen any push outs or slowdownsthere given the uncertainty in that industry? Thanks.
John Colbert
A lot of information in your questionthere. I may not cover it all in oneanswer here, so if I miss something by all means just let me know and we’llcircle around and get the points that I missed.
Startingwith the pipeline, as our business has been growing, obviously our pipeline hasbeen growing along the way. We stillfeel good about the guidance that we provided for the year, and we don’t haveany real issues there, I think you can see from the numbers that we’rereporting that the larger deals are increasing.
Philip Rueppel - Wachovia Securities
Financialservices, any particular issues there?
Frank Sansone
We’renot seeing any issues in financial services. Specifically, if you read a bunch of recent articles about our abilityand our type of products being able to withstand economic downturns in certainareas; as you know, usually bad news in a particular sector is good news forour company.
John Colbert
Atthe end of the day we’re definitely diversified across the industries. We’re not dependent on any one group likefinancial or government, even though both of those are large marketopportunities for us. Our software sellsinto just about any industry out there.
Philip Rueppel - Wachovia Securities
Onthe competitive environment, you mentioned that there’s a lot of archive-basedsolutions out there. Have you been ableto replace any of those index-based solutions yet with your eDiscovery solutionor are you in any kind of bake off around that area? Thanks.
John Colbert
We’vedefinitely been in those bake offs in the past where we’ve won certainengagements. I think at the end of theday, we don’t necessarily compete head-to-head with that technology, once wecan get in and talk with the customer, because what they do and what we do arein fact distinctly different.
Thequestion is, if an organization only has X number of dollars to spend on aneDiscovery solution, where are they going to spend it? We’re finding more and more often that whenwe can get in front of the customers that those dollars are coming our way asopposed to going into email archiving solutions which six months ago or so, a couple of quarters ago, I may have had adifferent answer to that question.
Ithink over the past six months, the industry’s acceptance of these emailarchiving solutions has changed. I thinkthat is as a result of a lot of business being won, where these email archivingsolutions were purchased specifically to handle eDiscovery. As I mentioned,they’re beginning to fall down in a number of circumstances.
Operator
Yournext question comes from Joshua Jabs - RothCapital.
Joshua Jabs - Roth Capital
Therehas been a lot of talk recently at the ICP Conference on Mobile Forensics, itlooks like its a pretty hot topic among local law enforcement agencies. Can you provide a little color on what you’veseen in that market, and specifically with Neutrino?
John Colbert
Sure,absolutely. Mobile forensics issomething that we jumped into in June when we released our Neutrino product. It certainly is a hot topic in the lawenforcement community. As everybody hereknows, we have a large and loyal forensic customer base that has been with usfor many years, and we still provide the leading products for that community. We intend to continue that effort goingforward, and Neutrino is a good example of that. Law enforcement officers are regularlychallenged with the need to get information out of mobile devices, and thesolutions in the industry were not really up to par, specifically on theability to access the information in the phone without allowing it to reach outand connect to a cell tower, which is a technology that we developed. As far as we know here, it’s the first of itskind that actually works.
So,with that said, it seems to be well received by the early adopters. It is a subscription product, so it will be arevenue stream we will have to build, but we are adding phones regularly, andhave [inaudible] for the product.
Joshua Jabs - Roth Capital
Lookingat gross margins, they came in better than we had expected, not surprisinggiven the strength and services. Do yousee this level of gross margin as being sustainable?
Frank Sansone
It’spart of where our targets are at and where we would like to see them grow. The strength of our maintenance stream hasbeen growing fairly rapidly. The reasonfor that is obviously the release of our suites in 2006, so it’s increasing theoverall maintenance renewal rates. Soour expectation is that we have some potential growth areas in our marginsstill.
However,as you know we have certain seasonality in our business. When you break down the overall margins wehave a couple of areas that are very strong. Our Training business puts out very strong gross margins. Obviously, our maintenance and our software havegreat margins. And areas where we havesome room for growth still is our professional services area. But overall I’d like to think that ourmargins can continue to expand and they’re pretty good at where they are at rightnow as well.
Joshua Jabs - Roth Capital
Lookingat guidance for next year, you mentioned the RTF upgrade. Is that expected to have a meaningful impacton expenses? And if so, can you quantifyit?
Frank Sansone
Myexpectation right now is that it is in our current estimates that you see thatwe just talked about. It will not starthitting the P&L obviously until it’s up and operational and functioningwhich would not be until mid to late part of the year. We hope that it does what we need it to dofor us.
Joshua Jabs - Roth Capital
Guidancefor Q4, I’m looking at the numbers here, it actually looks like at the high endof the guidance. The numbers areactually coming down from Q3 to Q4. Isthere something unusual going into the guidance? Or something we should be looking for?
Frank Sansone
No. We feel good about our guidance and we are alwaysgoing to be as conservative as we can about our forecasts and the way that wetalk to The Street and to our shareholders.
Joshua Jabs - Roth Capital
Iguess maybe to approach it from a different direction. Q3 is typically a good government spendingquarter. But with a lot of the softwarevendors that’s offset by enterprise strength in Q4. I’mjust wondering if there was some one-time stuff going on in Q3 on thegovernment side of that would have thatswapped for 2007?
Frank Sansone
No. I wouldn’t see a swap in that. Q4 is typically our strongest commercialquarter and our expectation is that will continue.
Operator
Yournext question comes from Brian Essex - MorganStanley.
Brian Essex - Morgan Stanley
Ijust wondered if we could dig in a little bit to the service and other line andI was wondering if you could give any color behind maybe how much revenue therecame off the balance sheet, how much is recurring related to maintenance andhow we can think about that going forward?
Frank Sansone
Brian,our Q will be filed today or tomorrow which has all the details of thoserevenues and everything and what happened to them. I can give you a little feedback on that if Ican pull up the page real quick, give me a second.
Brian Essex - Morgan Stanley
Thator even give a sense of maintenance growth over last year just so we can get ahandle on how to think about the recurring portion of that revenue.
Frank Sansone
Maintenancegrowth over last year was in the 93%, it’s continuing to grow in maintenance. Our renewals are strong and my expectation isthat it will continue that growth going forward.
Asfor the other areas of services and other, you’ve got the training businessthat is producing growth as well but obviously not as high as maintenance goesand our professional services fourth quarter is typically stronger than thethird quarter again because of seasonally slower services time.
Butif you look at our deferred revenue overall, we saw approximately 45% in ouroverall deferred revenue business and that is a good indicator for us goingforward as to the recognition of that.
Brian Essex - Morgan Stanley
Doyou have a sense for in that deferred revenue base what the contract durationis in terms of what period of time they would amortize over?
Frank Sansone
Ofthe $26 million plus, $24 million of that is in short term so less than 12months.
Brian Essex - Morgan Stanley
Justone other question on guidance for next year. With the top end kind of at consensus, if you have a level ofconservatism around 2008 how much of your conservatism would be companyspecific versus general economic driven?
Frank Sansone
Ithink that it’s a combination of both. As you know our enterprise is becoming a bigger and bigger portion ofour overall revenue and so we always want to be cautious when forecasting sothat we are consistent and conservative with our expectations.
Economicallywe have been able to thrive in down economic times. As you know, our software is also used ininternal investigations, et cetera, so when things are going bad, typically badpeople do bad things. So our software isoften used in, for example, to search and collect information around that typeof thing.
John Colbert
Justto add to that point, obviously we haven’t finished this year, so it’s a littleearly to have a laser focus on next year. It’s just a little early to have a good estimate as to what the economicconditions are going to look like next year, and direct on how the pipeline isgoing to shape up and those kinds of things. But at this time, I think we’re comfortable with the guidance that we’vegiven and as Frank mentioned, we’re going to be conservative and cautious inour approach.
Victor Limongelli
Onething I want to add on that is that the litigation market which increasingly a largedriver of our business with the eDiscovery suite, is somewhat counter-cyclicalso that when economic conditions are well, sure people are still suing eachother, but when they are poor, they really sue each other.
Operator
We’llgo next to Kevin Buttigieg - A.G. Edwards.
Kevin Buttigieg - A.G. Edwards
Iappreciated your discussion about competition against the archivalproducts. I was wondering if you couldtalk a little bit about what you see in the competitive arena when it comes tothe new range of data loss prevention products that are out there? Is that something where you are involved inany take-offs against those products or could you just generally discuss thatenvironment?
John Colbert
Ithink I can definitely discuss that briefly. With respect to some of the data loss prevention companies out there, Ithink Vontu probably is the most interesting right now, especially beingacquired by Symantec.
Wereally haven’t been going up against those companies lately. We seem to have a lot of activities there inthe first part of this year, but that tapered off and we don’t seem to be goinghead-to-head with those organizations for budget dollars or to solve specificbusiness problems. I think the industryis now aware that there is a distinct difference between what they do and whatwe do.
Kevin Buttigieg - A.G. Edwards
Frank,obviously you mentioned what the impact from the taxes is going to be on an EPSperspective. I was wondering if youwould talk a little bit about that from a cash tax perspective?
Frank Sansone
Theunique portion of this is there will be zero cash taxes paid for thisyear. It’s largely a financial reportingexercise. As you know tax code is alwaysfun.
Operator
Yournext question comes from Vic Churamani - Lehman Brothers.
Vic Churamani - Lehman Brothers
Justa quick question on the guidance again. I don’t mean to beat a dead horse, but you had a pretty solid thirdquarter and I guess the current environment is supposed to be a catalyst foryou guys but at the same time Q4 guidance is a little shy of our estimates thatwe had here.
Isthere something that we’re missing or is it just purely conservatism? Also whenyou look at ‘08 roughly about 24% plus growth that’s lower than what you guysexited in ‘07. Curious if you can give yourthoughts on any product plans or should we presume this also is just managementconservatism at this point?
Frank Sansone
Ithink you can look at it as management conservatism. But if you take our top end of the range tothe top end of the range of the guidance that we provided that’s 30% growthwhich is something that we’re comfortable with right now.
Vic Churamani - Lehman Brothers
Andany thoughts on cash expectations for next year?
Frank Sansone
Wehaven’t put any expectations out on next year yet.
Operator
Okay. We’ll go on to a follow-up with Brian Essex - Morgan Stanley.
Brian Essex - Morgan Stanley
Onemore follow-up on the expense side in looking how you had a little bit betterperformance than we expected, some it coming from sales and marketing. How are you doing headcount wise based on yourexpansion efforts? If you could projecta little bit into the forward quarters for employee headcount, where do youexpect it to be?
Frank Sansone
Atthe end of September we had 348 full-time employees. That was an increase of seven from June 30. Our expectation is that we’ll increase alittle bit but nothing material over the next couple of quarters. As you know, we made our major headcount addat the beginning of this year and our expectations are that we’ll add moreneeded, when needed in regards to growing our overall business.
John Colbert
Justto add to that, to back that up a little bit. We do expect to continue hiring in the next year at about the same pacethat we’ve been carrying through this year with maybe a slight increase as we gointo next year. I think expenses have continued to moderateand we expect them to stay that way as we go forward here.
Brian Essex - Morgan Stanley
Okaybut as we look back, recalling what happened in Q4, maybe some of the salescontracts kind of hit their accelerators, for lack of a better word. Is thedecline, even just in whole dollar amount sequentially, is that due to thecontracts or the sales mix or what caused that sequential decline even thoughyou had such robust growth?
Frank Sansone
Thefourth quarter is largely variable as to which sales reps are selling whichproducts and where it goes. As it standsright now there’s always the risk that you could be paying someone at a highercommission rate because they’re accelerators. However one of the things that we did going into this year is we kind ofrevamped our sales commission plan which is different from last year andcombine with that and obviously last year we had the significant sales forcehiring. We don’t have that same thing happening right now so our expectationsare that Q4 should continue to moderate overall.
Operator
Itappears that we have no further questions at this time. Mr. Powell, I would like to turn theconference back over to you for any additional or closing remarks.
William Powell
GreatI think the best closing remark I can make is thank you very much for listeningto us today and we look forward to speaking with you again next quarter.
Havea good day and a great holiday. Goodbye.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!