Chordiant Software Incorporated Q4 2007 Earnings Call Transcript

| About: Chordiant Software (CHRD)

Chordiant Software Inc. (CHRD) Q4 2007 Earnings Call November 15, 2007 5:00 PM ET


Kelly Hicks - Vice President, Corporate Business Planning

Steve Springsteel - Chairman, President and CEO

Pete Norman - Vice President and CFO


Derrick Wood - Pacific Growth Equities

Brian Denue - CIBC World Markets


Ladies and gentlemen, thank you for standing by. Welcome tothe Chordiant Software Fourth Quarter 2007 Financial Results Conference Call.At this time, all participants are in a listen-only mode. Later we will conducta question-and-answer session. Instructions will be given at that time.(Operator Instructions)

As a reminder, this conference is being recorded today,Thursday, November 15th, 2007. I would now like to turn the conference over toKelly Hicks, Vice President of Corporate Business Planning. Please go ahead,sir.

Kelly Hicks

Thank you for joining us today as we present the financialresults of our fiscal year ended September 30th, 2007. With me on the calltoday are Steve Springsteel, our Chairman and CEO and Peter Norman, our CFO.We'll begin with prepared comments from management and then we'll open the callfor questions.

The information in today's conference call will includehistorical information and forward-looking statements, including guidance aboutour business that involve risks and uncertainties that could cause actualresults to differ materially from those contemplated by the forward-lookingstatements. Chordiant's actual results could differ materially from pastresults and forward projections.

Forward-looking statements are generally identified by wordssuch as believe, anticipate, expect, will, plan, ensure, would, guidance,projects, projection and similar expressions. Further information on potentialfactors that could affect the financial results is included in Chordiant's mostrecent SEC filings. We assume no obligation to update guidance or other forward-lookingstatements.

In addition, non-GAAP financial measures and the mostdirectly comparable GAAP financial measures maybe discussed on this webcast.Our fiscal 2007 earnings release dated November 15, 2007, which was issuedafter the close of the market today contains non-GAAP financial measures.

Table C in that press release reconciles the non-GAAPmeasures and defines the most directly comparable financial measures preparedin accordance with Generally Accepted Accounting Principles or GAAP.

Chordiant continues to provide all information in accordancewith GAAP and does not suggest or believe non-GAAP financial measures should beconsidered as a substitute for or superior to measures of financial performanceprepared in accordance with GAAP.

Chordiant believes that these non-GAAP financial measuresprovide meaningful supplemental information regarding its operating results,primarily because they exclude amounts the company does not consider part ofongoing operation results when assessing the performance of certain functions,certain geographies or certain members of senior management.

We believe that our non-GAAP financial measures alsofacilitate the comparison of results for current periods and guidance forfuture periods with results for past periods. Please visit the InvestorRelations section of Chordiant's website at www.chordiant.comfor information regarding the non-GAAP financial measures discussed on thiswebcast.

And now, I'll turn over the call to Steve Springsteel.

Steve Springsteel

Great. Thank you and welcome to Chordiant Software's fourthquarter and full fiscal year conference call. Fiscal 2007 was a record year forChordiant. For the full year we had record revenue, profitability, deferred revenue,backlog and booking. We now enter 2008 in the strongest financial andoperational position in the company's history and expect to build on themomentum we gained in 2007.

I will provide you with a brief highlight on some of thehigh level metrics for the quarter and the year and then I'll turn it over toPete Norman who will go into more detail on the financials.

Revenue for the fourth quarter was $32.1 million up 48%year-over-year. For the full year revenue was $124.5 million up 28% year-over-yearand was at the highest level in the company's history.

GAAP net income for the fourth quarter was $5.3 million or$0.16 per share and non-GAAP net income was $6.3 million or $0.18 per share.GAAP net income for the full year of 2007 was $6 million or $0.18 per share andnon-GAAP net income was $17.1 million or $0.51 per share. Our full year resultsfor both GAAP and non-GAAP net income were at record levels.

Bookings for the fourth quarter were approximately $20million. For fiscal year 2007, bookings were a record $164 million up 62%year-over-year. Our bookings for fiscal 2007 included 15 transactions greaterthan $1 million of which three were greater than $10 million.

As we discussed in the past due to the size of ourtransaction and the timing of transaction closings, customer orders canfluctuate significantly from quarter-to-quarter. As an example, at the end ofour fourth quarter approximately $10.3 million of customer orders were slightlydelayed and were closed during the first week of October.

These orders had been approved at the customer business yearlevel but due to the size of the transaction they still required a signature atthe corporate level. Accordingly, these bookings will be included in our firstquarter bookings numbers and kick off fiscal year 2008 with a strong start.

Deferred revenue ended the year at $68 million and backlogwas $75.4 million at the end of Q4. Deferred revenue and backlog are keymetrics in that they lead to greater long-term predictability in our business.

On a year-over-year basis, deferred revenue and backlog haveincreased 130% and 107% respectively. We ended the fiscal year with a recordcash balance of $90.5 million, which is up over 98% from the prior year and isat a record level for the company.

Let's now spend a little time covering some of the keyevents in the quarter. During the fourth quarter we signed four transactionsgreater than $1 million with both new and existing customers spanning all ofour three core vertical markets.

These new and existing customers recognized the unmatchedvalue that our solutions bring toward greatly improving their customer'sexperience. The first transaction over $1 million was with the AIG marketinggroup which is the direct consumer insurer for AIG.

AIG, the world's largest insurance firm chose our foundationserver, Call Center Advisor, decision management and predictive modelingproducts. AIG will utilize our products to be their core selling and servicingplatform for their contact center and web self service channels.

This was a significant win for Chordiant since our solutionwas adopted as a corporate standard and therefore was subject to rigorousanalysis and review of both our software and implementation capabilities.

The second large transaction during the quarter was with anew customer Raiffeisen Bank and was through our partner IBM. Raiffeisen Bankheadquartered in Warsaw, Poland is part of the RZB group, a leading bank groupin Central Eastern Europe and Austria.

Raiffeisen Bank is using Chordiant's foundation anddecisioning solutions to orchestrate and automate customer service processesand consistently capital and cross an up-selling opportunities across thedifferent customer contact channel.

The four main goals of this project are to initially includesimplifying user desktops with a 360-degree view of the customer. Making thefront line teams more effective by automating processes across differentsystems. Transforming customer interactions in the profitable sellingopportunities. And finally, building closer relationships to increase customerlifetime value.

Our third win greater than $1 million was with Time WarnerCable an existing customer of Chordiant. Time Warner Cable expandedrelationship with Chordiant by purchasing additional licenses for our CallCenter Advisor browser product.

Time Warner purchase more seats from Chordiant to meet theirgrowth needs as they continue to provide exceptional call center service totheir customers using Chordiant's platform its final solution. Time Warner hasbeen a customer of Chordiant since 2004.

Finally, our fourth transaction greater than $1 million waswith Isbank an existing customer and the largest bank in Turkey. Isbank enteredinto an agreement with Chordiant in the second quarter of this year andpurchased our foundation server, Call Center Advisor browser, predictiveanalytics and decisioning products.

Working closely with both Chordiant and IBM, Isbankcompleted the initial phase of their internal project and is now servicingtheir customers using the Chordiant solution in accordance with the terms ofthe initial license agreement, Chordiant received a milestone payment withinour fourth quarter.

We are pleased with the closing of these four transactionsin the quarter. We continue to see a robust pipeline of opportunities at eachof the vertical markets we serve, financial services, insurance plus healthcareand telecommunications. We are seeing increased activity in the insurance andcommunications verticals in both the US and international carrying forward themomentum from fiscal 2007.

We are launching the financial services sector and morespecifically the subprime market and taking a conservative approach throughthis market. But to-date we have not seen a material change in sales cycle timeof project ramp and our value proposition continues to resonate well within themarketplace.

With that said, we believe having a vertically andgeographically diverse customer base is key to our ongoing success and arepleased with the increased activity in our insurance and communicationsvertical.

In addition to our vertical diversity, I just mentionedabove our pipeline growth and strength is being driven by our expansion intonew geographies, specifically Eastern Europe, as well as, the increased numberof opportunities from our system integration partner.

As you know, the system integrator channel is one we havebeen cultivating for a long time and we are now at the point with key SIpartners where Chordiant is recognized as the leading customer experiencesolution.

In order to maintain our leadership position Chordiant mustcontinue to innovate. During the fourth quarter our development teams were busyand completed a major release of marketing director, a release of the newenterprise case management module, a release of our recommendation adviser andbegan work with a new development partner in Eastern Europe as we expand ourdevelopment capabilities on a global basis.

Now, I'd like to take time to update you on a few excitingevents that have happened since the end of our fiscal year. At the beginning ofthis quarter, we held our executive customer advisory board meeting in Europe.In attendance, we are 22 CSO level executives from our major customers acrossall of our verticals.

These high level meetings validated the breadth and depth ofour product offerings, the continued demand for these products and the highlevel ongoing commitment our customers are making in Chordiant. This is justone example of many ongoing strategic and tactical discussions that we havewith our customers as we continue to grow our business.

In October, the Citibank card implementation went live andwe are extremely pleased to have met this major milestone. This is asignificant achievement for Chordiant as it is one of the largest projects thatChordiant has undertaken. The implementation went well and Citibank is nowservicing customers in both the call center and on the web.

Now, that we are in production with the initial roll out, wedo see additional revenue opportunities within Citibank and expect them toexpand their use of our system and products going forward.

For example, we are currently engaged in multipleimplementations of our applications in other Citi business units with fundingand scheduled go live dates in fiscal 2008.

As these incremental business units go into production theywill require additional fee purchases to become fully operational and we expectthese orders to be placed in fiscal year 2008. Our collections application isalso being implemented at Citi and is expected to go live this fiscal year.

Overall, our relationship with Citi remains strong and weare a key piece of their customer service strategy across multiple businessunits. We also are pleased to announce that in October, we heard a new VP ofworldwide sales, David Cunningham to strengthen our sales organization.

This position was created in response to the increasedcustomer demand for our products on a global basis. David has over 25 years ofsales experience with such companies as Symantec, IBM and ANDO Corporation.Most recently, David was the VP in charge of the vertical and large accountsfor Symantec, which is the world's fourth largest software company.

During his time at Symantec he was responsible for definingand expanding the America sales capabilities with a focus on telecommunicationsand financial services vertical markets. We are very pleased to have Davidjoining our team and believe that he has the expertise that we require as wescale our business and expand the new geography.

David will held each of our 3G graphical sales VicePresident to reports directly to him and will also be responsible for directingour alliances organization. David's first day on the job at Chordiant wasNovember 5th and he now joins the 23-quota carrying sales personal that we havetoday.

Fiscal year 2007 was a phenomenal year for Chordiant. Ibelieve that the company is in a great position to capitalize on our recentaccomplishments and expect that 2008 will be another terrific year forChordiant.

With that, I will now turn the call over to Pete Norman, ourCFO for a deeper dive into the financials, as well as, provide an update on theguidance.

Pete Norman

Thanks, Steve. Let's take a more detailed look at our finalresults for the most recent quarter, as well as, the results for our fiscalyear ended September 30, 2007. As Steve discussed, revenues for the fourthquarter of our 2007 fiscal year were $32.1 million up 48% from the $21.7million we reported for the same three months in 2006.

Sequentially, revenues were down 13% from the record $36.8million, we reported in the June 30th quarter. As discussed in our last callour previous quarter ended June 30 was favorably impacted by the cumulativecatch-up of revenues associated with the Citibank transaction.

For the fiscal year ended September 30, 2007, total revenuewas a record $124.5 million up 28% from the $97.5 million we reported in fiscal2006. Our aggregate $68 million deferred revenue balance at September 30, 2007 decreasedby approximately $8.6 million from the record $76.6 million balance at June30th, 2007. But increased $38.5 million from the $29.5 million ending balancefor fiscal 2006.

Our deferred revenue balance varies from quarter-to-quarterdepending on the timing of license transactions and the renewal of support andmaintenance agreements. We are very pleased that we are able to increase totaldeferred revenues in excess of 130% year-over-year.

A significant portion of our deferred revenue balance continuesto relate to license fees, including the fees associated with the largetransaction we have discussed in our last few earnings calls. As of September30, 2007, we continue to have seven accounts with more than $1 million indeferred license revenue, which will be recognized in future periods.

Of the $68 million in total deferred revenue at September30, 2007 approximately $27.4 million or 40% of the balance relates to licensefees and the remaining 60% is primarily associated with support and maintenanceagreements.

It is the significant and diversified license balance thatcontinues to give us visibility into our near-term results and confidence inproviding our 2008 guidance. Bookings for the quarter were $20 million whilethe Q4 bookings were below the levels we saw in Q2 and Q3 of this year.

Our total bookings for fiscal year 2007 were $163.8 millionup 62% year-over-year. Our license bookings for the fiscal year 2007 included15 transactions each in excess of $1 million.

As we have discussed in the past, due to the size of ourtransactions and the timing of deal closings, customer orders can fluctuatesignificantly from quarter-to-quarter. At the end of our Q4 a total of $10.3million of customer orders were slightly delayed and were obtained during thefirst week of October.

These orders had been approved at the customer's businessunit level but due to the magnitude of the individual transactions had not beensigned at the corporate level in time to be included in our fourth quarterbooking. Accordingly, these bookings will be included in our 2008 results.

As of September 30, 2007, backlog, which includes thedeferred revenue balances was $75.4 million, compared to the record level of87.6 million achieved last quarter. $10.3 million of this $12.2 millionsequential decrease is due to the slight delay in receiving the orders justdiscussed.

On a year-over-year basis, backlog was up $39 million or107%. Chordiant defines backlog as contractual commitments received from ourcustomers through purchase orders or contract that have yet to be delivered.

Looking at the geographic distribution of our revenue forthe fourth quarter, North American revenue of $19.9 million representedapproximately 62% of our total revenue with the remaining $12.2 million or 38%being generated in Europe.

For the year, North American revenues were $65.7 million or53% of total revenue and international revenues were $58.8 million or 47% oftotal revenue. Our international results continue to be strong due to ourexpansion into emerging markets and the strength of the insurance vertical.

Now, let's take a more detailed look at the incomestatement. License revenues were $13.9 million or 43% of total revenues andservice revenues were $18.2 million or 57% of total revenues for the quarterended September 30, 2007.

Our license revenues will fluctuate from quarter-to-quarterto the extent that we sign large book ship deals and account for priortransactions based on the percentage of completion method of accounting. Thisis why we provide you with metrics such as bookings and backlog so that you canbetter assess the strength of our business.

For the full 2007 fiscal year, license and services revenueswere $54.1 million and $70.5 million respectively. License revenue grew 33%while services increased 24% year-over-year with the ending composition oftotal revenues being 43% licensed and 57% service.

As you may remember, our targeted license revenue as apercentage of total revenue is 45% to 55%. Looking ahead, we expect licenserevenue to gradually increase as a percentage of our total revenue sinceconsulting service revenue will grow at more modest rates.

The slower growth in consulting services will be due to thecontinued success of our partner enablement model whereby Chordiant'sinvolvement on customer projects is limited to providing higher end technicalarchitect and business analyst services.

The growth in the total services area is expected to be atour targeted operating model margins as the maintenance revenues are expectedto become an increasingly larger percentage of services revenue.

With respect to margins, our overall fourth quarter non-GAAPgross margins including licenses and services were 74% at the low end of ourtargeted range of 74% to 76% and consistent with the June quarter's results.

For fiscal 2007, non-GAAP gross margins were also at 74%significantly higher than the 67% reported in fiscal 2006. Non-GAAP servicemargins, which include support and maintenance were 57%, down 2%, as comparedto last quarter but in the middle of our targeted model of 55% to 60%. For theyear, non-GAAP service margins were also 57%, a significant improvementcompared to the 47% we recorded in 2006.

Overall, we believe the shift towards increasing licenses asa percentage of revenue and the layering in of higher margin maintenanceagreements that are associated with new license transactions will be theongoing drivers for expanding gross profit.

During 2007, we began to achieve our targeted range forservice margins and expect them to remain at this level going forward. Now,let's review operating expenses by category.

Sales and marketing expenses, excluding stock basedcompensation for the quarter ended September 30, 2007, were approximately $7.8million, decreasing from the $9.1 million we reported last quarter. Thisdecrease is primarily due to the timing of marketing events, as well as, lowersales commissions in the current quarter.

For the year, sales and marketing expenses increased from$31.3 million in fiscal 2006 to $31.9 million in fiscal 2007. We expect salesand marketing expenses to fluctuate in future quarters with the timing ofperiodic sales and marketing events.

Sales expenses will also increase as we execute to our planto grow the number of quota carrying sales reps from 23 today to 30 at the endof fiscal 2008.

Research and Development expenses, excluding stock basedcompensation decreased to $6.5 million for the quarter, compared to the $7.2million we reported last quarter. This decline coincides with the delivery ofthe collections product, which was completed in the June quarter.

For the year, R&D expenses increased from $25.5 millionto $27 million. We expect R&D expenses to increase as planned headcountincreases are added over the next several quarters.

General and administrative expenses, excluding stock basedcompensation and non-recurring costs were $4 million for September 30, 2007,down from the $4.4 million last quarter.

For the year, G&A increased from $17.7 million in 2006to $18.2 million in 2007. This increase included the one-time costs associatedwith the stock option review that was concluded in February 2007.

In future quarters, we expect G&A costs to return to thequarterly average levels of 2006, within our targeted range. Sales andmarketing, R&D and G&A expenses are expected to fluctuate or increaseover time.

On an annual basis, we expect operating expenses to achievethe percentage ranges previously disclosed in our targeted business model. Thedetails of this model are available for your review on the investor relationpage of our website.

Non-GAAP operating income as a percentage of revenue for thequarter was 17.3% consistent with the 17.6% for last quarter. These results arewithin our targeted operating model range.

For the year, non-GAAP operating income as a percentage ofrevenue was 12.6% a significant improvement over the 9.3% loss we incurred lastyear. This achievement is at the high-end of the guidance we provided for thesecond half of 2007.

Other income and expense combined with interest income was$1.2 million for the quarter, an increase of $300,000 from last quarter. Forthe year other income and expense combined with interest income was $3 million,as compared to $500,000 for 2006.

These increases are associated with the interest income onour continually rising cash balances, as well as, realized foreign currencygain. During the year we also transferred a portion of our cash balances tohigher yielding marketable securities.

Income tax expense was $500,000 in the quarter and $1.6million for the year. As previously discussed our provision for income taxes in2007 includes the following. Approximately $800,000 of withholding taxesassociated with specific transactions in Turkey and Poland.

The limited tax expense relating to international locationsand the provision for the alternative minimum tax in the United States now thatthe company has achieved ongoing profitability.

In the near-term, the majority of our taxable income willcontinue to be offset by the roughly $147 million in federal net operating losscarry-forwards. Our non-GAAP net income excluding amortization, adjustments torestructuring reserves and stock based compensation for the quarter endedSeptember 30, 2007 was $6.3 million or $0.18 per share, compared to $7.1million or $0.21 per share in the quarter ended June 30, 2007.

Our non-GAAP net income for fiscal 2007 was $17.1 million or$0.51 per share, compared to a loss of $9.2 million or a loss of $0.30 pershare. Both our GAAP and non-GAAP annual net income and earnings per shareresults were records for the company.

The non-GAAP $0.51 per share exceeded the high-end of ourpreviously published guidance. Under Generally Accepted Accounting Principlesor GAAP net income for the quarter ended September 30, 2007 was $5.4 million or$0.16 per share on a fully diluted basis, compared to the $6.5 million or $0.19per share last quarter.

For the fiscal year end September 30, 2007, GAAP net incomewas $6 million or $0.18 per share on a fully diluted basis, compared to a lossof $16 million or a loss of $0.51 per share in 2006.

Now, let's take a look at cash and accounts receivable. Theoperating results of the company for the quarter and the full year endedSeptember 30, 2007 have each generated positive cash flows from operations.Cash flows from operations in the quarter were $2.6 million and were $38.9million for the full year.

Aggregate cash, cash equivalents, marketable securities andrestricted cash have grown to a record balance of $90.5 million up $5.1 millionsequentially and $44.7 million from the end of last year. During the quarterour days sales outstanding or DSO relating to accounts receivable were 81 daysup slightly from the 77 days we reported last quarter.

Now, let's turn to our guidance. With regard to our 2008guidance primarily due to the orders received during the first week of Octoberwe are revising our previously discussed 2008 guidance.

Our 2008 guidance is now as follows. Chordiant's totalbookings for fiscal year 2008 are now expected to range between $160 millionand $170 million an upward revision of $10 million from the previous guidance.

Chordiant's total revenues for fiscal year 2008 are expectedto range from $140 million to $150 million, unchanged from our previousguidance. Chordiant expects to increase its deferred revenue balances duringfiscal 2008.

Chordiant also expect to report GAAP fully diluted EPS ofbetween $0.46 and $0.61 and non-GAAP fully diluted EPS up between $0.60 and$0.76 for fiscal 2008. Based on approximately $36.5 million diluted sharesoutstanding unchanged from our previous guidance.

Finally, Chordiant expect to generate positive cash flows inexcess of $20 million for fiscal 2008. While we continue to provide annual andnot quarterly guidance on our last call we discussed the seasonality associatedwith our planned Q1 discretionary spending including our sales kickoff andPresident's club events.

Our Executive Customer Advisory Board or ECAB event, as wellas, a significant portion of our normal year-end audit fee.

In addition, we want to remind you of some seasonalityassociated with our Q1 revenues. In our first quarter ended December 31st asmuch as two weeks of productive time may be lost with customer holiday, closureand travel schedules.

The holidays reduce the number of consulting hours performedresulting in lower utilization of our professional services organization anddue to the lower number of hours worked projects accounted for on a percentageof completion basis progress more slowly than in other quarters affecting ourlicense revenues.

While our Q1 will be impacted by these planned items weremain confident with our 2008 guidance, including the upward revisions justdiscussed.

Now, let me turn the call back over to Steve for a briefsummary. Steve?

Steve Springsteel

Thanks, Pete. In summary, fiscal year 2007 was an excellentyear for Chordiant. We outperformed across the board on the metrics we use toevaluate our business. This year we had more customers make larger andlonger-term commitments to us than at any time in our company's history.

We made tremendous progress on the turnaround of ourbusiness and are well positioned to be a long-term leader. While fiscal year2000 was a great year we see continued opportunity in 2008 and beyond.

Our pipelines keep getting larger and are the strongestever. We have expanded and strengthened our sales organization and our robustproduct offerings should position us well.

Before, I turn the call over to Q&A. I would also liketo thank the dedicated employees of Chordiant for all of their hard work andongoing effort. Fiscal 2007 was the great year but it was only the beginning ofthe many peaks for us to climb.

That concludes our remarks for today. I will now open the callup for question. Operator?

Question-and-Answer Session


(Operator Instructions) Our first question comes from theline of Derrick Wood, Pacific Growth Equities. Please go ahead.

Derrick Wood - Pacific Growth Equities

Hi. Thanks. If you could give us some color, you talkedabout one of your big deals was the AIG deal. Given the big deals that you'veclosed with WellPoint and DAK and some other healthcare insurance companies,Cigna, was.

I mean, can you give us any color as to how big this dealwas and what it was relative to original expectations and was that in thebacklog number that you reported in the quarter?

Steve Springsteel

Well, I'll let Pete hand it Derrick. I let Pete go throughthe financial part of that and I'll answer the…

Derrick Wood - Pacific Growth Equities


Pete Norman

Historically, we disclose deals over $1 million in the callsand deals that are over $10 million we would file an 8-K. So that implies itwas between 1 and 10. And yes, the AIG deal would be in backlog as its part ofdeferred revenue at the balance sheet date.

Steve Springsteel

Do you have any other question with respect to the insurancevertical. Derrick, we seem to be getting a lot of strength in that insurance orhealthcare, depending upon who you are vertical, with don't forget last year,not even in 2007 but the end of 2006, that's when we did the big Cigna deal andwe've been getting a lot of momentum on the tail end of that.

Derrick Wood - Pacific Growth Equities

Okay. In terms of the slippage in the bookings ofapproximately $10 million, was that due to one deal or are there multiple dealsin that number?

Steve Springsteel

No. That was multiple deals across multiple geographies.

Derrick Wood - Pacific Growth Equities

Okay. You know, if look in your pipeline you mentioned thatyou kind of qualified some of the growth opportunities that you're seeing.Clearly, you're going to get a question around financial services and a lot ofthem headline negative news that we've seen.

You know, as you look at your pipeline now versus threemonths ago, has there been any change in terms of your outlook in growth infinancial services and yes, of course, rates and pipeline activity and allthat?

Steve Springsteel

No, I tell you Derrick, we still see financial servicesbeing pretty strong for us. Having said that, insurance/healthcare, as well as,telecommunications is coming on pretty strong so there was any slowdown offinancial services. We feel more than confident that we could make that up in theother verticals that we're in right now.

And then if you look within financial services, kind ofdouble click within that by geography if the US is having a little bit oftoughness based on what I read in the paper but you give into more like Germanyor some of the other countries pretty strong in and you don't hear problemscoming outs of those specific geographies.

Derrick Wood - Pacific Growth Equities

Right. Okay. And I think your guidance does not include anyassumptions around closing mega deals, is that right? And do you continue tohave some in your pipeline?

Steve Springsteel

Yes. It does not include mega deal, the effect of mega dealsand yes, we do always have some in the pipeline.

Derrick Wood - Pacific Growth Equities

And in terms of Citibank, you've press conference that beingable to close additional transactions trying to cross selling into otherdivisions in fiscal year '08. So I guess, this would mean that they're notchanging their spending patterns, at least as it relates to you. Can you justgiven some of the turmoil that they're going through, can you give us reasonswhy that it hasn't been disrupted?

Steve Springsteel

Yes. Derrick, that's actually a very good question. So keepin mind when we closed the Citibank transaction the initial transaction thatwas at the time when Citibank was in the process of a $1 billion cost cuttingexercise.

So when Citibank purchased our technology, they purchased itnot only for the cross-selling and up-selling opportunity but they purchased itfor the ability to standardize on a platform across multiple business units,thereby enabling them to reduce the number of legacy systems that they'reoperating on to get into a more cost effective environment.

You know, we went live with a North American credit cardservices very recently here and we expect to go live in another one of thebusiness units within Citi and then there's other multiple business unitsbeyond that that we're in the process of implementing.

The way that the transaction was set up they purchased asmall number of seats upfront and as these business units become live, they'regoing to obviously need to acquire more seats to bring those additional peopleon live in their various production environments. So we feel pretty good about theCiti transaction in light of some of the financial difficulties that they'refacing right now.

Derrick Wood - Pacific Growth Equities

Okay. And you hired five reps in the quarter I think itlooks like that's a pretty good number from 18 to 23. What are your assumptionsin terms of ramp to productivity? Are they going to be covered into thepipeline for fiscal year '08?

And then on the follow-up, I'd be interested to hear aboutthe new head of sales, I don't think you had a head of sales position why don’tyou feel like you, you needed to hire somebody and is there going to be anychange in the go to market positioning as he ramps up?

Steve Springsteel

Yes. First, let Kelly answer your questions aboutproductivity based into the guidance and then I'll talk about the head of salesposition. Good. Kelly?

Kelly Hicks

Yes. So in the guidance in the productivity, we haveembedded in that a ramp time. I won't you give the specific number but there isa ramp time for these reps to get up to speed and we feel on the history thatwe're comfortable with that ramp time and the forecasts that we have embed thatinto it. And with regard to why we need a head of sales, I'll turn that back toSteve.

Steve Springsteel

Yes. For the head of sales position if you were to go back acouple of years prior to my joining the company there was a head of sales andwe eliminated that position so that I could get close to the sales environment,get close to our customers and that helped facilitate a number of changes thathave allowed us to grow significantly.

We're now at a point where the volume has skyrocketed. We'reexpanding into multiple geographies throughout the world and just from ascalability perspective it doesn't make sense to have all of those geographyreport to me. And so that's why we made the position, went on a search and webrought David Cunningham on board and David fits the profile of what we need inthat role very well.

David has over 25 years of experience he's a big deal guy.He's done transactions within our respective verticals he knows the space. He'slived both domestically and abroad. He's done two assignments overseas. So heknows the international market very well. David fit not only the job spec butalso the culture of the company and we're really glad to have David on board.

Derrick Wood - Pacific Growth Equities

Okay. I guess that's it for me. I'll get back in the queue.Thanks.

Steve Springsteel

Thanks, Derrick.


Our next question comes from the line of Brian Denue withCIBC World Markets. Please go ahead.

Brian Denue - CIBC World Markets

Hi, guys. It’s Brian for Brett. How are you?

Steve Springsteel

Hi, good. Brian, what's up?

Brian Denue - CIBC World Markets

Good. Thanks. So I have quick question for you. You addedfive sales reps here in the quarter. Any sort of color on the, are you guysbreak down your sales force I believe by vertical. You know, with a lot ofthose in insurance and healthcare and healthcare versus financial services, areyou putting more wood behind that area than you used to?

Steve Springsteel

Well. I mean our plan, as we discussed our plan was toaggressively ramp the sales force. You can assume that that ramp is going toinclude both North American geographies and EMEA.

EMEA we run the business a little bit differently, thattends to be more of a territory or country, you know, market and the way thatwe approach it over the sales. And in the US, the way we align aroundverticals, so it's pretty evenly disbursed, as far as, the headcount adds in thesales force.

Pete Norman

You know, then as we go from 23 to a target of 30 by the endof our new fiscal year, fiscal 2008. You're going to see more heads being addedin the alliance area as our alliance relations just gets more and more intense,we see a lot of fruit there for us to go after and so we're going to be hiringfolks that will be focused on that area.

Brian Denue - CIBC World Markets

Okay. And then I don't know if you guys have ever reallybroken this out but can you give us kind of a feel for relatively speaking whatthe breakdown is between and financial services and insurance in terms of thesize of the bookings composition?

Steve Springsteel

Yes. We historically, we said that financial servicesrepresented kind of a major portion of our business. Depending upon the quarterit could go anywhere from say 70% in some quarters up to 90%.

What we have seen actually over the last year is insuranceor healthcare has grown significantly and if you were to look at our bookingsby vertical for last year, you know, insurance and healthcare is probably rightaround 40% of our business.

Brian Denue - CIBC World Markets


Steve Springsteel

So it's grown dramatically and if you were to put kind ofCigna on top of that, now you're getting closer to almost on par with wherefinancial services were. So our dependency on financial services has beenlessened significantly over the last year.

Brian Denue - CIBC World Markets

Great. That's pretty much for me. Thanks, guys.

Steve Springsteel

Great. Thanks, Brian.


(Operator Instructions) That does conclude ourquestion-and-answer session for today. Back to you for any closing remarks.

Steve Springsteel

Great. I would just like to thank everybody for the supportover this last fiscal year. It was just an incredible year by just about anymetric that you look at. As we look out to 2008, we're just as excited that2008 is going to be another incredibly great year for us. And thank you to allthose folks that support us, not only our investors and the analysts but evenmore so our employees and customers. Thanks again.


Ladies and gentlemen, that does conclude our conference fortoday and this conference will be available for replay starting at 7:00 pmEastern Time today and going until midnight on November 22nd. You may accessthe replay by dialing 800-405-2236 or 303-590-3000 and entering the access codeof 11098835 and the pound sign.

Thank you for your participation. You may now disconnect.

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