Epicor Software Corp. Q4 2007 Earnings Call Transcript

Epicor Software Corp. (EPIC)

Q4 2007 Earnings Call

February 7, 2008 5:00 pm ET

Executives

Damon Wright - Head of IR

George Klaus - Chairman and CEO

Mark Duffell - President and COO

Michael Piraino - EVP and CFO

Analysts

John Mietta - Needham & Company

Steve Koenig - KeyBank

Branden Chen - Piper Jaffray

Abhey Lamba - UBS

Terry Tillman - SunTrust Robinson Humphrey

Richard Baldry - Canaccord Adams

Brad Felix - Lehman Brothers

Presentation

Operator

Ladies and gentlemen, good day and thank you for your patience, we'd like to welcome you to this Epicor Q4 and Yearend 2007 Earnings Results Conference Call. As a reminder, today's call is being recorded. And at this time, I would like to turn the conference over to Damon Wright, Head of Investor Relations for Epicor. Please go ahead, Sir.

Damon Wright

Thank you, Daya. And thank you all for joining us on our call this afternoon to discuss Epicor's 2007 fourth quarter financial results. We'll also be covering our outlook for the 2008 first quarter and full year.

In addition, we will be discussing the completed acquisition of NSB Retail Systems, which is announced this morning, closed today. Both the earnings and NSB press releases may be accessed on our web site at www.epicor.com under the investor section.

Joining us on today's call are George Klaus, Epicor's Chairman and CEO; Mark Duffell, President and COO; and Michael Piraino, Executive Vice President and CFO. George will begin the call with a few comments followed by Michael, who will discuss the financial results in more detail and provide financial guidance.

Following the prepared remarks, we will conduct a question-and-answer session.

Before I begin, I would appreciate your patience as I review our Safe Harbor statement. The discussions on today's call will include forward-looking statements. These forward-looking statements include statements regarding the Company's expected revenue, earnings and other financial results, which include our acquisition of NSB, as well as expected new product releases and other statements that are not historical facts.

Actual results may differ materially from those expressed or implied in the forward-looking statements. For discussion of such risks and uncertainties, which could cause actual results to differ from those contained in our forward-looking statements, please see our annual report on Form 10-K for the period ended December 31, 2006, and our quarterly report on Form 10-Q for the quarter ended September 30, 2007.

Today's comments will also include a discussion of certain non-GAAP financial measures, such as adjusted EBITDA and non-GAAP revenue and non-GAAP earnings, which exclude amortization of prior intangible assets; stock-based compensation expense, restructuring and other charges. The most directly comparable GAAP financial measures and information reconciling the Company's non-GAAP and GAAP results are included in our earnings release in the Form 8-K to be filed with the SEC.

I would also like to point out, unless otherwise specifically referenced, all financial expectations for 2008 include the contribution from the acquisition of NSB on a non-GAAP basis.

With that I'd now like to turn the call over to George. George?

George Klaus

Thank you, Damon, and thanks to everyone joining us this afternoon. Our fourth quarter topped off another excellent year of company wide execution for Epicor, where we saw record financial performance across every revenue line as well as our non-GAAP profitability.

Our record license revenues were strong and we received important validation by our most important critics, our customers, of the strength of our markets, our sales teams, our pipeline, our software solutions, our business model and our go-to-market strategy.

Our fourth quarter and full year financial performance also underscores our confidence that Epicor is extremely well positioned in the markets that we target. Year after year, we continue to experience an increase in demand coupled with further market momentum. Importantly, we are not seeing any increase or change in the competitive environment.

Our strong 2007 year marks the fourth consecutive year of double-digit growth in license revenue, total revenue and non-GAAP earnings. Additionally, we generated an excess of $66 million in cash from operation for the year, highlighted by $23 million in cash flow from operation in the fourth quarter.

We continue to do a very good of forecasting in our annual top and bottom line growth rates. While we fully understand that Wall Street judges us each and every quarter, businesses are meant to be run with longer term objectives in mind, with strategies that are generally required to be at least 12 months or more in the future in order to be effective and to be meaningful.

Our accuracy in projecting annual growth rates was evidenced once again in 2007, as we exceeded the initial total revenue expectations of $420 million to $425 million and hit the top end of the EPS of $0.83 to $0.85 that we provided to you more than a year ago. Admittedly, we achieved these strong results in a bit different manner than we and Wall Street originally expected and there were some peaks and valleys over the course of the year.

We had an excellent start and a fantastic finish to 2007, although we did experience some growing pains in the middle of the year. However, throughout the year, we remained highly confident in our long-term business model and in our positioning within our markets. As such, we made sure we did not deviate from the core strategies we put in place prior to the beginning of the year and our full year performance speaks well for itself.

It is clear that Epicor is reviewing the rewards of our strategy to expand our addressable market by moving up market. Our strong fourth quarter was driven impart by a new record for our top ten license fields, which average in excess of $600,000 for software licenses alone.

We continue to maintain a strong focus on our more traditional markets and our success in winning bigger deals was complimented by solid execution in our core mid-market businesses. As evidenced, by the additional 232 new name customers in Q4, bringing the total new customers for 2007 to more than 740.

During the fourth quarter, we also enjoyed retention rates of 94% and won back a record, 183 customers, who had previously gone off maintenance, that now have been brought back on maintenance, based on our product strategy going forward.

Winbacks for the year totaled 689, which equates to at least $4 million in annual maintenance revenues going forward. Bringing these two numbers together, new name wins and customer winbacks added more than 1400 customers to our base as we enter 2008.

Our ability to continually successfully add 700 to 800 new logos, plus winback approximately 500 to 700 customers every year is an important part of Epicor's growth strategy. The significant number of annual new customer wins will continue to benefit Epicor for years to come by addition to our consulting backlog and our maintenance backlog.

Additionally, our new logo wins and customer winbacks contributes to our highly profitable maintenance revenues and increases a number of base customers into which we can sell additional license functionality and fees.

As discussed with you at the end of 2007, to augment our successful go-to-market strategy in the first quarter, we have bifurcated our new name sales team. Based on company size, and varying by geography and by vertical, we now have a new name sales force focused solely on companies under a certain size and a new name sales force focused on companies over a certain size.

This slight organizational requirement plays to the strengths of individuals throughout our new sales team organization and has been very well received with zero distraction to our business in the quarter.

Before I turn the call over to Michael, I wanted to make a few comments on our acquisition of NSB, which was finalized earlier today. We are extremely pleased to have closed this acquisition ahead of our original expectations of mid to late February, as we believe NSB is an excellent next step in our stated commitment to grow Epicor, both organically and through highly strategic and accretive acquisition.

This most certainly will create a larger, stronger and more profitable Epicor. We have an excellent history of integrating acquisitions on a timely basis, while meeting our financial and technology commitments to providing value to our customers, our employees and our shareholders.

We have begun the integration process already with several kick off meetings that have already been scheduled. We expect to rapidly combine functional teams including sales, professional services, support and research and development. Additionally, we expect to be able to leverage Epicor's existing market and general and administrative infrastructure across all functions of the two companies within the first half of 2008.

We will also be making special efforts to reach out to our current and targeted retail customers to ensure that they understand our approach to product rationalization as well as the fact that is our practice not to sunset products.

While we are not providing additional specifics at this time, other than the increased revenue and EPS guidance, which Michael will cover in a few minutes. We have already identified substantial synergies, excellent cross selling opportunities and significant economic to scale that we expect to realize across the combined company.

We are working to quickly be in a position to execute these plans. Our expectations for material accretion from the addition of NSB in 2008 are conservatively based on cost synergies only. The positive effect of which we believe will prove even greater over the longer term and into 2009 and beyond.

We do plan to be prudently conservative on our expectations for revenue and earnings contribution from NSB in 2008, and we are also factoring in the potential for Epicor license sales in the retail vertical in general to be back half loaded in the year based on customers potentially delaying purchasing decisions, as they digest the combination of the two companies and we roll out our retail products strategies.

I want to stress that we do not expect to lose any significant business in the retail vertical and feedback from current and targeted customers of both companies has been excellent regarding the combination as I see the opportunity to benefit from the combined strengths of both companies. In fact, I believe Epicor will be invited to participate in the vast majority of all specially RFPs for the retail sector.

I am now going to ask Michael to cover our Q4 financials and update our 2008 guidance, after which I’ll provide a few additional remarks and open the call for questions. Michael?

Michael Piraino

Thank you, George, and again thanks to everyone for joining this afternoon. Turning to the specifics of a very strong fourth quarter, total 2007 fourth quarter revenue of $119.7 million was up approximately 15%, year-on-year to our highest quarterly revenue ever.

2007 fourth quarter GAAP net income was $22.5 million or $0.38 per diluted share, compared to $6.7 million, or $0.12 per diluted share in Q4 2006. GAAP net income for the 2007 fourth quarter benefited from $14 million, or $0.24 per diluted share related to a non-cash income tax benefit due to the release of deferred tax valuation allowances.

Unlike our previous valuation release in 2005, which significantly impacted our provided tax rate going forward, we expect this valuation release to have a minimal impact on our 2008 rate.

2007 fourth quarter non-GAAP net income increased more that 30% to $15.9 million, or $0.27 per diluted share compared to non-GAAP earnings of $12.3 million, or $0.21 per diluted share in the 2006 fourth quarter. While we are pleased with our earnings performance for the quarter, it is important to point out that our net income was negatively impacted in the quarter by some additional expense.

As a result of the acquisition of NSB, announced in mid-December 2007, we had to defer approximately $600,000 in retail license revenues related to a customer wanting to wait to receive more clarity on our go forward, combined company product rationalization. Since this was not related to the sales profits, we felt it proper to pay commissions on this deal, so we were hit with all the expense, but received none of the revenue or margin benefit.

Had the revenue in the fourth quarter been recognized, we would have experienced the positive impact to earnings of approximately a penny per diluted share. This deferred revenue is expected to fall directly to the bottom line in 2008. We also believe that there were some current and perspective retail customers that have delayed their purchasing decisions, again as they wait for our combined retail product strategy.

As you would expect, we also had to catch up on some accruals for our chairman's club trip and management performance incentive plans as our record license revenues drove many of our employee to reach or exceed quotas negatively impacting net income by approximately a penny. While we continue to do a good job on the expense line, we were disappointed to see adjusted EBITDA margins down sequentially from Q3 by 50 basis points in Q4 to 17.1, primarily due to the items adding additional expense that I just covered.

This also impacted our second half goal to increase adjusted EBITDA margins by 400 to 500 basis points over the first half. Second half adjusted EBITDA margins did increase by 310 basis points to 17.4 versus 14.3 in the first half, which is excellent improvement, although it did fall a little short of our goal.

We do not believe these items will impact us in 2008 and as such we expect full year 2008 adjusted EBITDA margins to realize the full operating leverage that we expected in 2007. For the 2008 year, we expect adjusted EBITDA margin improvement of 300 to 400 basis points over full year 2007 adjusted EBITDA margin. Similar to 2007, we expect to see linear improvement throughout the year. We have provided an adjusted EBITDA reconciliation table in our press release table.

Overall, 2007 fourth quarter gross margin excluding amortization were 57.8%, up strongly by 270 basis points sequentially from Q3 '07, overall gross margin of 55.1%. 2007 fourth quarter software license revenue was extremely strong, up more than 18% year-on-year to $38.2 million. The strength of this performance is emphasized, when you consider that we grew software revenue year-over-year by 26% in last year's fourth quarter.

Software license gross margins excluding amortization were up sequentially to 78.5% versus 76.9% in Q3, primarily due to product mix. 2007 fourth quarter consulting revenue continues to demonstrate strong year-on-year increases, up 20% to $35.1 million.

Consulting gross margins were flat sequentially at 17.9% based in part on adding more than 30 new consultants to our professional services organization, to ensure we were appropriately staffed to handle some of the larger contracts that we were wining. We expect consulting margins to trend upward throughout the 2008 year starting around 19% and building to approximately 23% or better by the end of 2008.

We continue to experience the benefit of posting year after year of double-digit license revenue growth with retention rates in the mid 90% range, as 2007 fourth quarter maintenance revenue again experienced very solid growth of a large base, increasing year-on-year, by 8%, to another all time record of $41.4 million.

Maintenance is our largest and most profitable revenue segment helping to drive excellent cash flows for Epicor. Maintenance gross margin maintained their highest point of the 2007 year, which was reached in Q3 coming in at 78.6% for the fourth quarter.

Hardware and other revenues were inline with our expectations at around $5 million. As expected, hardware and other revenue gross margins were $6.8 for the quarter, a reflection of end of year seasonality and some yearend adjustments to inventory reserve.

Now, moving onto some additional quarterly metrics, our mix of Americas and International software license revenues for the quarter was split approximately 66% Americas, 34% International. All verticals in geographies were strong. While we generally do not provide additional granularity, I do want to mention that our UK new business sales team had an exceptional quarter, more than making up for the weakness to experience earlier in the year.

Additionally, even with the large license deferral in our retail business, we had one of the strongest quarters ever in the retail vertical. The 2007 fourth quarter total revenue did benefit from currency fluctuation.

Now turning to operating expenses, total Q4 operating expense was $50.4 million; excluding $400,000 in restructuring and other expense were 42% of revenue, up sequentially by approximately 90 basis points from Q4 2006.

Specifically though by category for Q4, sales and marketing expense was approximately $24.8 million in the quarter, or 20.7% of revenue, down slightly compared to $21.7 million, or 20.8% of revenue last year.

Software development continues to benefit from our strategy to offshore much of our R&D effort, and was up slightly as a percentage of revenue at $10 million or 8.3% of revenue versus $8.3 million or 7.9% in the same period last year.

General and administrative expenses were $15.7 million or 13.1% of revenue versus last year's G&A expense of $13 million or 12.5% of revenue. G&A for the fourth quarter is up year-over-year in total dollars and as a percentage of revenue due to Q4 is very strong revenues creating a situation, where we had to true up incentive, pay outs due to the company's significantly higher revenue performance.

We have strong collections during the quarter in excess of $122 million or approximately 102% of revenue. Day sales outstanding were 76 days up slightly from 75 last quarter primarily due to the renewal of maintenance contracts for the bulk of our Scala International customers, which takes place on December 31, and added approximately four days to DSOs.

Deferred revenue was $71.2 million, up more than $6 million from Q3 of 2007, reflecting annual maintenance renewal on December 31st from the bulk of our International Scala customers as I mentioned above, as well as some additional license deferral.

Cash flow from operations continues to be very strong at $23 million for the quarter. As of December 31, 2007, the balance sheet included $161 million in cash designated for the acquisition of NSB, which closed today, as well as cash and cash equivalent in short-term investments of $76.5 million.

Now I'd like to cover our financial guidance for 2008. Despite uncertainties in the economy, we remain cautiously optimistic about our business in 2008 and with that mindset we prepared guidance ranges including our expectations for fully integrating NSB, which we believe are realistic.

Additionally, as George mentioned based on the work we will be doing in integrating NSB completely into Epicor as soon as possible, we are taking a very conservative outlook for our retail vertical license revenue, which we believe is prudent, buying cycle may lengthen as we roll out our product strategy to our combined customers.

Our outlook and pipelines continue to support expectation for license revenue growth of 8% to 10% in all of the other verticals we addressed. We expect 2008 full year total non-GAAP revenues to be in the range of $545 million to $555 million. Full year non-GAAP license revenue is expected to range between $120 million and $130 million.

Hardware revenue is expected to be in the range of $30 million to $35 million. Non-GAAP earnings per diluted share is expected to be $1.02 to $1.06 for the year.

I want to point out that in addition to providing non-GAAP earnings per share guidance; our 2008 revenue guidance is also provided on a non-GAAP basis as it include deferred revenues from NSB that are expected to be written off as required by purchase accounting in accordance with GAAP reporting.

We currently expect to write-off $8 million to $10 million in NSB deferred revenue for the 2008 fiscal year, approximately $1 million of which will be license revenue with the remainder consisting of maintenance revenue.

For the 2008 year, we currently expect gross margins to slightly decline by 80 to 100 basis points over 2007, reflecting the additional low margin hardware contribution from our acquisition of NSB.

Full year spending on sales is expected to be down by more than a 150 to 200 basis points as a percentage of revenue from 2007 at around 13%. However, sales expense is expected to be approximately 15% of revenue at 15.15 in the first quarter of 2008, as we invest an additional sales programs and personnel.

Marketing expense is expected to be flat year-on-year at around 3.8%; software development for the year is expected to be approximately 10% of revenue, up approximately 130 basis points as we prepare to launch Epicor 9.

G&A expenses for the 2008 year are expected to be down by approximately 100 basis points as a percentage of revenue to around 12.6%, reflecting continued operating leverage as well as leverage in the integration of NSB.

For the 2008 first quarter, we expect total non-GAAP revenue to range between $112 million to $115 million, including the contributions from NSB from today's date. Hardware revenue is expected to be approximately $5 million to $6 million. Non-GAAP earnings per diluted share was expected to be $0.16 to $0.17 for the quarter.

We believe we do a very good job at forecasting our expected annual license growth. However, as evidence this past year, we saw quarterly license revenues exceed our guidance by more than 23% at the top end, and miss our guidance by 8% to 10% on the low end.

It's quite normal for our business to experience fluctuations from quarter-to-quarter. This is particularly true due to our focus on new name business and our ability to successfully move up market. As such and coming off with a record license revenue quarter, we believe this is the right to slightly change our license guidance methodology, and we will no longer be providing quarterly license guidance.

We continue to be focused on delivering solid year-on-year growth as reflected in our 2008 full year guidance. The company's full year 2008 non-GAAP net income guidance excludes current expectations for full year amortization of intangible assets of approximately $19.3 million and full year stock based compensation expense of approximately $8.1 million each net of tax

Full year 2008 non-GAAP earnings per share expectations assume a weighted average share count of 59.5 million shares. That's my report and now I'd like to turn the call back over to George. George?

George Klaus

Thanks, Michael. So, prior to opening the call for Q&A, I wanted to take a few brief minutes and make some comments on the state of the market that Epicor targets.

Obviously everywhere you turn there is a huge amount of pessimism, regarding the economy and the outlook for growth in 2008. Despite what everyone is predicting from the local daily newspaper to the most notable economic guru, the majority of the checks we have made and performed indicate continued solid demand for our specific target markets and for our software solutions.

Industry analyst project IT spending growth in our markets that we cover and they noted ERP is one of the top spending priorities in the markets we cover. Our customers say they have budgets to spend and our pipeline and channel checks support our expectations for solid growth in 2008.

We have virtually zero direct exposure to the financial or housing industries. The mid market and especially the four verticals we are focused on appear to be more sheltered than others. This does not come as a surprise to us, as we have a long history in this industry and have experienced economic down turns before. The positive difference for Epicor today versus other downturns is that we are now a large global organization doing business in more than a 144 countries around the world.

We are vertically focused on very specific industry and actually concentrate on sub-verticals in many of those industries.

In addition, we are selling products that are at a very early stage of their life cycle. It is also important to remember that our solutions provide a near term return on investment for our customers, who may be looking to become more efficient in an effort to save money or to reduce headcount.

We have entered into 2008 cautiously optimistic and have provided what we believe is prudent financial guidance and we expect will establish a record of consistent quarterly financial execution to complement the consistent annual financial execution, we have demonstrated year after year.

Those are my comments and with that operator, we'd like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And let's take a question from John Mietta with Needham & Company.

John Mietta - Needham & Company

Hey, thanks very much. George, you just commented on it, so I'm wondering if you could qualitatively describe the strength of the pipeline this quarter Q1 as compared to Q1 a year ago?

George Klaus

I think the comments that I can successfully make is that our pipeline is stronger than it was a year ago, and while it has been I think we continue to get smarter and smarter in the way we fill our pipeline and scrub our pipeline. So, I think the pipeline is a little stronger and certainly of higher quality.

Needham & Company

Got it, okay. And then, Michael, non-GAAP tax rate was up the same as the tax provision quarter in the release 33.4%.

Michael Piraino

No. The non-GAAP tax rate would be slightly less, closer to 31% for the fourth quarter.

John Mietta - Needham & Company

Yeah, okay. And then how should I think about non-GAAP tax rate moving forward into 2008?

Michael Piraino

I think with the GAAP tax rate that that we have presumed in 2008 guidance is around 37%, and I think that's conservative. The non-GAAP would be slightly lower than that, and if you are modeling, I'd put that in the 35.5% range.

John Mietta - Needham & Company

Okay. And then just last question with regard to the commission accelerated rates, you said that cost roughly up a penny, was that sort of the internal expectation given the out performance or is that penny over and above, what would have expected?

George Klaus

Well, that would be as a result of software guidance we gave initially, which around $31 million and we round up doing 38. So, we had to pay commissions on $7 million. So, yeah, we would have expected that $7 million bucks, we would have had that in there.

Mark Duffell

This is Mark. Also more of our sales people exceeded their annual closures than we had anticipated going into Q4 because of the increased software number.

John Mietta - Needham & Company

Okay.

Mark Duffell

So, with accelerated commission rates associated with that.

Michael Piraino

Yeah, and as you know, the way our plans were structured, they are back-end loaded. So, if you're closer to your quota, or in fact over your quota, you're getting paid a higher rate.

John Mietta - Needham & Company

Got it. Thanks very much, everyone.

Michael Piraino

Thanks, John.

Operator

Our next question now comes from Steve Koenig with KeyBank

Steve Koenig - KeyBank

Hi, gentlemen. Quick housekeeping questions for Michael and then a more general question. Michael, do you for us CapEx in the quarter and any through acquisition any purchase costs?

Michael Piraino

Well, CapEx was about $3 million. Purchase costs, what you asking about specifically?

Steve Koenig - KeyBank

Just acquisition related costs appearing in the investments section…

Michael Piraino

Well, we did have some cost associated with, in fact it's in the press release, in the reconciliation and EBITDA and in the reconciliation to non-GAAP earnings, and there were really true costs associated there. One had to do with some legal and accounting costs associated with an acquisition, we did not make and then another one had to do with we bought a forward contract on the purchase price for NSB.

Because you may recall from the announcement of the deal, that we were required to deliver pence, British Sterling, there. So we hedge that and we took a loss on that contract, but we more than in fact gained on the as a result of having to deliver less US dollars. So, those were actually perform it out in the non-GAAP earnings reconciliations for both non-GAAP earnings and EBITDA.

Steve Koenig - KeyBank

Okay. Thanks for the detail on that. And then kind of another question then would be concerning your acquisition of NSB and your move to become a lot deeper in retail with more critical mass in retail.

Yeah, my questions there would relate to the idea that large deals in retail tend to be larger, and in our experience, they can get delayed more -- the POS decision can be can come at the tail end of lot of other decisions that happened, and it seems that it could make the execution potentially more volatile.

How do you plan to manage that and then related to that? How is the management team involved in the processes -- is it really being run by the retail organization in a hands-off manner, or how do you propose to have that structured?

George Klaus

So, a couple of comments. This is George, Steve. Couple of comments there -- one is as you know, the biggest fish in the pond is the one that gets the most recognition, and we are clearly going to be -- clearly going to be the market-leader in the specialty retail market space. So, the champs of us not playing in RFPs and deals that are going down in this specialty retail market space that, I think, are small. So, we are going to get more opportunities as a result of this acquisition, and that will be great for us.

In addition to that, we said it is many ways as we could in the script here, that we are taking a very conservative approach in the first half of the year, with regard to retail new sales. And that our synergies that we have identified as a result of combining NSB and our retail group together are based totally on cost synergies and not on additional revenue synergies.

And with all that said, we expect to get after it very quickly in rationalizing the products between POS, merchandising and get out to our customers and prospect base as soon as possible. And I'd think that would be reasonably short-term, what are go-forward product strategy is. And, Mark, you want to comment on that?

Mark Duffell

Yeah, a couple of things. It's worth remembering that the sales in retail launches into new name accounts, that we -- as George has commented on our strength in the new name business, but a large percent of the sales into retail customers are into our existing base. So, less vulnerable for any downturn in the economy with those types of sales.

With regard to your question on how we are running the retail division -- yeah, it will be a division, headed by David Henning, who was a former CEO of NSB. But within that division, all functions will very closely with the equivalent ethical functions.

And this is the same sort of metrics management organization that's been in place for the last two years with CRS and has worked very well for us.

Steve Koenig - KeyBank

Okay. That's great. And then just a quicker way to follow-up, in terms of -- I heard a lot and clear about you, your conservatives around license assumptions from NSB, have you in terms of incorporating NSB license revenue? Are you assuming any reduction because any certain pruning or certain types of revenue or geographies, or are you assuming some reductions, or maybe conservatism about being more back halfloaded?

George Klaus

Well, Michael alluded to in his script that during Q4, some current customers sent some prospects waited to buy both on our side and on NSB side, until they saw the product the go-forward product strategy of the combined organization. So, we're being very conservative with regard to that.

I think as I mentioned we have not put any synergies, we have not counted on any synergies as a growth in the revenues. Yeah, we believe all of our synergies are costs related and non-revenue related, and we'll continue to be very conservative in that regard.

And so I think we have taken a very conservative approach in the first half of the year with regard to the retail space.

Steve Koenig - KeyBank

Okay. Thanks a lot. I appreciate it.

Operator

We'll take our next question from Ajay Kasargod with Piper Jaffray.

Branden Chen - Piper Jaffray

Branden Chen getting in for Ajay Kasargod. Just to add on the previous question -- are you currently assuming note -- license contribution for NSB in Q1 in the first half of '08?

George Klaus

We are assuming minimal license contribution from them.

Branden Chen - Piper Jaffray

Okay. And then just can you comment on the seasonal pattern of NSB business?

Mark Duffell

This is Mark. It is aligned with their assets. It's slightly skew to the seasonality of the non-retail business, where Q4 being a typically a difficult quarter from a license standpoint. No seasonality that you would see on the maintenance and service in a consulting line, but a weaker Q4 pretty linear, tipped from a seasonality standpoint any other courses.

Michael Piraino

This is Michael. You might remember, when we talked about the seasonality associated with CRS, you have got a kind of a cut over for retailers, where the systems have to be in and working prior to the selling season, which really kicks off October 1st and through the holiday.

So on the -- Mark is exactly right. On the maintenance and consulting lines you see basically normal linearity throughout the year, but on the license line you see a little bit different.

George Klaus

And all of that seasonality has been bait into our guidance.

Branden Chen - Piper Jaffray

Okay. That's great. And one more question, what one-time costs associated with NSB are factor in Q1?

Michael Piraino

Any one-time costs, we are still in the process of -- we just started the integration meetings today. So, we are still in the process of determining what level of cost synergy and associated restructuring costs, and so on.

So, we don't have an estimate of those numbers today, although we certainly know what our goal is from the synergy perspective. Any of those cost -- any of those cost restructuring cost would be pulled out into non-GAAP earnings presentation in of Q1. So, they will not expect the non-GAAP guidance that we gave earlier.

Branden Chen - Piper Jaffray

Okay. Thank you very much.

Operator

(Operator Instructions) Moving on now to Abhey Lamba with UBS.

Abhey Lamba - UBS

Yeah, thank you. George or Michael, Can you talk about the growing pains that you mentioned in the middle of last year. Do you think are they all behind you, and now we should see smoother sailing from now on?

George Klaus

I think Q4 should have solved that problem. I mean we acknowledged some of those pains at the end of Q3, Q4. We bifurcated the sales force to some degree and focused on making sure that the opportunity for balanced over the sales force, and as we've reported, we had a record Q4.

We just had an unbelievably great sales kick off meeting couple weeks ago, where we brought in our worldwide sales team, and everybody is pumped up, everybody has their targets for '08, and they hit the street running, and they know what they're doing.

Abhey Lamba - UBS

Great, thanks. Fair enough. Just one more, there was -- also some issue with the close rates in the larger deals and the assumption behind them. Can you talk a little bit about the close rates that you are assuming in your guidance, and are you using different rates for larger deals and smaller deals?

George Klaus

I also comment and let Mark comment. But that was something that we experienced during Q2 and Q3. And obviously, in Q4 those started to reconcile themselves, and we got our close rates for the larger deals properly input into our pipeline, if you will.

And so, where it may take three to six months to close some of the smaller deals, it takes six to nine months to close some of the larger deals. And that was clearly rectified as we entered Q4, and we don't expect that to be any kind of an issue going forward.

Michael Piraino

The only thing I would add is, yes, we bake in different close rates for different type of bills. And we are very comfortable that we can accurately forecast both the larger and the smaller bills moving forward.

George Klaus

Yes, as I mentioned earlier, our Q1 pipeline is scrubbed better than Q1 pipeline was a year ago because we've taken all these things into effect.

Abhey Lamba - UBS

Okay. Thank you.

Operator

Moving on now to take a question from Terry Tillman with SunTrust Robinson Humphrey.

Terry Tillman - SunTrust Robinson Humphrey

Hey, good afternoon, guys.

George Klaus

Hi, Terry.

Terry Tillman - Suntrust Robinson Humphrey

First question just relates to, so it sounds like if I heard this right, the various verticals the traditional verticals you store are looking for 8% to 10% license growth. But as George commented, there was a higher degree of conservatism even within your existing organic retail business, just taken into account trying to bring these two retail businesses together. Can you help us -- though in terms of obviously it is not 8% to 10% license growth in the traditional Epicor retail business, what the growth might be in '08 just in terms of your plan?

Mark Duffell

This is Mark, Terry. So we have been very conservative on the retail line, but our guidance for all Epicor software has remained as it was before.

Terry Tillman - SunTrust Robinson Humphrey

Okay. But Mark, aren't you guys saying though that the traditional CRS or just your traditional retail business Epicor before NSB, you are assuming a lower growth rate than the rest of the business for license. So that's correct, or do I have that wrong?

Mark Duffell

So we expect retail to be flat to growing in 2008, and the rest of ethical business to be in line with previous guidance and with most of the retail growth being in the second half.

Terry Tillman - SunTrust Robinson Humphrey

Okay, got it. And then in terms of, Mark, since you are on, and you sense with the question. I am curious, aside from bifurcating the sales force any other changes you guys did in terms of the quarters or anything to kind of accelerate business or make it less lumpy or all of it at the current end of the year?

Mark Duffell

Well, we always increase quarters every year. So we did a slight increase in the quarter to give more productivity out of sales force, and one of our goals of course is to deliver a higher percentage of profitability than we do as a percentage of revenue year-over-year and that one of the ways we do that is to give more productivity out of our organization and in particular our sales force.

George Klaus

And we have done a number of things that to make sure everybody hits the ground running in Q1. Yeah, we have got plans out much earlier than we have done in the past. We had a very early worldwide sales kick-off, and in fact we had an early-achievers trip than we've had in five years. So we can maximize the amount of selling time in Q1.

Terry Tillman - SunTrust Robinson Humphrey

Okay, and then just my final question relates to the harbor and other line item. That looked tired than I was assuming I guess this is a lack of my education here. But at NSB business, did they have some of their own hardware? Is that why this hardware number looks more aggressive than I would have assumed, or was that just off of my traditional CRS assumption?

Mark Duffell

No, they had a higher component of hardware than just the traditional CRS business. So that's what you are seeing there.

Terry Tillman - SunTrust Robinson Humphrey

Okay, thank you.

Operator

Moving on now to Richard Baldry with Canaccord Adams.

Richard Baldry - Canaccord Adams

Thanks. Sort of a housekeeping. Could you go over the head count exiting the quarter, and then maybe where you see that impact when you put NSB together -- I mean without talking frame some of what NSB is today or it could get by the end of either the first quarter or end of the year? And then, maybe you can talk about whether the maintenance was pretty strong? You even built a number of win backs, so this was solid -- it still seemed to be well above your sequential growth turn there. Was there anything unusual on that line?

George Klaus

Hi, Richard, it's George. We had approximately 2,520 employees exiting Q4. NSB today has 600, a little over 600 employees, and it would be inappropriate for us to comment at this time what the synergies that we are going to be developing over the next 14 days are going result in as we are in the middle of all the meetings going forward.

So, all I can tell you, is you can be assured that we will reach the cost synergies that we projected when we made the offer to buy this company. So, if you ask me next quarter what our exiting employee rate is? I’ll be happy to tell you, and you can take that versus 2,520. But I really can't tell you that answer right now, while we have a good idea, it would be inappropriate for me to tell you that answer right now.

Richard Baldry - Canaccord Adams

Sure. And of the maintenance side?

George Klaus

Michael, you want to take that one?

Michael Piraino

Maintenance, what headcount?

George Klaus

No.

Michael Piraino

Can you repeat the question?

George Klaus

Yeah, we'll take the second part of the question, Rich.

Richard Baldry - Canaccord Adams

Yeah, it was sequentially very strong in the quarter, well above any other prior times that….

Michael Piraino

You are talking about the dollars and the margin?

Richard Baldry - Canaccord Adams

Right.

Michael Piraino

Yeah, we had a very -- I think we think highlighted this in the script, but we had a very, very strong quarter from a win-back perspective. We had a record in terms of win back and, so I think that probably accounts for the revenue side.

On the cost side, number of years ago and you know the story for a very time, so you know that the company embraced the whole concept of low-cost geographies, providing labor in low-cost geographies, and we did it in R&D. Over this past year, I think we've done a really good job. I say we, it's the guys that are running – the guys and gals that are running and consulting in support in the other parts of our business.

But they've been doing a very good job of moving additional labor to lower cost geographies. And this has really started to engage from a consulting and a support perspective. So I don't have the number on top of my head, but I bet you, we have 20% or 30% of our support people outside the US at this time, and that certainly helps from a gross-margin perspective.

So, on the one hand, you're winning back customers, driving up revenue, pricing is kind of remaining relatively same because it's basically people who are renewing and on the cost side, on the per-head basis you're driving the cost down.

George Klaus

And while it's not directly related to answer your question, we have to be lenient or at the very top of the industry in terms of customer retention, which we worked very hard to do and stay in the mid-90s.

Richard Baldry - Canaccord Adams

And could you also talk about the decision, those split sales along sort of size of target customers, do you think it's -- or what drove that, is it because sort of the upper mid-market is moving at a different growth scale than maybe the lower end of the mid-market versus the decision to I guess specialize more of a vertical/geography which I think you still do, it's a subcategory, thanks.

Mark Duffell

This is Mark. The decision has been driven largely because of the difference in sales cycles, and the way in which you sell to large -- as opposed to smaller -- customers. So they require a slightly different skill set, different lengths of sales cycles, so it makes a lot of sense to focus individual sales people or one or the other.

So we basically have three new, not customers, but new sales teams. We have which you would call a sophisticated telesales team, which actually aren't all telesales. They do get on the plane and go visit customers for the lower end of our business, and then we have, if you will, our new sales team that calls on the -- I am not going to give you a number here, but on the mid-market companies, if you will and then we have a strategic account team that calls on the Fortune 1000 kind of companies.

Richard Baldry - Canaccord Adams

Thanks.

Mark Duffell

And as you can guess the traditional mid-market sales team is considerably larger than the other two.

Richard Baldry - Canaccord Adams

Thanks, I guess that [ramparts] -- meaning a discussion on any significant large scale deals in the quarter, and if you are going to break them down by greater than $1 million, or something like that. Congrats on the great quarter.

Mark Duffell

Thanks. We had two over $1 million and two over $0.5 million and averaged $600,000 for our top 10, and that's license-holding.

George Klaus

Yeah and of the two over a $1 million, one was a retail side and other one is manufacturing sale.

Richard Baldry - Canaccord Adams

Thanks.

Operator

And we have time for one final question. That will come from [Brad Felix] with Lehman Brothers.

Brad Felix - Lehman Brothers

Hey, guys. Brad Felix here. Thanks for taking my question. My question is more just on the competitive side. You obviously have had some success this quarter and moving up-market, that's great. Just curious, if there is any sub-vertical or competitor that you are seeing more success against in a certain vertical, or just either in the sub-verticals or on a competitive front?

George Klaus

So the competitive landscape is pretty much the same, Brad. We see Oracle, we see SAP and we see Microsoft in the majority of the deals that we play in. No vendor from a competitive standpoint is becoming stronger or weaker out of those three. So the landscape is pretty much the same as it was in prior quarters.

So still the reason we get to move up-market is because our functionality is very rich, and because we are Microsoft basis. Microsoft improves their scalability and our functionality adapts to that scalability. We can move into larger and larger enterprises and provide our product solutions at a significantly lower total cost of ownership to those customers than our competitors can.

Brad Felix - Lehman Brothers

Got it. And then I guess, going forward with regard to the win back, obviously you had some success there. Is there an install base I guess a finite set of customers that are currently coasting, their running licensing has been not on maintenance that you are going after and you still see an opportunity there in I guess 2008?

George Klaus

Yeah. We don't see any reason why that should change a lot. I mean like we said, we are 5 to 700 a year. Hopefully we will sell it all up at some point in time, but we still have thousand of customers that we can pursue for win backs.

Brad Felix - Lehman Brothers

Got it. Great, thanks.

Operator

And that concludes our question-and-answer session. I would like to turn the conference back over to Mr. Klaus for additional or closing remarks.

George Klaus

Thank you. Well, in closing I would like to as I always do, personally thank every Epicor employee, for each of their commitments and dedication and hard work helped make 2007 a really another great year for Epicor.

I would also like to take this opportunity to welcome all of our new employees from NSB into the Epicor family. This is a great combination of two very good companies. We have demonstrated as a company significant revenue and profitability growth over the past few years and I look forward to continuing our momentum and achieving new records in 2008. So, look forward to talking with each and everyone of you and thank you for listening.

Operator

That concludes today's conference call. Thank you for your participation and have a good day.