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Executives

Erika Simms - Treasury Analyst

Dave Anastasi - President and CEO

Steve - Executive

Peter Papano - CFO

Analysts

Kevin Liu - B. Riley & Company

John Maietta - Needham & Company

Nathan Schneiderman - Roth Capital Partners

Jeff Van Rhee - Craig-Hallum Capital Group

George Walsh - Gilford Securities

Captaris Inc. (OTCPK:CAPA) Q4 2007 Earning Call February 14, 2008 10:00 AM ET

Operator

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Captaris fourth quarter 2007 Earnings Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) As a reminder, this conference is being recorded today Thursday February the 14, 2008.

I'd now like to turn the conference over to Erika Simms. Please go ahead.

Erika Simms

Good morning, and thank you for joining us today for our fourth quarter and year end 2007 financial results conference call. I'm Erika Simms, Treasury Analyst for Captaris. Also on the call today is Dave Anastasi, President and CEO; Peter Papano, Chief Financial Officer. I'll start with the necessary caution regarding forward-looking statements turn the call over to [technical difficulty], who will provide financial comments about the fourth quarter and followed by Dave, who will provide his observations on developments and progress made during this quarter and [technical difficulty]. Following Dave's comments, we'll provide our guidance for 2008. After our formal remarks, we'll open the call for your questions.

Before we begin, let me remind you that certain portions, our comments today about future expectations, plans and prospects of the company, including the earnings guidance we'll provide constitute forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors, including factors discussed in our most recent annual report on form 10-K, quarterly reports on form 10-Q under the heading risk factors. Except as required by law, we do not assume any obligation to update the forward-looking statements we make today.

As a reminder, today's call is being recorded and a replay will be available on our website captaris.com under the Investor Relations heading. A phone replay will also be available commencing approximately two hours after the call and remaining in effect through Friday, February 22nd at midnight Pacific Time. You may access the replay by dialing 1-800-405-2236 and entering the following access code 11107 followed by the pound key.

Steve

Thanks, Erika. I wan to highlight several strategic initiatives in 2007. The impact of these actions in our financial result and how we will be measuring these decisions. I'm going to talk about the strategic initiatives in four broad areas, R&D and products, geographic expansion, management changes and the recent acquisition. From a strategic viewpoint, we executed several critical changes that upgrades to our business.

I'm not satisfied with our financial results for 2007, as we fell below the financial goal set at the beginning of the year. We made considerable progress in strengthening our business and positioning our company to improve top line and cash flow performance in 2008.

First, we executed a major transformation of our R&D operations. We contracted with multiple outsourced companies to perform our sustaining and maintenance engineering work. We also centralized our design and architectural teams moving the positions to our Bellevue headquarters to better achieve product synergies.

Our objectives are to more effectively embrace the voice of the customer, research speed to market overall cost of sustaining and maintaining our products by a small resources and focus on value add engineering effort and all of which should allow us to get more productivity from our R&D investment.

Compared to 2006 additional spending during 2007 for R&D outsourcing was about $1.9 million. We'll measure the success of our R&D transformation 2008 by the number of our significant new product releases and our speed to market.

During the first quarter of 2008, we plan to announce several important new product releases that incorporated advanced document capture processing and distribution capabilities. We have also introduced a new set of plans leveraging our Castelle acquisition. The second key initiative, we are pursuing is to geographically expand and improve the capabilities of our sales orientation. The team members that support and assist their effort.

We expanded our distribution capability by enhancing the skill sets and redeploying a significant portion of our North American sales organization focused on more attractive selling opportunities. We invest in our sales and support organization in international market. The incremental cost of these two actions in the sales area was about $2.4 million in 2007. We'll measure the success of these investments initiatives by organic revenue growth, market penetration and customer acceptance of our new products.

We are encouraged by the sequential improvement of our Q4 revenue results given the challenging economic environment. We are making progress and shifting our focus to higher growth verticals and evolving our partner channels and in expanding our international markets.

For 2008, we expect organic growth from our current product suite, that's revenue from the new product releases and our recent acquisition. The third key initiative we have taken is a change in certain senior management positions to add vital experience and skills in the marketing and broad product development areas.

Cost of executing these changes in 2007 including severance and relocation was about $820,000. Most importantly, we substantially increased the skill of our company with the acquisitions of Castelle July 2007 I'd say document technologies, which we renamed Captaris Document Technologies CDT the first week of January 2008.

Measures of success we are using for the Castelle acquisition are operating income contribution, revenue growth. Castelle acquisition added approximately $3.5 million to our operating cost structure in 2007. We are completing G&A cost reductions that will improve operating income by about $1.3 million on an annualized basis. We achieved solid sequential growth for the FaxPress product line in Q4 '07 expect continuing improvement in 2008.

In addition, we have a major product release scheduled in the first quarter 2008 targeted for the MFP market. We have several near term goals coming from our CDT acquisition. We expect revenue growth to come from applying their technology to our product lines and from cost selling opportunity. As we announced in early January, we are in the early stages of a series of deployment document capture technology to the German Government.

From a financial perspective, we will have some integration cost primarily in the first half of 2008 followed by product and cost synergies in the second half of 2008. We anticipate opportunities for sustainable cost synergies such as royalty cost savings that are likely to occur in the second half of 2008. In summary, we expect our acquisition of CDT will become accretive during 2008 including non-cash purchase accounting charges.

Now, I'll provide some comments about the financial results for the fourth quarter. Revenue for the fourth quarter of 2007 was $28.1 million increase of about 11% compared to the fourth quarter of 2006 near the high end of our revenue guidance range of $27 million to $28.3 million provided on our third quarter earnings conference call in early November.

Compared to the fourth quarter of 2006, RightFax software revenue growth was about 9% and maintenance, support revenue growth was 12%. The revenue results for Alchemy and our FaxPress offerings were also encouraging. Alchemy revenue increased 22% compared to Q4 '06. FaxPress product revenue increased 15% sequentially and was about 11% higher in Q4, 2006 result because Castelle was an independent company. Overall we believe we're gaining momentum with the Castelle acquisition.

Gross margin for the fourth quarter was 69.5% fairly consistent with gross margin results in prior quarter. Moving to operating expenses the increases from the same quarter of last year reflects the operating cost for Castelle of about $1.7 million about $1.5 million for the consolidation and outsourcing of our software development activities including about $375,000 for organizational transition cost and about $750,000 for higher legal and advisory fees, travel and other G&A costs associated with the acquisition and shareholder matters.

Capital spending in the fourth quarter is $1.1 million reflecting the upcoming moves of our Bellevue headquarters, Tucson office in the latter stages of our IT strategic systems projects. We anticipate a decline in our recent pace of capital spending beginning in the second quarter and we expect a decline of at least $500,000 in capital spending in 2008 compared to the $6.1 million, we spend during 2007 even with the substantially larger scale of our company.

At this point, I'll turn the call over to Dave.

Dave Anastasi

Thanks, [Steve]. Today Captaris is a very different company and where we were a several years ago, when we set a vision of being a leading provider of software that automates paper and unstructured document processes. Our goal is to offer high quality end-to-end solutions with both flexible and affordable. We sold our non-strategic businesses with intent of focusing on inbound and outbound documents and building upon our RightFax franchise.

As a result our business consisted of RightFax with revenue about $60 million. A large customer base with incurring revenue both in the high single to low double-digit range. The structural changes, organic growth, acquisitions and infrastructure investments, we believe we are now positioned to achieve the goal with expanded products and solutions in a very scalable distribution and support capability.

To achieve our vision it was evident, we need to add more capabilities to our technology product offerings in there customer base and market presence as a faster growing segments, while internal controls growing infrastructure to supports an organization that could extend a strategic partnerships, distribution capability and our global reach.

Finally, we had to create an organization with the financial model that we could leverage and scale appeal to a broad investor audience. Today through a combination of organic growth and key acquisitions, we set across the $130 million revenue run rate with very complementary technologies and with much larger market opportunities with much higher growth rate potential.

On an annualized basis our recurring revenue has almost quadrupled close to 40% of our revenues internationally of the 30% is noncore fax business. We also provide 24/7 support on a global basis a direct footprint on every major continent plus significant strategic relationships with Microsoft, Cisco, IBM, FileNet, Oracle, HP, Xerox, [Ricoh] (inaudible) and several others.

We are implementing strong and channel controls that continue to invest in internal technology that we'll further enhance our efficiency and drive notably better operating leverage. In our Q4 2006, annual earnings call, we clearly stated we would leverage all aspects of our RightFax business including product channel and installed base.

To enhance our engineering and product devilry effort through a combination of outsourcing, maximizing on our internal resources that focus on leveraging functionality from our workflow and Alchemy products until the RightFax business. Focused on our products development pattern continues improvement in our point solution and further around components of our core business automating document centric processes both cooperation of our partners provide additional incremental customers functionality and value by adding imaging and capture to our portfolio a particular eye towards mid market and departmental solution.

Execute on expanding our distribution capability throughout MFP growth plan vision ourselves to grow the businesses and Fax-over-IP is a compliment to our partners Voice-over-IP deployments. Work with Microsoft and a downstream distribution partners to deliver compelling document centric solutions to enhance their offerings and commit to expanding our market coverage particularly in international markets.

In 2007, our core midlevel business was sound, but we are not our successful during the large deals beginning in the second quarter and particularly in the third quarter. Mortgage market crisis significantly impacted our success in our single largest vertical market financial services. Although, we realized a significant recovery in the fourth quarter for the full year our core business did not experienced the growth in prior years.

We have taken several aggressive measures to position ourselves for promising future. The two strategic acquisitions will more than double our international run rate revenue expanded our product line offerings into areas that are growing significantly faster then a traditional core standalone business.

The consolidated software development those two development offices and outsource sustaining and maintenance activity. We also made internal staffing changes and sure we have experience and expertise we need to execute our growth strategy, while delivering an improved operating leverage models that will increase shareholder value.

Our acquisition of CDT including its valuable capture technology as a fulfillment of vision we have had for several years to use captured technology to extend the RightFax franchise. CDT technologies fits very well with our document-centric strategy has already being incorporated into our products as noted in our recent press announcement.

2008, we will realize a full year revenue from our acquisition of Castelle and Captaris Document Technologies. We currently are integrating Castelle's backoffice now identifying integration synergies for CDT. I'm so pleased we'll significantly reduce the administrative cost for running these businesses add more profit to our bottom line.

In larger deals, we realized the importance of continuing with large net working players. More often than not customers are moving their telephony infrastructure to voice over IP making the fast decision as part of the bigger infrastructure deployment includes phone, fax, network and IP communication system. We are embracing this change and continue to develop fair relationships majority of these costumers continue to use Captaris technology.

Going into 2007, we put a new leadership in place there and it transformed our development organization. During the fourth quarter, we stayed significantly downside as our Denver and Calgary development staffing levels moving the design and architectural divisions to our headquarters. As mentioned earlier, we are organizing to better embrace the voice of the customer, improve product interoperability, reduced the cost of maintaining our products, while increasing our emphasis on value add engineering.

Our ultimate goal is to have all design and architectural resource to centralize the outsourced lower value coding activity. This focus on strategic engineering is already benefiting us speed-to-market. Recently, we announced the integration of RightFax from Microsoft SharePoint. Physician will take advantage of the Microsoft's fastest selling server ever.

RightFax can now be used as a service to capture documents remotely and populate Microsoft SharePoint depositories. We also leveraged the technology of newly acquired CDT to provide an easy method for extracting data and images in this environment.

These enhancements demonstrate our continuing towards it's the RightFax franchise. Let me further explain our revenue growth strategies for the coming year. As Pete mentioned we have a series of new product introductions and enhancements.

During the first quarter, we introduced a new fast appliance designed to leverage our expanding presence in MFP market. This appliance will be easy to deploy invades our new hardware and software platform, they are the first Captaris branded appliance.

The product will be initially marketed by the icon channel leveraging technology acquired to Castelle. FaxPress product lines from Castelle acquisition has an innovative hardware design regarding hardware and software to plug and play device. We believe this is particularly well suited for the MFP market small and medium enterprises looking for basic fax services at affordable and easy to deploy.

Early March, we'll unveil three significant new additional product offerings expand our strategic position in document capture, process and delivery. We'll introduce a new capture platform a business process management product and the document distribution system. These new products and obviously the recent CDT acquisition, the overall interoperability and create significant synergies of Microsoft's SharePoint and .Net platforms.

Speaking of Microsoft, we recently announced RightFax for exchange server 2007 bundle and operating we are promoting exclusively to the Microsoft exchange inside messaging community. Microsoft are now referring to customers, who need more than the basic FoIP capabilities offered exchange 2007 to Captaris. We'll also be announcing some more development with the Microsoft SharePoint search group in early March.

Through the combination of extending our distribution network and new product introductions particularly due to the technology enhancements from CDTs I'm confident, we'll see organic growth in our RightFax product revenue. To summarize, despite difficult economic times, we'll extremely follow the market. We are excited about our prospects for 2008. We have made significant organizational changes, added more experienced people invested to position ourselves for positive financial results in 2008.

Today I'm more confident than ever in our position as a leading provide of software that automates paper and extracts of document processes. We'll continue to clarify and communicate a focused strategy, our priorities, key milestones, measurements and metrics that result in revenue and profit growth while providing outstanding solutions to the enterprise software market. The position to take advantage of our main asset, a solid global customer and partner base, the portfolio of attractive technologies will grow our business even further.

So, we'll invest in a disciplined fashion to improve our operations and overall efficiency. Finally, our focus is on generating revenue growth through the bottom line performance accelerating operating cash, moving shareholder value in 2008 and beyond.

Now, I'll turn the call over to Pete for guidance.

Peter Papano

We are very happy regarding our outlook for accelerating revenue growth and improving cash flow in 2008. We will provide our financial projections next four quarters, adds for the first quarter of 2008. We believe we can achieve solid revenue growth for our new products and our capture product offering specifically related to CDT. We conducted extensive due diligence given the short timeframe since the acquisition we'll be cautious in our revenue outlook, DT business first quarter or two following the acquisition.

We are working on a detailed budget for the newly combined company we’ll update our revenue and expense expectation on our next quarterly call. Revenue, if the acquisition of Castelle and CDT are revenue scale increased substantially. As Dave highlighted in his comments, we anticipate organic growth across our products suite coming from new product releases, mentioned of our distribution partners and for market expansion.

We are providing a base top line forecast for the next quarter -- four quarters of $140 million and various opportunities to exceed that amount by $5 million to $10 million. We expect revenue to follow a significant upward trajectory throughout the year into our typical seasonality and the timing of new product releases, and other market initiatives.

The upward trajectory could be accelerated further if we exceed the upside -- if we achieved the upside revenue opportunities. The areas where we see the opportunity to exceed $140 million are timed in more towards the second half for 2008. First CDTs activities with the German government are in a relatively early stage ramp up late in 2008.

Revenue, we've eventually recognized in 2008 will depends on the timing of completing implementation in various locations. Second revenue growth opportunity, you'll see exceed our current expectations of $3 million in the second half of the year associated with our upcoming product release. For the first quarter 2008 with the considerations mentioned earlier our revenue expectation is in the range of $29 million to $30 million.

Gross margin 2008 excluding the impact of additional amortization arising from purchase accounting for the [CDT] acquisition, we anticipate a modest decline in our gross margin percent -- due to the lower gross margin at CDT.

Operating expenses CDTs operating expenses at the current exchange rate are about $5.6 million on a quarterly basis. Turning to our existing Q4 '07expense structure, we estimate Q1 '08 operating expenses about $25.5, $26.2 million including the impact of additional amortization from the purchase accounting for the CDT acquisition.

We expect to operate our business with a relatively flat operating cost structure in the next four quarters. The non-cash charges in the next four quarters, we anticipate amortization of about $3.2 million plus the amortization from this (inaudible).

Stock compensation expense of about $2 million to $2.3 million in the next four quarters. Deprecation expense of about $5 million to $5.4 million. Finally, we anticipate an overall tax rate of about 35%.

I will now turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions). Our first question comes from the line of Kevin Liu. Please go ahead.

Kevin Liu - B. Riley & Company

Hi, good morning guys.

Dave Anastasi

Hi Kevin how do you doing?

Kevin Liu - B. Riley & Company

Just wanted to talk about what kind of the long-term opportunity there is now with all the acquisitions as well as with kind of the -- in cost reduction efforts that are being put in place. I mean as you look out the '09 and maybe beyond that kind of the long-term top line growth rate as well as where do you think potential margins could go?

Pete Papano

Okay, Kevin this is Pete, in terms of long-term growth rate, (inaudible) business so about overall growth rate I think now in the content space is about 10%, 10% to 12%, 13%. So we think we can grow as rest of the market rates and we will consider long term rate and we think what we should do to do better than that. So the question about the margin as the company gets larger there is some such [cyclical] opportunities that he have to scale, because we a G&A cost basis but a much bigger revenue basis. So as I mentioned Kevin we expect to see improve in operating margin percentage and then if you take out that non-cash effect of the purchase account and when we looking to around the horizon that we expect around the businesses in double-digit operating margin percentage and some of the amortization charges.

Dave Anastasi

Well, this Dave Anastasi, I think our traditional our run rates have picked up and in some of our top order we are very optimistic about some of the acquisitions and (inaudible).

Kevin Liu - B. Riley & Company

And then I guess just lastly I know you guys haven’t commented too much in the past, but there is some discussions that factored. I am just curious there was ever update on the table and if so why did you guys not feel like that was right for shareholders?

Dave Anastasi

(inaudible)

Kevin Liu - B. Riley & Company

All right. Thank you.

Operator

Thank you, sir. Our next question comes from the line of John Maietta. Please go ahead.

John Maietta - Needham & Company

Hey, thank you very much. Question -- couple of questions actually related to cash flow. I was just wondering how we should think about operating cash flow in '08? What potentially could be the growth range there and Pete also the comment about how we should think about CapEx from calendar '08?

Peter Papano

Okay. So, CapEx I think in the script we talked about it but we have it initially around $6.1 million in capital spending in 2007. So we expect a decline at near roughly $0.5 million dollar in 2008.

Kevin Liu - B. Riley & Company

Okay.

Peter Papano

That will be bigger going one -- we didn't have the acquisitions as we have on CDT but we are expect some spending perhaps (Inaudible) right now. So there is as a drop off. So we had [doubled] particular in the last couple of quarters mostly related to the movement at Bellevue and Tucson offices. And so the capital spending will come down in 2008. To the question is about cash flow operating. That on (Inaudible) results?

Kevin Liu - B. Riley & Company

Yeah.

Peter Papano

Okay. So my script was we expect in terms of the non-cash charges and amortization at 3.2 stock comp at 2.3 and depreciation of 5 to 5.4. So when we look at yearly take, the revenue guidance we provided and also (Inaudible) look the relatively flat operating structure. So let me see were of course for the year, our expectation over the course of he year is one, we are facing some synergies and we will be moving some resources from what we call infrastructure of non revenue (Inaudible) significant improvement in both profitability and cash flow in 2008 compared to 2007.

Kevin Liu - B. Riley & Company

Got it thanks very much.

Dave Anastasi

I am not hearing as clearly I am hearing the -- we may not sound clear is that all right.

Kevin Liu - B. Riley & Company

Your just sounded fine right there Dave, but there has been a lot of feedback on the call.

Dave Anastasi

Okay, sorry, I apologize on what's going on the kind of getting (inaudible).

Kevin Liu - B. Riley & Company

I'll circle back.

Operator

Thank you, sir. Our next question comes from the line of Nathan Schneiderman. Please go ahead.

Nathan Schneiderman - Roth Capital Partners

Hi thanks very much, hi Dave, hi Pete. I wanted to kind of follow up on the first series of question just to make sure on I am clear on your expectations here. Pete you talked about 10% to 13% growth in the market and doing at least as well there. Were you talking about for the entire business or just a portion of your business? Do you see this business as a double digit growth business organic or something less than that?

Pete Papano

We see that’s double digit organic growth business overall, for the question was from Kevin what do you see the long-term growth in the company in terms of revenue growth and again our expectation is to grow is faster, faster than the overall market and our internal target are to go faster than the overall market in the content space.

Nathan Schneiderman - Roth Capital Partners

So, you think you can sustain double-digit revenue growth. Is that what are you saying?

Dave Anastasi

Our plan is that - we had provided in the guidance as you can see is double-digit revenue growth and we think that as we get more products into the market (inaudible) what schedule from first quarter as we get people integration into the broader distribution capabilities and enhancing our offerings to those we (inaudible) saw double-digit on growing our business.

Nathan Schneiderman - Roth Capital Partners

What is if you look out medium term 2-3 years or so what your pro forma operating margin target, what sort of levels do you think are reasonable?

Peter Papano

Yeah, I answered that to Kevin, what would you have done. We take out an amortization non-cash amortization because that's really is the purchase accounting associated with the acquisitions, we will adjust for that, And our expectation is that as the business expands that we should able to run it and have a double-digit operating margins.

Nathan Schneiderman - Roth Capital Partners

So you are pacing the business to be at 10% or at 15% or where do you see it's like.

Peter Papano

I guess that would depend on -- as the business grows then the opportunity get to the upper end of that gets better, right. So we see improving operating margin over time and look to a comparable benchmark companies as we grow and make sure that we are operating a businesses at attractive returns compared to peers in that same size.

Dave Anastasi

Well, and I think the other thing as we've indicated in 2007 we made a lot of investment and we upgraded our ERP system, we've done -- we are making a lot of moves. Some of those particular items and that two or three or four or five years as the infrastructure changes there maybe - there should have opportunity to leverage those internally for creating better operating leverage and also we're doing things to make sure that technology deployment and thinks we're doing also, free up selling time for our channels. So we think that there is leverage on both sides of that.

Nathan Schneiderman - Roth Capital Partners

What level of operating margin do you expect to achieve for '08 and what sort of run rate do you think will end the year at?

Peter Papano

Again as we go through quarter we will continue to update and we intend to provide guidance on kind of a rolling four quarter basis as well as for the current quarter. And so again we provided the top line number, we outlined the top line starting point numbers of our forecast towards the next four quarters with the upside opportunities. I mean that we have outlined the cost structure, I think you can model that out and see where that goes. We have an upward trajectory in revenue over the course of the year because you recall in our business we have seasonality in this set, it that means the first quarter generally tends to be the smallest quarter and then they step up in Q2, Q3 and Q4. That would be accentuated this year because we have product releases like the AME show coming up as Dave mentioned, there is some existing announcements we are going to make.

And so these products the new products the RightFax derivative products one are coming out in the second quarter --in the first quarter and second quarter and the MFP product coming out at the end of the first quarter. So we will see revenue growth from those new product offerings that would primarily be in the second half for the year.

And so the target in our planning model is $3 million from those products, again with upside it’s saying how successful we are. So we need to model it out that way with a revenue growth in the new products and in the later part of the year.

Dave Anastasi

So for example I think I mentioned in earlier I mean if we can -- we going to look at 60, 90 day on the 20 days cycle to traditionally for our sales. But we did the SharePoint conference in -- demonstrated our RightFax integration in our single-click new CDT integration at the SharePoint. We had more leads in the first day of that show that we generally get in the in month.

So obviously, that also a revenue here but its indications of our levels of interest and again other pieces we worked on for example, the work we have done with the independent MFP guys, their business all doubled last year. So we are looking at expanding those programs this year. So as we aggressively expand those, we are optimistic we will get some opportunity from those.

Nathan Schneiderman - Roth Capital Partners

If you had your $140 million revenue target would you hit the growth 10% plus in '09 that you expect. Would it yield a double-digit operating margin per forma at '09?

Peter Papano

For 2009?

Nathan Schneiderman - Roth Capital Partners

Yes.

Peter Papano

We haven't provide a guidance out that far but again, if we meet the target set that we we're talking about, we will be on that path doing quite well in 2009. Remember the big thing is that, in the later part of 2008 that we talked about briefly was a transaction we have, in fact a series of transactions we have with the German tax government, German federal government associated and it will depend on the timing of those. How we recognize the revenue? So we'll see what actually happens in later part of the year and the first part of 2009.

Nathan Schneiderman - Roth Capital Partners

All right, thank you.

Operator

Thank you, sir. Our next question comes from the line of Jeff Van Rhee. Please go ahead.

Jeff Van Rhee - Craig-Hallum Capital Group

Hi guys, my apologies if its repetitive from my end, we missed a lot of the call as it was very, very bad on hearing, I could hear the question but I couldn't hear your answers. Organically, just as you gave your annual number if I heard it right was 140. What are you assuming in there for Oce and what are you assuming for Castelle?

Pete Papano

Jeff this is Pete. So again, overall to look at our business we assume that the business that we acquired we run at that revenue with some upside. So we have its a little bit of upside built into it, in terms of the CDT business and what's the other part of your question?

Jeff Van Rhee - Craig-Hallum Capital Group

You think it would run it that level, I am just asking for a specific number?

Pete Papano

That's a little bit of upside, so again it's a revenue -- it's a guidance number for the full year. So we would expect some revenue growth there. Again, as I mentioned to earlier question that exact what -- we'll have better visibility on where we stand with revenue from the CDT business as we move through the year because of the greater revenue will work through the last part of the year.

Jeff Van Rhee - Craig-Hallum Capital Group

Right. But I mean to give guidance you have got to have placeholder in there for these business, right? I mean, I understand there is upside I heard that part those $5 million to $10 million upside but what are you using at least for a placeholder? So, I have a sense of -- that kind of answers everything right. It tells what you are assuming on the organic…

Peter Papano

Hello, Jeff you lost me there?

Jeff Van Rhee - Craig-Hallum Capital Group

Yeah. I am still here. Can you here me?

Peter Papano

Yeah. Well, we missed half of your question.

Jeff Van Rhee - Craig-Hallum Capital Group

The Oce --. you gave a $140 million in annual revenue guidance and all I am asking is what was your placeholder. I understand that you don't have prefect visibility so you're being conservative but what is your placeholder in that $140 million from Oce and from Castelle?

Peter Papano

Okay. So, for the CDT business, Captaris Document Technology, the basic planning assumption as we would have the business. Again, this is a current exchange rate it should to be around the $3 million range plus a little bit of growth. We'll update as we go through the year. What we expect for Castelle, the FaxPress product line that comes the Castelle acquisition was we had in the range of about $5 million of revenue in 2007 and so we would expect that numbers do a little bit more than double again in 2008 because we brought the business and have little more than, little less, some of the latter part of July. So as we have a full year effect of that and than we see some growth.

So as we mentioned the upside opportunity on the FaxPress product technology is what Dave talk about in terms of the offerings for the MFP market.

Dave Anastasi

And the low end expansion.

Jeff Van Rhee - Craig-Hallum Capital Group

Okay.

Dave Anastasi

International.

Jeff Van Rhee - Craig-Hallum Capital Group

Okay. Thanks.

Operator

Thank you, sir. Our next question comes from the line of George Walsh. Please go ahead.

George Walsh - Gilford Securities

Once again I also apologize if I am repeating the question but these was a major, major distortion on the audio.

Dave Anastasi

In the interest of everybody there we are trying to get our work done.

George Walsh - Gilford Securities

No. its okay now. You coming some clear now. With the changes in the acquisitions and the additions there, can you go through a bit more of your end-market that you are serving. Has there been any major changes there . Obviously with the financial services market has been changes. But can you kind just run through some of the markets you are serving and the health you are seeing in your end users there?

Dave Anastasi

So from an end users I think obviously that we're focused on document centric, process centric environment. So financial services, it's struggling in some areas it's still a good. We still see there is an opportunity in mortgage market has been struggling more than anything.

But government healthcare, legal anything they has heavy document centric -- manufacturing, those kind of environment. So for example, the large ODT deal that we did, our CDT deal we did, is a government services deal. And with all of the different environment around healthcare and issues, we see a lot of opportunities in the healthcare sector.

So those are sectors we think are very strong and where we building offerings towards. Again, I think we all look at it from two perspective not just product, but distribution as IP deployment grows, we get to look at the IP distribution channel and right away behind, the CISCO, [Revios] and others types of AVST we partner with. Other types of partners in that spectrum.

Microsoft as they continue to deploy their technology in the enterprise environment. We have actually integrations to basically to every aspect of Microsoft’s enterprise strategy. So as they push into their broad downstream channel, where they are pushing the verticals whether it would be for their dynamic strategy or a SharePoint or the other strategies, we can leverage both vertical and distribution opportunities. And large one of course is this, the more network MFP and scanning devices become, we get the opportunity from the channels there. But they all tend to play more heavily in those document centric environments, the verticals I mentioned.

George Walsh - Gilford Securities

Okay. Do you have any data on the -- how the MFP scanning devices are doing, I mean on the hardware entry and is that an indicator for you?

Dave Anastasi

Well, we certainly I mean there is a variety different data points from Gartner’s and the Foresters and we have overall market data that we use on the size of those markets and its different components because its across the hardware piece and how much software has been sold on top of that hardware's, the part were interested in. And our actually in the last presentation we did from a Needham conference, if you pull up the webcast you will see there is some slides in there on the different market sizes and so you could pull that information or we can get you those PDF copy of that presentation and it tells you the different market sizes that we are in that. But the overall size there selling in the multibillion between the combined different markets and they are all growing markets.

George Walsh - Gilford Securities

Okay.

Dave Anastasi

And our addressable market and those are the pieces we see that sits on top of software. So if you take - independent multifunction printing device provider we see an opportunity with our Castelle product on the lower end but then many of the larger or even the independents have professional services group that sell network integrations at the backend environments for larger deals. So there is two sides there. But the market data is in the actual presentation, its on our website and in the last presentation we did at Needham conference.

George Walsh - Gilford Securities

Okay. And Pete just could you describe a little bit with the acquisition the CDT the pension liability that you taking in the nature of those?

Pete Papano

Yeah sure. So the company has a -- there is pension plan for the employees there and so we assume that pension plan built into the structure of the transaction was an offset with cash. So the present value of the future payments of these pension obligations, it was evaluation done by a third-party, and then there is cash offset that’s a equivalent amount that we got in the structure, the transaction. In US dollars its roughly $17 million to $18 million. And so the annual servicing cost is relatively modest and it goes out for however long the pension payments is. It goes to the people as I presume pass away.

George Walsh - Gilford Securities

Okay. All right. And was there any other debt that came or whether that was primarily it, with the deal?

Peter Papano

There is no other debt that came with that. Its a normal trades payables and what not associated with the normal operations of the business.

George Walsh - Gilford Securities

Okay. And Pete, what's going on, with some of this auction markets and bonds and stuff with short-terms securities. You have a lot of cash, you just to beg a question is, is your cash in pretty liquid things and readily available?

Peter Papano

We have an investment policy that generally is quite conservative because we are not in the business of attempting to make maximize our return on these kind of investments. We're not skilled or equipped to do that, and so the general investment policy of the company is quite conservative.

George Walsh - Gilford Securities

Okay. And cash is, all your cash you feel is readily available?

Peter Papano

Well, the cash is in different places in the world. But it's not in the investment that are not liquidatable.

George Walsh - Gilford Securities

Right.

Peter Papano

So there is no long-term obligations, there is no long-term kind of investments, is that your question?

George Walsh - Gilford Securities

Well, some of the -- if you seen on the papers, some of these auction markets, municipal by auction markets they have been having some difficulties and some of these markets have been drying up. And so it has some companies that had some effects on what they viewed to short-term instruments with their cash. So I just want to make sure that, you feel you got things that are readily liquid for your cash.

Peter Papano

Yeah. Our investment horizon for our cash is very short-term. So it's a couple years and less and in very high great securities and so again we are not, we don’t ever represent ourselves is been among the leading edge of making these investments in those kinds of securities. So we maintain very conservative investment profile in short maturities.

George Walsh - Gilford Securities

Okay. Great. Thank you.

Operator

Thank you, Sir. Our next question is a follow-up from the line of Jeff Van Rhee. Please go ahead.

Jeff Van Rhee - Craig-Hallum Capital Group

Hi guys. Just one or two points of clarification. The operating expenses you said for Oce we are going to add $5.6 million quarterly and you said to build off Q4.. But wasn't Q4 --wasn't the all the suggestion about Q4 and the operating expense structure that it was one-time in nature related to some of these overruns on the development side and that would reverse so why are we building Q4, if I heard that right?

Peter Papano

Yes. So again we spend more in Q4 overall than what we have we recently thought we would for a series of reasons not just R&D. But again, for our planning purposes, what we are using for guidance's is to say the basic operating cost structure of the company in Q4 carries forward on to Q1 '08 plus we have the acquisition. So we still are pushing very hard in the R&D area because, as Dave outlined there is a series of exciting press -- product releases that are coming out in the first part of the year and we are really very close on these and so we really want to keep pushing on that.

We also are making some increased investment in some product development people that are in that. So there some offset in terms of reduction in some categories of R&D and then some increase in some others. We expect to add in the quarter, some people on the product development side to help us with the product, roadmap and overall vision of the product. And so those would be cost increases and then other hand we have some reductions in some parts of R&D associated with people who have left the business.

So overall for guidance purposes, the point is this, in approximate numbers the [incorporating] cost structure is about the same going forward in to Q1.

Jeff Van Rhee - Craig-Hallum Capital Group

Okay. But these suggesting is unclear, as the Q4 suggesting was that you are running duplicative development team as you're bringing things and I see a lot more outsource contractors. Wasn't that the primary reason you gave?

Pete Papano

We did have some duplicate cost yes, so we still have some duplicate cost in Q1 as well because we -- the transition doesn't finish really until around the end of the first quarter. So we've got people that are still on contract and what not and that continues on for a little while. But again we really pushing very hard on the product development, product release side, to get products out to market and there again, they are in the very near-term horizon. So we believe it is the right business decision to keep pushing hard to get those products out the door. Jeff, if you have chance if you go to the AME show, which is the 1st week of March and that’s not far from where you are. Its going to be in Boston.

Jeff Van Rhee - Craig-Hallum Capital Group

Okay, and then I guess just lastly the system spending CapEx was up I know you spent a lot through the course of '07 to give you visibility and help drive some sales initiatives. Just comment on the CapEx and the benefits you think you are seeing or is it not meeting expectations?

Pete Papano

Well, in terms of the CapEx the two big drivers of the CapEx in the last year were the ITSS project, Information Technology Strategic Systems project and then the moves of the offices. So the Bellevue we have move is actually next weekend .So it's coming up. So by the end of this month, we need to be out of this office and into another and the move of our Tucson office, which is where we have tech support and engineering. Well now, that is going to be in another month or so. And so we are tailing down in terms of the capital spending on those projects.

The ITSS projects includes Oracle, it includes the number of things like improved infrastructure of the ACD replacement

Dave Anastasi

Data warehouse..

Peter Papano

Data warehouse then there is a CRM, and the last big projects which is really is just getting started is the CRM. I mean, so what I was saying is that we would to expect a decline in capital expending in 2008. So if we would take this CDT acquisition out, we would expect somewhere around the $0.75 million to $1 million decline in capital spending. And we will still see spending for ITSS going on in 2008, but the spending related to the infrastructure offices stops here pretty quickly.

But there is a placeholder we have in our spending capital spending forecast related to the CDT business because we do expect to spend some capital to conform infrastructure and network backbone and what not and. Again, those are some just high level estimates at this point in time. So we maybe conservative in the estimate on the spending.

Dave Anastasi

And at least you get some cost in that conversion of both Castelle and ODT on to our ERP systems and etcetera over the course of the period. And once those are passed and those are one time opportunities.

Jeff Van Rhee - Craig-Hallum Capital Group

Okay. Thanks.

Operator

(Operator Instruction). And Mr. Anastasi, there are no further questions at this time, Please continue with any closing remarks.

Dave Anastasi

Okay. Well, first I want to apologize for I guess we have some quality problems and I hope to got better as the call went on. So I hope everybody got to question. If there is anything else we can answer we will certainly circle back to folks. Again it's been a -- it's really a lot of heavy lifting and changes and we are excited about our new acquisitions.

I think the first quarter we made a lot of significant investment in 2007 and as we clear to the first quarter we are going to see, I think a lot of exciting new products. And talking about channels downstream channel partners, our traditional ones, plus our new focus around our MFP and our telephony type of partners and the Microsoft environment. We’d get a lot of excitement generated, we see in that transfer into the customer, say with some of some relief and I was encouraged by some of the revenue recovery in the fourth quarter even though the economic environment is still questionable and I think and in all the conversation that have I have been having with folks, they seem very upbeat about, not only some of the improvement or some of the relationship for their customers but the new products that we are showing them and what that gives them an opportunity to go back to an existing customers base plus new customers. I think overall we are feeling very good and then we're going to work very hard to drive that operating leverages as quickly as possible out of those integrations and get the synergies out of our investment that we've made both in infrastructure and consolidation and changes in our distribution and our product development.

So, I think we have done a lot of work and as we quickly clear and start to head to the first quarter and second half of the year, I think that we're going to see some very exciting result. But I think I am looking forward future earnings calls and talking about those positive results. I appreciated it and anybody have good day.

Operator

Ladies and gentlemen. This concludes the Captaris fourth quarter 2007 Earnings Call. If you would like to listen to a replay of today's conference. Please dial 1-800-405-2236, for internationally 303-590-3000 and enter passcode 11107967. Once again the numbers are 1-800-405-2236 and internationally 303-590-3000, entering passcode 11107967. ACT would like to thank you for your participation you may now disconnect. Have a pleasant day.

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